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SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-Q

(Mark One)

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

For the quarterly period ended October 31, 2001

OR

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

For the transition period from  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 Floor San Diego, California

92103(Address of Principal Executive Offices)

(Zip Code)


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 /x/  No / /

As
of October 31, 2001, PMR Corporation had 7,255,017 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 October 31, 2001 (Unaudited) and April 30, 2001                              |                                                                                       | 1   
|        |         | Condensed Consolidated Statements of Operations for the three and six months ended October 31, 2001 and 2000 (Unaudited) |                                                                                       | 2   
|        |         | Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 2001 and 2000 (Unaudited)           |                                                                                       | 3   
|        |         | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                         |                                                                                       | 4   
|        | Item 2. |                                                                                                                          | Management's Discussion and Analysis of Financial Condition and Results of Operations |     
|        | Item 3. |                                                                                                                          | Quantitative and Qualitative Disclosures about Market Risks                           |     
|PART II |         | OTHER INFORMATION                                                                                                        |                                                                                       |     
|        | Item 1. |                                                                                                                          | Legal Proceedings                                                                     |     
|        | Item 2. |                                                                                                                          | Changes in Securities and Use of Proceeds                                             |     
|        | Item 3. |                                                                                                                          | Defaults Upon Senior Securities                                                       |     
|        | Item 4. |                                                                                                                          | Submission of Matters to a Vote of Security Holders                                   |     
|        | Item 5. |                                                                                                                          | Other Information                                                                     |     
|        | Item 6. |                                                                                                                          | Exhibits and Reports on Form 8-K                                                      |     

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Part I  FINANCIAL INFORMATION

Item 1. Financial Statements

PMR Corporation  Condensed Consolidated Balance Sheets

|                                                                                                             |                                                                                                                          | October 31,
2001 |            | April 30,
2001 |  
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | ---------------- | ---------- | -------------- | -
|
|Assets                                                                                                       |                                                                                                                          |                  |            |                |  
|Current assets:                                                                                              |                                                                                                                          |                  |            |                |  
|                                                                                                             | Cash and cash equivalents                                                                                                |                  | $          | 13,122,877     |  
|                                                                                                             | Short-term investments, available for sale                                                                               |                  |            | 5,842,297      |  
|                                                                                                             | Accounts receivable, net of allowance for doubtful accounts of $5,096,000 in 2002 and $4,992,000 in 2001                 |                  |            | 325,720        |  
|                                                                                                             | Prepaid expenses and other current assets                                                                                |                  |            | 316,686        |  
|                                                                                                             |                                                                                                                          |                  |            |                |  
|Total current assets                                                                                         |                                                                                                                          |                  | 19,607,580 |                |  
|Furniture and office equipment, net of accumulated depreciation of $2,683,000 in 2002 and $2,473,000 in 2001 |                                                                                                                          |                  | 446,494    |                |  
|Long-term accounts and notes receivable, net of allowance for doubtful                                       |                                                                                                                          |                  |            |                |  
|accounts of $520,000 in 2002 and 2001                                                                        |                                                                                                                          |                  | 664,166    |                |  
|Other assets                                                                                                 |                                                                                                                          |                  | 65,671     |                |  
|                                                                                                             |                                                                                                                          |                  |            |                |  
|Total assets                                                                                                 |                                                                                                                          | $                | 20,783,911 |                | $
|                                                                                                             |                                                                                                                          |                  |            |                |  
|Liabilities and stockholders' equity                                                                         |                                                                                                                          |                  |            |                |  
|Current liabilities:                                                                                         |                                                                                                                          |                  |            |                |  
|                                                                                                             | Accounts payable                                                                                                         |                  | $          | 186,638        |  
|                                                                                                             | Accrued expenses                                                                                                         |                  |            | 1,512,273      |  
|                                                                                                             | Accrued compensation and employee benefits                                                                               |                  |            | 358,926        |  
|                                                                                                             | Advances from case management agencies                                                                                   |                  |            | 1,571,864      |  
|                                                                                                             |                                                                                                                          |                  |            |                |  
|Total current liabilities                                                                                    |                                                                                                                          |                  | 3,629,701  |                |  
|Note payable                                                                                                 |                                                                                                                          |                  | 15,426     |                |  
|Contract settlement reserve                                                                                  |                                                                                                                          |                  | 4,199,146  |                |  
|Other long-term liabilities                                                                                  |                                                                                                                          |                  | 12,254     |                |  
|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                                                                                               |                  |            | 31,294,656     |  
|                                                                                                             | Notes receivable from employees and officers                                                                             |                  |            | (539,260       | )
|                                                                                                             | Accumulated other comprehensive income                                                                                   |                  |            | 86,474         |  
|                                                                                                             | Accumulated deficit                                                                                                      |                  |            | (17,898,135    | )
|                                                                                                             | Treasury stock, common stock at cost  49,475 shares in 2002 and 10,000 shares in 2001                                   |                  |            | (88,901        | )
|                                                                                                             |                                                                                                                          |                  |            |                |  
|Total stockholders' equity                                                                                   |                                                                                                                          |                  | 12,927,384 |                |  
|                                                                                                             |                                                                                                                          |                  |            |                |  
|Total liabilities and stockholders' equity                                                                   |                                                                                                                          | $                | 20,783,911 |                | $
|                                                                                                             |                                                                                                                          |                  |            |                |  

See
notes to condensed consolidated financial statements

1

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PMR CORPORATION  Condensed Consolidated Statements of Operations  Unaudited

|                                                    |                                       | Three months ended October 31, |           | Six months ended October 31, |          
|--------------------------------------------------- | ------------------------------------- | ------------------------------ | --------- | ---------------------------- | ---------
|
|Revenues                                            |                                       | $                              | 4,933,471 |                              | $        
|                                                    |                                       |                                |           |                              |          
|Expenses:                                           |                                       |                                |           |                              |          
|                                                    | Direct operating expenses             |                                |           | 3,992,053                    |          
|                                                    | Research and development              |                                |           |                             |          
|                                                    | Marketing, general and administrative |                                |           | 953,863                      |          
|                                                    | Provision for doubtful accounts       |                                |           | (1,278,923                   | )        
|                                                    | Depreciation and amortization         |                                |           | 137,720                      |          
|                                                    | Software development amortization     |                                |           |                             |          
|                                                    | Special charge                        |                                |           | 332,035                      |          
|                                                    |                                       |                                |           |                              |          
|                                                    |                                       | Total expenses                 |           |                              | 4,136,748
|                                                    |                                       |                                |           |                              |          
|Interest expense                                    |                                       |                                | (3,139    | )                            |          
|Other income  interest                             |                                       |                                | 154,526   |                              |          
|                                                    |                                       |                                |           |                              |          
|Net income (loss)                                   |                                       | $                              | 948,110   |                              | $        
|                                                    |                                       |                                |           |                              |          
|Earnings (loss) per common share                    |                                       |                                |           |                              |          
|                                                    | Basic                                 |                                | $         | 0.13                         |          
|                                                    |                                       |                                |           |                              |          
|                                                    | Diluted                               |                                | $         | 0.13                         |          
|                                                    |                                       |                                |           |                              |          
|Shares used in computing earnings (loss) per share: |                                       |                                |           |                              |          
|                                                    | Basic                                 |                                |           | 7,224,392                    |          
|                                                    |                                       |                                |           |                              |          
|                                                    | Diluted                               |                                |           | 7,227,119                    |          
|                                                    |                                       |                                |           |                              |          

See
notes to condensed consolidated financial statements

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PMR Corporation  Condensed Consolidated Statements of Cash Flows  Unaudited

|                                                     |                                                                                   | Six Months Ended October 31,                 |                                           
|---------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------
|
|Operating activities                                 |                                                                                   |                                              |                                           
|                                                     | Net loss                                                                          |                                              | $                                         
|                                                     | Adjustments to reconcile net income to net cash provided by 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 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                                 |                                                                                   |                                              |                                           
|                                                     | Payments on note payable to bank                                                  |                                              |                                           
|                                                     | Acquisition of treasury stock                                                     |                                              |                                           
|                                                     |                                                                                   |                                              |                                           
|                                                     | Net cash used in financing activities                                             |                                              |                                           
|                                                     |                                                                                   |                                              |                                           
|Net (decrease) increase in cash and cash equivalents |                                                                                   |                                              | (513,245                                  
|Cash and cash equivalents at beginning of period     |                                                                                   |                                              | 13,636,122                                
|                                                     |                                                                                   |                                              |                                           
|Cash and cash equivalents at end of period           |                                                                                   | $                                            | 13,122,877                                
|                                                     |                                                                                   |                                              |                                           

See
notes to condensed consolidated financial statements

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PMR CORPORATION    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

October 31,
2001

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 six months ended October 31, 2001 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.

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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.

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

|                                                       |                                     | Three Months Ended October 31, |          
|------------------------------------------------------ | ----------------------------------- | ------------------------------ | ---------
|
|Numerator:                                             |                                     |                                |          
|Net income (loss) available to common stockholders     |                                     | $                              | 948,110  
|                                                       |                                     |                                |          
|Denominator:                                           |                                     |                                |          
|Weighted average shares outstanding for basic          |                                     |                                |          
|earnings per share                                     |                                     |                                | 7,224,392
|                                                       |                                     |                                |          
|Effects of dilutive securities:                        |                                     |                                |          
|                                                       | Employee stock options and warrants |                                |          
|                                                       |                                     |                                |          
|Dilutive potential common shares                       |                                     |                                | 2,727    
|                                                       |                                     |                                |          
|Shares used in computing diluted loss per common share |                                     |                                | 7,227,119
|                                                       |                                     |                                |          
|Earnings (loss) per common share, basic                |                                     | $                              | 0.13     
|                                                       |                                     |                                |          
|Earnings (loss) per common share, diluted              |                                     | $                              | 0.13     
|                                                       |                                     |                                |          

No
potential common shares were included in the computation of diluted earnings per share for the three months ended October 31, 2000 because the inclusion thereof would have
had an antidilutive effect.

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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. Activities classified as "Other" in the following schedule relate primarily to unallocated home office items.

A
summary of segment activity is as follows:

|              |  | Six Months Ended October 31, |          
|------------- |  | ---------------------------- | ---------
|
|2001          |  |                              |          
|Revenues      |  | $                            | 9,438,762
|Income (loss) |  |                              | 2,758,474
|2000          |  |                              |          
|Revenues      |  | $                            | 9,445,084
|Income (loss) |  |                              | 797,468  

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NOTE DNOTES RECEIVABLE FROM EMPLOYEES AND OFFICERS

In December 2000, the Company loaned approximately $400,000 pursuant to promissory notes to certain employees and officers of the Company for the
purchase of stock through the exercise of stock options. In addition, the Company loaned approximately $1.3 million additional funds to other employees and officers in January 2000 for
the purchase of stock through the exercise of stock options. For purposes of this discussion, the sum of $1.7 million ($400,000 plus $1.3 million) shall be referred to as the "Stock
Notes".

The
Company also received, in January 2000, promissory notes in the amount of $451,000 from certain officers for loans related to tax liabilities (the "Tax Notes").

The
Stock Notes are with recourse and the Tax Notes are without recourse. Both the Stock Notes and the Tax Notes are secured by stock under respective pledge agreements. As of
October 31, 2001, after repayments from certain employees and officers, $539,000 is owed under the Stock Notes and $451,000 is owed under the Tax Notes. $312,000 of the Stock Notes and all of
the Tax Notes bear interest at 6.21% per annum and are due on December 31, 2004. The rest of the Stock Notes bear interest at 5.87% per annum and are due on December 31, 2005.

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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 October 31, 2001, the Company continued to focus on maximizing cash flow. The Company generated $948,000 in net income during
the three months ended October 31, 2001, versus a loss of $2.5 million for the same period in the prior year. The income was a result of the continued positive operating margins in the
Company's Health Services Business, termination of the Health Information Business, continued reduction in other operating costs, and collection of accounts receivable previously provided for as
doubtful of collection. The income for the quarter ended October 31, 2001 included a reversal of bad debt expense of $1.3 million resulting primarily from the collection of previously
reserved accounts receivable relating to closed outpatient programs. Excluding the effects of these collections as well as $332,000 in special charges due to certain staff terminations during the
quarter, the Company's results from operations were approximately break-even.

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 (5) years. As
of October 31, 2001, 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

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contracts, the Company is required to indemnify the providers for some or all of the Company's fees if 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 October 31, 2001, the Company had recorded $4.2 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 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 October 31, 2001 Compared to Quarter Ended October 31, 2000

RevenueRevenues increased from $4.3 million for the quarter ended October 31, 2000
to $4.9 million for the quarter ended October 31, 2001, an increase of $671,000 or 15.7%. The outpatient programs recorded revenues of $370,000 for the quarter ended October 31,
2001, a decrease of approximately $304,000 or (45.1%) as compared to $675,000 for the quarter ended October 31, 2000. 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 $3.6 million for the quarter ended
October 31, 2000 to $4.6 million for the quarter ended October 31, 2001, an increase of $975,000 or 27.2%. 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 $4.0 million in the second quarter of fiscal year 2002, compared to $3.9 million a
year ago, an increase of 3.6%. As a percentage of revenues, direct operating expenses decreased to 80.9% for the quarter ended October 31, 2001 from 90.4% for the quarter ended
October 31 2000. 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
$954,000 for the quarter ended October 31, 2001 versus $1.9 million for the quarter ended October 31, 2000. As a percentage of total revenues, marketing, general and
administrative expenses improved from 44.8% for the quarter ended October 31, 2000 to 19.3% for the quarter ended October 31, 2001. The improvement was primarily due to the elimination
of marketing, general and administrative expenses related to the terminated InfoScriber operations.

Provision for Doubtful AccountsDuring the quarter ended October 31, 2001, the Company reversed $1.3 million
in provision for doubtful accounts primarily due to the collection of previously reserved accounts receivable relating to closed outpatient programs.

Depreciation and AmortizationDepreciation and amortization expenses decreased from $222,000 for the quarter ended
October 31, 2000 to $138,000 for the quarter ended October 31, 2001, a decrease

9

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of $85,000 or (38.1%). 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 October 31, 2001, the Company recorded special charges totaling $332,000.
These charges were primarily for severance and other costs related to terminations of certain general and administrative staff. For the same period in the preceding year, the Company incurred a charge
of $70,000 related to contract terminations or expirations.

Net Interest IncomeInterest income, net of interest expense, decreased from $351,000 for the quarter ended
October 31, 2000 to $151,000 for the quarter ended October 31, 2001, a decrease of $200,000 or (56.9%). The decrease was primarily due to lower cash, cash equivalents, and
short-term investments at October 31, 2001 versus October 31, 2000. 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 six months ended October 31, 2001.

Net IncomeThe Company's net income for the quarter ended October 31, 2001 was $948,000 versus a $2.5 million
loss for the same period in the preceding year, a $3.5 million increase. Excluding the effects of the special collections (see Provision for Doubtful Accounts) and the special charges,
operating results during the quarter ended October 31, 2001 were approximately break-even.

Results of OperationsSix Months Ended October 31, 2001 Compared to Six Months Ended October 31, 2000

RevenueRevenues for both six months ended October 31, 2001 and 2000 remained unchanged at
$9.4 million. Outpatient Program revenues decreased from $2.2 million during the six months ended October 31, 2000 to $742,000 during October 31, 2001, or
$1.5 million. The decrease was primarily the result of the Company's changed business strategy and the associated reduction in the Company's outpatient programs. This $1.5 million
decrease was equally offset by an increase in revenues from the case management programs. The increase in case management program revenues to $8.7 million for the six months ended
October 31, 2001 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 $7.8 million during the six months ended October 31, 2001, compared to
$8.3 million a year ago, a decrease of 5.4%. As a percentage of revenues, direct operating expenses decreased to 83.1% for the six months ended October 31, 2001 from 87.7% for the six
months ended October 31, 2000. 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
$2.2 million for the six months ended October 31, 2001 versus $4.0 million for the six months ended October 31, 2000. As a percentage of total revenues, marketing, general
and administrative expenses improved from 42.1% for the six months ended October 31, 2000 to 23.1% for the six months ended October 31, 2001. The improvement was primarily due to the
elimination of marketing, general and administrative expenses related to the terminated InfoScriber operations.

Provision for Doubtful AccountsDuring the quarter ended October 31, 2001, the Company reversed $1.3 million
in provision for doubtful accounts primarily due to the collection of previously reserved accounts receivable relating to closed outpatient programs.

10

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Depreciation and AmortizationDepreciation and amortization expenses decreased from $462,000 for the six months ended
October 31, 2000 to $310,000 for the six months ended October 31, 2001, a decrease of $152,000 or (32.9%). The decrease was primarily due to disposal and write-off of assets
as a result of contract terminations or expirations.

Special ChargesDuring the six months ended October 31, 2001, the Company recorded special charges totaling
$1.1 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 $211,000 related to contract terminations or expirations.

Net Interest IncomeInterest income, net of interest expense, decreased from $679,000 for the six months ended
October 31, 2000 to $325,000 for the six months ended October 31, 2001, a decrease of $354,000 or (52.2%). The decrease was primarily due to lower cash, cash equivalents, and
short-term investments at October 31, 2001 versus October 31, 2000. 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 six months ended October 31, 2001.

Net LossThe Company's net loss for the six months ended October 31, 2001 was $550,000 versus $4.2 million
for the same period in the preceding year, an improvement of $3.6 million. The decrease in losses was primarily due to reduced operating expenses during the first six months of fiscal year 2002
resulting from the termination of the InfoScriber operations as well as the $1.3 million reversal in provision for doubtful accounts.

Liquidity and Capital Resources

For the six months ended October 31, 2001, net cash provided by operating activities was $1.3 million versus $597,000 during the same period in
the prior year. The improvement in cash flow was primarily due to the reduction in operating losses.

Working
capital as of October 31, 2001 was approximately $16.0 million, an increase of $548,000, as compared to working capital at April 30, 2001. Cash, cash
equivalents and short-term investments totaled $19.0 million as of October 31, 2001, an increase of $1.2 million as compared to April 30, 2001. The increase in
working capital, cash and cash equivalents, and short-term investments was primarily a result of the collection of accounts receivable provided as doubtful as to collectibility in prior
periods relating to closed outpatient programs.

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. The Company also anticipates using working capital and, if necessary, incurring indebtedness in
connection with selective acquisitions.

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 six months ended October 31, 2001, the Company repurchased 39,475 shares of its common stock at an average price of $1.56 per share, or $61,401 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 six months ended October 31, 2001.

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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 six 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 October 31, 2001, we had recorded $4.2 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 of the potential
contract disallowances 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 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 $131,000 outstanding under this note at
October 31, 2001.

At
October 31, 2001, the fair market value of the investment in debt securities was approximately $5.8 million, which includes an unrealized gain of approximately
$86,000. These securities bear interest rates ranging from 2.3% to 7.55% 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.

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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

On October 24, 2001, the Company's stockholders approved the following: (1) to increase by 1,000,000 the aggregate number of shares of Common
Stock authorized for issuance under the 1997 Equity Incentive Plan; and (2) to increase by 500,000 the aggregate number of shares of Common Stock authorized for issuance under the Outside
Directors Non-qualified Stock Option Plan. See Item 4 below.

Item 3Defaults upon Senior Securities

None

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

On October 24, 2001, the Company held its Annual Meeting of Stockholders where Susan Erskine and Richard Niglio were re-elected as directors
of the Company. The following directors continued in office after the meeting: Allen Tepper, Charles McGettigan, Mark Clein, Eugene Hill, and Satish Tyagi.

In
addition, the Company's stockholders approved the following: (1) to amend the 1997 Equity Incentive Plan to increase the aggregate number of shares of Common Stock
authorized for issuance under the plan by 1,000,000 to an aggregate number of 4,000,000; and (2) to amend the Outside Directors Non-qualified Stock Option Plan of 1992 to increase
the aggregate number of shares of Common Stock authorized for issuance under the plan by 500,000 to an aggregate number of 1,025,000.

The
re-election of Susan Erskine as a director was approved with 4,288,014.56 votes in favor, 0 against, and 499,291 abstentions. The re-election of Richard
Niglio as a director was approved with 4,291,844.56 in favor, 0 against, and 495,461 abstentions. The amendment to the 1997 Equity Incentive Plan was approved with 2,339,250.56 votes in favor, 834,441
against, and 502,813 abstentions. The amendment to the Outside Directors Non-qualified Stock Option Plan of 1992 was approved with 2,438,820.56 in favor, 734,841 against, and 502,843
abstentions.

Item 5Other Information

None

Item 6Exhibits and Reports on Form 8-K

(a)  Exhibits

None

(b)  Reports
on Form 8-K

None

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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: December 12, 2001 |  | PMR CORPORATION
|------------------------ |  | ---------------
|                         |  | BY:            
|                         |  | BY:            

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