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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 July 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(State or Other Jurisdiction of Incorporation
or Organization)

23-2491707(IRS Employer Identification No.)


501 Washington Street, 5th Floor San Diego, California(Address of Principal Executive Offices)

92103(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)


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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 July 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 July 31, 2001 (Unaudited) and April 30, 2001                      |  | 1   
|        |  |         |  | Condensed Consolidated Statements of Operations for the three months ended July 31, 2001 and 2000 (Unaudited) |  | 2   
|        |  |         |  | Condensed Consolidated Statements of Cash Flows for the three months ended July 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                         |  | 6   
|        |  | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risks                                                   |  | 10  
|        |  |         |  |                                                                                                               |  |     
|PART II |  |         |  | OTHER INFORMATION                                                                                             |  |     
|        |  | Item 1. |  | Legal Proceedings                                                                                             |  | 11  
|        |  | Item 2. |  | Changes in Securities and Use of Proceeds                                                                     |  | 11  
|        |  | Item 3. |  | Defaults Upon Senior Securities                                                                               |  | 11  
|        |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                                           |  | 11  
|        |  | Item 5. |  | Other Information                                                                                             |  | 11  
|        |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                              |  | 11  

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Part 1FINANCIAL INFORMATION        Item 1. Financial Statements        PMR Corporation        Condensed Consolidated Balance Sheets

|                                                                                                             |                                                                                                                               | July 31,
2001 |            | April 30,
2001 |  
|------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | ------------- | ---------- | -------------- | -
|
|Assets                                                                                                       |                                                                                                                               |               |            |                |  
|Current assets:                                                                                              |                                                                                                                               |               |            |                |  
|                                                                                                             | Cash and cash equivalents                                                                                                     |               | $          | 13,901,725     |  
|                                                                                                             | Short-term investments, available for sale                                                                                    |               |            | 3,551,883      |  
|                                                                                                             | Accounts receivable, net of allowance for doubtful accounts of $5,002,000 in 2002 and $4,992,000 in 2001                      |               |            | 730,027        |  
|                                                                                                             | Prepaid expenses and other current assets                                                                                     |               |            | 361,954        |  
|                                                                                                             |                                                                                                                               |               |            |                |  
|Total current assets                                                                                         |                                                                                                                               |               | 18,545,589 |                |  
|Furniture and office equipment, net of accumulated depreciation of $2,557,000 in 2002 and $2,400,000 in 2001 |                                                                                                                               |               | 583,975    |                |  
|Long-term accounts and notes receivable, net of allowance for doubtful acounts of $520,000 in 2002 and 2001  |                                                                                                                               |               | 663,548    |                |  
|Other assets                                                                                                 |                                                                                                                               |               | 67,236     |                |  
|                                                                                                             |                                                                                                                               |               |            |                |  
|Total assets                                                                                                 |                                                                                                                               | $             | 19,860,348 |                | $
|                                                                                                             |                                                                                                                               |               |            |                |  
|Liabilities and stockholders' equity                                                                         |                                                                                                                               |               |            |                |  
|Current liabilities:                                                                                         |                                                                                                                               |               |            |                |  
|                                                                                                             | Accounts payable                                                                                                              |               | $          | 256,127        |  
|                                                                                                             | Accrued expenses                                                                                                              |               |            | 1,542,266      |  
|                                                                                                             | Accrued compensation and employee benefits                                                                                    |               |            | 452,275        |  
|                                                                                                             | Advances from case management agencies                                                                                        |               |            | 1,383,411      |  
|                                                                                                             |                                                                                                                               |               |            |                |  
|Total current liabilities                                                                                    |                                                                                                                               |               | 3,634,079  |                |  
|Notes payable, long-term portion                                                                             |                                                                                                                               |               | 44,028     |                |  
|Contract settlement reserve                                                                                  |                                                                                                                               |               | 4,199,146  |                |  
|Other long-term liabilities                                                                                  |                                                                                                                               |               | 19,807     |                |  
|Stockholders' equity:                                                                                        |                                                                                                                               |               |            |                |  
|                                                                                                             | Convertible preferred stock, $.01 par value, authorized shares1,000,000; issued and outstanding sharesnone in 2002 and 2001 |               |            |               |  
|                                                                                                             | 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                                                                                                    |               |            | 31,279,109     |  
|                                                                                                             | Notes receivable from employees and officers                                                                                  |               |            | (539,260       | )
|                                                                                                             | Accumulated other comprehensive income                                                                                        |               |            | 40,981         |  
|                                                                                                             | Accumulated deficit                                                                                                           |               |            | (18,846,245    | )
|                                                                                                             | Treasury stock, common stock at cost20,775 shares in 2002 and 10,000 shares in 2001                                          |               |            | (43,847        | )
|                                                                                                             |                                                                                                                               |               |            |                |  
|Total stockholders' equity                                                                                   |                                                                                                                               |               | 11,963,288 |                |  
|                                                                                                             |                                                                                                                               |               |            |                |  
|Total liabilities and stockholders' equity                                                                   |                                                                                                                               | $             | 19,860,348 |                | $
|                                                                                                             |                                                                                                                               |               |            |                |  

See
notes to condensed consolidated financial statements

1

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PMR CORPORATION        Condensed Consolidated Statements of Operations        Unaudited

|                                         |                                       | Three months ended July 31, |               
|---------------------------------------- | ------------------------------------- | --------------------------- | --------------
|
|Revenues                                 |                                       | $                           | 4,505,291     
|                                         |                                       |                             |               
|Expenses:                                |                                       |                             |               
|                                         | Direct operating expenses             |                             |               
|                                         | Research and development              |                             |               
|                                         | Marketing, general and administrative |                             |               
|                                         | Provision for doubtful accounts       |                             |               
|                                         | Depreciation and amortization         |                             |               
|                                         | Special charge                        |                             |               
|                                         |                                       |                             |               
|                                         |                                       |                             | Total expenses
|                                         |                                       |                             |               
|                                         |                                       |                             |               
|Interest expense                         |                                       |                             | (3,728        
|Other incomeinterest                    |                                       |                             | 176,966       
|                                         |                                       |                             |               
|Net loss                                 |                                       | $                           | (1,498,119    
|                                         |                                       |                             |               
|                                         |                                       |                             |               
|Net loss per common share:               |                                       |                             |               
|                                         | Basic                                 |                             | $             
|                                         |                                       |                             |               
|                                         | Diluted                               |                             | $             
|                                         |                                       |                             |               
|                                         |                                       |                             |               
|Shares used in computing loss per share: |                                       |                             |               
|                                         | Basic                                 |                             |               
|                                         |                                       |                             |               
|                                         | Diluted                               |                             |               
|                                         |                                       |                             |               

See
notes to condensed consolidated financial statements

2

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PMR Corporation        Condensed Consolidated Statements of Cash Flows        Unaudited

|                                                 |                                                                                           | Three Months Ended July 31,                  |                                           
|------------------------------------------------ | ----------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------
|
|Operating activities                             |                                                                                           |                                              |                                           
|                                                 | Net loss                                                                                  |                                              | $                                         
|                                                 | Adjustments to reconcile net loss to net cash (used in) 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 receivables            
|                                                 |                                                                                           |                                              | 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 (used in) 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 of disposals                             |                                              |                                           
|                                                 |                                                                                           |                                              |                                           
|                                                 | Net cash provided by investing activities                                                 |                                              |                                           
|                                                 |                                                                                           |                                              |                                           
|                                                 |                                                                                           |                                              |                                           
|Financing activities                             |                                                                                           |                                              |                                           
|                                                 | Payments on note payable to bank                                                          |                                              |                                           
|                                                 | Acquisition of treasury stock                                                             |                                              |                                           
|                                                 |                                                                                           |                                              |                                           
|                                                 | Net cash used in financing activities                                                     |                                              |                                           
|                                                 |                                                                                           |                                              |                                           
|                                                 |                                                                                           |                                              |                                           
|Net increase in cash and cash equivalents        |                                                                                           |                                              | 265,603                                   
|Cash and cash equivalents at beginning of period |                                                                                           |                                              | 13,636,122                                
|                                                 |                                                                                           |                                              |                                           
|Cash and cash equivalents at end of period       |                                                                                           | $                                            | 13,901,725                                
|                                                 |                                                                                           |                                              |                                           

See
notes to condensed consolidated financial statements

3

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PMR CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)        July 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 months ended July 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.

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 July 31, |           
|---------------------------------------------------------------- | ----------------------------------- | --------------------------- | ----------
|
|Numerator:                                                       |                                     |                             |           
|Net loss available to common stockholders                        |                                     | $                           | (1,498,119
|                                                                 |                                     |                             |           
|                                                                 |                                     |                             |           
|Denominator:                                                     |                                     |                             |           
|Weighted average shares outstanding for basic earnings per share |                                     |                             | 7,238,070 
|                                                                 |                                     |                             |           
|Effects of dilutive securities:                                  |                                     |                             |           
|                                                                 | Employee stock options and warrants |                             |           
|                                                                 |                                     |                             |           
|Dilutive potential common shares                                 |                                     |                             |          
|                                                                 |                                     |                             |           
|Shares used in computing diluted loss per common share           |                                     |                             | 7,238,070 
|                                                                 |                                     |                             |           
|Loss per common share, basic                                     |                                     | $                           | (0.21     
|                                                                 |                                     |                             |           
|Loss per common share, diluted                                   |                                     | $                           | (0.21     
|                                                                 |                                     |                             |           

No
potential common shares were included in the computation of diluted earnings per share because the inclusion thereof would have had an antidilutive effect.

4

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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:

|              |  | Three months ended July 31, |          
|------------- |  | --------------------------- | ---------
|
|2001          |  |                             |          
|Revenues      |  | $                           | 4,505,291
|Income (loss) |  |                             | 680,922  
|              |  |                             |          
|2000          |  |                             |          
|Revenues      |  | $                           | 5,182,411
|Income (loss) |  |                             | 485,184  

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
July 31, 2001, after repayments from certain employees and officers, $539,000 is owed under the Stock Notes and $451,000 under the Tax Notes. $312,000 of the Stock Notes and all of the Tax
Notes bear interest of 6.21% and are due on December 31, 2004. The rest of the Stock Notes are due on December 31, 2005 which bear interest of 5.87% per annum.

5

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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 July 31, 2001, the Company continued to focus on maximizing cash flow in the Outpatient and Case Management Programs.

In
July 2001, after exploring numerous strategic alternatives, the Company terminated the operations of its InfoScriber subsidiary and licensed the InfoScriber application to
Conundrum Communications, Inc. ("Conundrum") on an exclusive and perpetual basis in the behavioral and social services areas.

InfoScriber
Corporation had a business plan to become a leading provider of strategic health information for pharmaceutical companies, medical device companies, managed care
organizations and healthcare providers. The Company made significant progress in the completion of the software program, the signing and implementation of a group of select physicians as well as
significant discussions with purchasers of the associated data. As anticipated, InfoScriber was using cash and the Company had hoped to seek additional third-party financing to fund the growth of the
subsidiary. However, given the state of the capital markets and the need for significant additional investment to bring the InfoScriber subsidiary to profitability, it was determined in
July 2001 that it would be in the shareholders' best interest to terminate the operations of InfoScriber. In addition, on July 30, 2001, the Company agreed to license the InfoScriber
application to Conundrum. Conundrum will have the opportunity to grow the InfoScriber application in the behavioral health and social service areas while our InfoScriber subsidiary will be eligible to
receive royalties for a period of five (5) years. Other than some transition services, which will be 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.

The
Company's cash, cash equivalents, and short-term investments position was $17.5 million at July 31, 2001. The Company expects this cash balance to
increase during fiscal year 2002 as the Company's continuing operations produce positive cash flow and the Company continues to collect on accounts receivable balances from closed programs.

6

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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 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 July 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 Medical 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 July 31, 2001 Compared to Quarter Ended July 31, 2000

RevenueRevenues decreased from $5.2 million for the quarter ended July 31, 2000 to
$4.5 million for the quarter ended July 31, 2001, a decrease of $677,000, or (13.1%). The Outpatient Programs recorded revenues of $372,000 for the quarter ended July 31, 2001, a
decrease of approximately $1.2 million or (75.8%) as compared to $1.5 million for the quarter ended July 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
July 31, 2000 to $4.1 million for the quarter ended July 31, 2001, an increase of $487,000 or 13.4%. 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 $3.8 million in the first quarter of fiscal year 2002, compared to $5.3 million a
year ago, a decrease of 26.8%. As a percentage of revenues, direct operating expenses decreased to 85.4% for the quarter ended July 31, 2001 from 101.5% for the quarter ended July 31
2000. The decrease was primarily attributable to the decrease in direct operating expenses for the InfoScriber subsidiary.

Research and DevelopmentIn the first quarter ended July 31, 2001, the Company incurred $197,000 in software
development costs related to version 2 of the InfoScriber application. With the termination of the operations of InfoScriber, the Company does not anticipate incurring any further costs associated
with research and development for InfoScriber.

7

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Marketing, General and AdministrativeMarketing, general and administrative expenses from continuing operations were
$1.2 million for the quarter ended July 31, 2001 versus $1.3 million for the quarter ended July 31, 2000. As a percentage of total revenues, marketing, general and
administrative expenses were relatively unchanged at 27.2% and 25.3% for the quarters ended July 31, 2001 and 2000, respectively.

Provision for Doubtful AccountsExpenses related to the provision for doubtful accounts decreased from $213,000 for the
quarter ended July 31, 2000 to $9,000 for the quarter ended July 31, 2001, a decrease of approximately $204,000 or (95.7%). The decrease was primarily due to fewer programs in fiscal
year 2001. The Company expects the allowance for doubtful accounts to fluctuate based on the amount of claims under review in its Outpatient Programs and the number of programs that the Company
manages or administers.

Depreciation and AmortizationDepreciation and amortization expenses decreased from $240,000 for the quarter ended
July 31, 2000 to $172,000 for the quarter ended July 31, 2001, a decrease of $67,000 or (28.1%). The decrease was due primarily to disposal and write-off of assets as a
result of contract terminations or expirations.

Special ChargeDuring the quarter ended July 31, 2001, the Company recorded special charges totaling $726,000. 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 $140,000 related to contract terminations or expirations.

Net Interest IncomeInterest income, net of interest expense, decreased from $328,000 for the quarter ended July 31,
2000 to $173,000 for the quarter ended July 31, 2001, a decrease of $154,000 or (47.1%). The decrease was primarily due to lower cash, cash equivalents, and short-term investments
at July 31, 2001 versus July 31, 2000. The reduction in these 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.

Net lossThe Company recognized a net loss of $1.5 million during the quarter ended July 31, 2001 versus
$1.7 million for the same period in the preceding year, a $155,000 decrease or (9.4%). The decrease was primarily due to the reduction in marketing, general and administrative expenses as well
as provision for doubtful accounts, all of which resulted from the reduction in the Company's Outpatient Programs.

Liquidity and Capital Resources

For the three months ended July 31, 2001, net cash used in operating activities was $245,000 versus $31,000 in cash provided by operating activities
during the same period in the prior year.

Working
capital as of July 31, 2001 was approximately $14.9 million, a decrease of $518,000, as compared to working capital at April 30, 2001. Cash, cash
equivalents and short-term investments totaled $17.5 million as of July 31, 2001, a decrease of $312,000 as compared to April 30, 2001. The decrease in working
capital, cash and cash equivalents, and short-term investments was primarily a result of the cash burn from InfoScriber for the first quarter of fiscal year 2002.

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.

8

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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 three months ended July 31, 2001, the Company repurchased 10,775 shares of its common stock at an average price of $1.52 per share, or $16,347 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 shareholders. No dividends were paid during the three months ended July 31, 2001.

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 three 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 July 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 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

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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.

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 $160,000 outstanding under this note at
July 31, 2001.

At
July 31, 2001, the fair market value of the investment in debt securities was approximately $3.6 million, which includes an unrealized gain of approximately $41,000.
These securities bear interest rates ranging from 3.74% 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

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

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

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