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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 1996

Commission File Number 33-80731

PHYSICIAN SUPPORT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware 13-3624081
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

Route 230 and Eby-Chiques Road
Mt. Joy, Pennsylvania 17552
(Address, including zip code, of principal executive offices)

(717) 653-5340
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $.001 per share

Indicate by a 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 _____
-----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on March 15, 1997 was approximately
$63,296,000.

As of the close of business on March 15, 1997 there were 9,720,033 shares
of the registrant's Common Stock, par value $.001 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the proxy statement to be prepared in connection with the 1997
annual meeting of Stockholders are incorporated by reference into Part III.

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PART I

ITEM 1. BUSINESS.

General

Physician Support Systems, Inc., was formed as a Delaware corporation in
1991 as the sucessor to a business founded in 1983. Unless the context indicates
otherwise, as used herein the "Company" or "PSS" means Physician Support
Systems, Inc. and its subsidiaries. The Company is a leading provider of
business management services to health care providers. The Company's clients
include principally hospital-affiliated physicians and hospitals. The Company's
physician clients practice medicine in an array of settings, including solo and
group practices, independent practice associations, specialty networks and other
affiliated-physician groups and practice various specialties, including
radiology, anesthesiology, emergency room medicine, pathology, cardiology,
surgery and primary care. The Company currently provides business management
services to over 450 hospitals and 4500 physicians throughout the United States.

The Company offers its clients a broad variety of business management
services, ranging from accounts receivable management to financial,
administrative and strategic support, data management and information services.
In addition, the Company employs its proprietary technology and financial and
patient encounter databases to provide a comprehensive range of managed care
services to its clients, including contract review, contract negotiation,
implementation and administration, thereby enhancing its clients' ability to
profitably participate in managed care systems. For its services, the Company
generally is compensated with a management fee based upon a percentage of its
clients' net collections, which percentage is determined after considering a
broad range of factors, including the nature of the services to be provided and,
in the case of physician clients, the physician's medical specialty.

The Company's business strategy is to build upon its reputation and
expertise in providing a broad range of cost-effective, value-added business
management services to physicians and hospitals. The Company intends to
continue its emphasis on providing its clients with a broad array of quality,
personalized services and strong performance on their behalf, utilizing
proprietary software systems.

A key aspect of the Company's strategy in 1996 was the acquisition of other
companies providing business management services to hospitals and physicians.
The Company has acquired 11 businesses since January 1996 for aggregate
consideration (including deferred payments) of approximately $37.2 million in
cash and stock valued at the time of such acquisitions at approximately $64.2
million. The Company intends to continue to devote time to identifying and
pursuing acquisition candidates, although it may commit less of its resources to
acquisitions in 1997.

In February 1996, the Company completed an initial public offering of
4,025,000 shares of common stock, par value $.001 per share (the "Common
Stock"), aggregating approximately $43.6 million in net proceeds to the Company.

Industry Background

The Health Care Financing Administration estimates that health care
spending in the United States totaled approximately $1 trillion in 1994, with
approximately $200 billion attributable to physician services and approximately
$400 billion spent on hospital services. As a large and rapidly growing
component of overall health care costs, health care providers have come under
increasing pressure due to an increasingly complex reimbursement environment,
the continued penetration of

-2-

managed care and the ongoing prospect of health care reform legislation. Due to
these and other market forces, health care providers have, in increasing
numbers, sought to align themselves with each other and with business management
services companies in an effort to acquire enhanced management capabilities and
information systems. In addition, hospitals have come under pressure as more of
their services are provided on an outpatient basis. As the volume of outpatient
activity increases and reimbursement procedures grow in complexity, many
hospitals have chosen to outsource their accounts receivable and other business
management functions. The Company believes that by providing a broad array of
business management services to physicians and hospitals, it enables physicians
to maintain independence and ownership of their practices while providing them
with the expertise necessary to meet the challenges posed by the changing health
care environment, and it facilitates the timely collection of accounts
receivable for hospitals. In addition, as more physicians face pressure to
affiliate with other health care providers or managed care organizations, their
need for advisors experienced in analyzing and negotiating such affiliations
increases. Finally, the Company is able to service the business needs of
physician practice management groups, management service organizations,
independent physician associations and other specialty provider organizations,
many of which have developed in light of the changing health care environment.

The Company believes that the health care business management services
industry is highly fragmented. Many of the participants in the industry are
smaller firms with annual revenues of less than $2 million that have limited
capital and management resources and limited patient encounter databases. These
firms offer primarily accounts receivable management services, have a narrow
range of additional services, and often lack the ability, due to their limited
patient encounter databases, to provide comparative information to assist their
clients in managing their practices more effectively, particularly in evaluating
managed care proposals. As health care providers form larger networks such
competitors are less able to service such large, complex clients, particularly
where the provider group covers a broad geographic area. The Company believes
that, as health care providers continue to demand greater sophistication,
broader services and technology-driven products, these smaller service providers
will find it increasingly difficult to compete.

Business Management Services

In recent years, the health care business management services industry has
changed from one where the service provider was responsible primarily for
accounts receivable management to one where a comprehensive, integrated range of
services is provided. The Company provides a broad variety of business
management services, including fee schedule development and management,
capitation plan analysis and administration, patient and resource scheduling,
managed care contract negotiation, budgeting, cash management, payroll and
accounts payable, data collection, analysis and reporting, encounters database
design and analysis, patient demographic and encounter information and resource
utilization analysis.

The Company does not provide the full range of its business management
services to any one client, although generally all clients receive accounts
receivable management services. The Company generally does not charge
separately for additional business management services, although its management
fee (which is based on a percentage of its clients' net collections) does take
into account the nature of the services to be provided.

The Company believes that the level of service provided is a distinguishing
factor among health care business management service companies. Accordingly,
the Company emphasizes a personalized

-3-

approach in providing services to its clients. Through its client
representatives, the Company is able to maintain regular contact with its
clients and respond rapidly, often in person, to questions or problems. In most
cases, the Company provides monthly and quarterly reports to its clients. These
reports indicate, among other things, the client's accounts receivable activity
for the period, financial and clinical analysis of patients seen and procedures
performed for the period, referring physician information, and a financial
analysis of payors' activity. The Company's client representatives typically
review these detailed financial reports with the clients on a regular basis. In
addition, the Company's client representatives may share industry or regional
data with the Company's clients to help clients better understand their business
relative to that of other physicians or hospitals.

Customers

The Company's clients consist of hospitals and primarily hospital-
affiliated physicians. The Company estimates that it provides services (either
directly or through its physician group clients) to over 450 hospitals and 4500
physicians. The Company's physician clients practice various specialties,
including radiology, anesthesiology, emergency room medicine, pathology,
cardiology and surgery.

In most cases, the Company enters into written agreements with its
physician clients. The Company's written agreements generally range from month-
to-month to five years in duration, renew automatically at the end of the
initial term unless notice is given by either party 30 to 90 days prior to
renewal and, in many cases, may be cancelled by either party with 30 to 90 days
written notice. In certain regions where the Company conducts business, the
industry practice is to provide business management services without a written
contract. In those cases, typically the Company does not require a written
agreement with its physician clients.

Substantially all of the Company's arrangements for business management
services provide for management fees payable to the Company based upon a
percentage of the Company's clients' net collections. Management fees are
negotiated at the outset of an engagement based upon a number of factors,
including the range of services to be provided by the Company, an analysis of
the collectability of a client's accounts receivable portfolio, an estimate of
the costs of such collection and, in the case of physician clients, the types of
physician specialists involved. No single customer or organization accounted
for 10% or more of the Company's total revenue in 1996.

A client of the Company representing less than 5% of the Company's 1996
revenues filed for protection under the United States Bankruptcy Code during
February 1997. There was no effect of this filing on the Company's results of
operations or financial position as of and for the year ended December 31, 1996.
The Company cannot determine the effect on 1997 operations of this event at this
time.

Acquisitions

Since the acquisition of the predecessor business of the Company in 1991,
the Company has grown primarily through acquisitions. During the year ended
December 31, 1996, the Company acquired 10 businesses and completed another
acquisition in February 1997. The Company acquired these businesses through
purchases of stock or assets with cash, shares of Common Stock or both.

-4-

Acquisition Strategy. Generally, the Company looks for acquisition
--------------------
candidates that share its philosophy of focusing on high-quality service to
clients and focuses on acquisition candidates that have strong management,
demonstrate potential for revenue growth or continued profitability and are
compatible with the Company's business or provide an opportunity to expand into
other services, geographic regions or client specialties. PSS typically
encourages and expects the management of its acquisition candidates to remain
involved in the business on a long-term basis after the Company acquires the
business in order to ease the transition to the Company's ownership and utilize
the expertise and skills of the acquired company's managers long term. Although
it evaluates each acquisition candidate on a case-by-case basis, the Company
does not currently anticipate acquiring other businesses where significant
consolidation or staff reductions would be required, and PSS anticipates that if
any consolidation were necessary, it would be gradual.

Acquired Businesses. Unless otherwise indicated, each of the acquisitions
-------------------
described below was accounted for using the purchase method of accounting and
the aggregate purchase price included amounts paid in consideration of covenants
not to compete. In some cases, the purchase price is subject to adjustment,
based on the retention of clients for certain periods following the acquisition
or the satisfaction of certain other performance-based criteria. In addition, in
each case employment or consulting agreements were entered into with senior
management of the acquired companies for periods generally ranging from three to
five years following the acquisition. Generally, selling shareholders and select
senior management sign non-compete agreements of up to five years duration.

In February 1996, the Company acquired the capital stock of North Coast
Health Care Management, Inc. and substantially all of the assets of North Coast
Account Systems, Inc. and Medical Dental Invoicing Services, Inc. (the "NCHC
Group") These businesses, based in Cleveland, Ohio, provide business management
services to emergency room and other physicians in Ohio, West Virginia and
Kentucky. The aggregate purchase price for these businesses was $8.0 million in
cash and deferred payments.

In February 1996, the Company acquired substantially all of the assets of
Medical Management Support, Inc. ("MMS"), a business providing accounts
receivable management services primarily to anesthesiologists and other
physicians in the greater Seattle, Washington area. The aggregate purchase
price for the business was $2.5 million in cash.

In February 1996, the Company acquired substantially all of the assets of
Data Processing Systems, Inc. ("DPS"), which provides accounts receivable
management services to radiologists, pathologists and other physicians in the
Birmingham, Alabama area. The aggregate purchase price for the business was
$1.15 million in cash and deferred, contingent payments.

In May 1996, the Company acquired substantially all of the assets of PBS
Northwest, Inc. ("PBS"), which provides business management services primarily
to anesthesiologists and surgeons in the Portland, Oregon area. The aggregate
purchase price for the business was $3.0 million in cash.

In May 1996, the Company acquired substantially all of the assets of ALM,
Inc. ("ALM"), a company based in Leawood, Kansas, providing business management
services primarily to anesthesiologists and other physicians. The aggregate
purchase price for the business was $1.6 million in cash and deferred,
contingent payments and 11,628 shares of Common Stock.

-5-

In June 1996, the Company acquired all of the capital stock of Synergistic
Systems, Inc. ("SSI" or "Synergistic Systems") in exchange for 944,992 shares of
Common Stock. Synergistic Systems provides business management services
primarily in California, Washington, Georgia, and Florida. This transaction has
been accounted for using the pooling of interests method of accounting and,
accordingly, the financial statements of the Company have been restated to
reflect the operations of SSI.

In August 1996, the Company acquired all of the capital stock of EE&C
Financial Services, Inc. ("EE&C") in exchange for 1,026,852 shares of Common
Stock. In addition, the Company also repaid outstanding indebtedness of EE&C in
an aggregate amount of $2,622,971 by issuing an additional 131,148 shares of
Common Stock. EE&C provides business management services to hospitals in New
York and New Jersey and other parts of the United States. This transaction has
been accounted for using the pooling of interests method of accounting and,
accordingly, the financial statements of the Company have been restated to
reflect the operations of EE&C.

In September 1996, the Company acquired all of the capital stock of EE&C
Health Services, Inc., Med-Data Interface Systems, LLC and Medical Intercept
Systems, LLC (collectively, the "MIS Group") in exchange for an aggregate of
approximately $3.7 million in cash and 285,998 shares of Common Stock. The MIS
Group provides business management services to radiology, pathology,
anesthesiology, surgery, and primary care physicians primarily in Texas,
Illinois and New Jersey.

In December 1996, the Company acquired all of the capital stock of C-Care,
Inc., H.O.P.E. Enterprises Group, Inc. and Professional Medical Recovery
Service, Inc. (collectively, the "MARS Group"). These businesses provide
patient financial services to hospitals in New Jersey, Pennsylvania and
Delaware. The aggregate purchase price for the MARS Group was $7.1 million in
cash and 175,439 shares of Common Stock.

In December 1996, the Company also acquired all of the capital stock of
Revenue Production Management, Inc. ("RPM") in exchange for 315,048 shares of
Common Stock. Revenue Production Management provides business management
services to hospitals and physicians primarily in Illinois and Missouri. This
transaction has been accounted for using the pooling of interests method of
accounting and, accordingly, the financial statements of the Company have been
restated to reflect the operations of RPM.

In February 1997, the Company acquired all of the capital stock of Physerv
Solutions, Inc. ("Physerv"), based in Michigan, which provides business
management services to anesthesiologists throughout the United States. The
aggregate purchase price was approximately $10.1 million in cash and 563,934
shares of Common Stock.

-6-

Competition

The business of providing business management services to the health care
industry is highly competitive. The Company estimates that it competes with
several relatively sophisticated local, regional and national business
management services organizations, with smaller, less-sophisticated local
accounts receivable management services businesses and with hospitals and
physicians that self-manage their businesses and accounts receivable. The
largest independent provider of billing and accounts receivable management
services to physicians in the United States is Medaphis Corporation, which is
substantially larger than the Company and has substantially greater resources.

The Company believes that the principal competitive factors in its industry
are the quality and range of services provided to clients, including the
optimization of revenue to physician clients for each procedure performed or
service provided. In the Company's view, the fees charged for its services are
a less important factor, although it believes that its fees are competitive with
other service providers. In addressing certain complexities created by managed
care initiatives, the Company believes that one of the principal competitive
factors is having a patient financial database and other market information to
enable an assessment of managed care proposals. The Company believes that,
through use of its proprietary technology and regional and specialty expertise,
it is able to compete effectively in providing business management services in
the managed care market.

Regulation

Various state and federal laws may regulate the Company's business of
providing business management services to hospitals and physicians. The Company
also is subject to laws and regulations relating to business corporations
generally. The Company believes that its operations are in material compliance
with applicable laws. However, many aspects of the Company's business
operations have not been the subject of state or federal regulatory
interpretation, and certain areas of the Company's business are highly technical
in nature. In addition, as the Company's business expands by the addition of
services provided or geographically, it may become subject to additional federal
or state regulations based on the services it provides or the states in which it
conducts business.

Regulatory authorities have broad discretion concerning how these laws and
regulations are interpreted and how they are enforced. The Company may,
therefore, be subject to lengthy and expensive investigations of its business
operations. If the Company were found to be in violation of these laws or
regulations, the Company could be subject to criminal or civil penalties or
both, which could limit or prevent the Company from providing its business
management services.

Under regulations in effect in Pennsylvania prior to December 15, 1995,
emergency room services were required to be differentiated between non-emergency
and emergency services and were subject to different reimbursement rates. In
this regard, the Pennsylvania Department of Public Welfare ("DPW") previously
announced that it was reviewing the billing procedures of emergency room
physicians in Pennsylvania to determine whether services had been accurately
reflected in the claims submitted for Medicaid reimbursement. In connection with
the DPW's review, a former emergency room client of the Company had requested
that the Company pay approximately $66,000 and related expenses as partial
reimbursement of the client's settlement with the DPW, representing
approximately $6,000 of fees to the Company attributable to the over-
reimbursement to the client plus a $60,000 penalty. Counsel for the Company has
attempted to negotiate a settlement of this matter directly with counsel for the
former client for more than a year. Counsel for the former client has not
responded to the Company's most recent offer of compromise.

-7-

In connection with this matter, the Company, along with Counsel, met with
DPW officials. As a result of this meeting, the Company volunteered
to work with its physician clients to develop a process to resolve this matter.
This process is ongoing. There have been confidential settlement agreements
executed between certain physician clients and the DPW. Under these agreements
to date, the Company has not been required to make payments to the physician
clients or the DPW, and the Company has been given a release by the DPW under
these executed agreements. Although the Company believes that its current
practices comply with applicable regulatory guidelines, similar issues may exist
with respect to past billing at some or all of its current and former emergency
room clients. The Company believes that it is insured against such claims and
believes that the amounts involved will not be material.

In accordance with Medicare regulations, physicians and hospitals are
permitted to assign Medicare claims to a billing and collection service only in
certain limited circumstances. The Medicare statutes that restrict assignment
of Medicare claims are supplemented by Medicare regulations and provisions in
the Medicare Carrier's Manual (the "Manual"). The Medicare regulations and the
Manual provide that a billing service that prepares and send bills for the
provider or physician and does not receive and negotiate the checks made payable
to the provider or physician does not violate the restrictions on assignment of
Medicare claims. The Company believes that its practices do not violate the
restrictions on assignment of Medicare claims and that it operates in a manner
consistent with these provisions.

The Social Security Act imposes criminal penalties for paying or receiving
remuneration (which is deemed a kickback, bribe or rebate) in connection with
Medicare or Medicaid programs. Violation of this law is a felony, punishable by
fines and imprisonment. These anti-kickback laws and rules have been broadly
interpreted to prohibit the payment, solicitation, offering or receipt of any
form of remuneration in return for the referral of Medicare or Medicaid patients
or any item or service that is covered by Medicare or Medicaid reimbursement.
The Company believes that its business operations do not put it in a position to
make or induce the referral of patients or services reimbursed under government
programs and, therefore, believes that its practices do not violate the federal
anti-kickback statute. If, however, the Company were found in violation of
these laws, the Company could be subject to substantial civil monetary fines,
criminal sanctions or both.

The Company also may be subject to criminal, civil and administrative
penalties under federal and state law prohibitions against submitting false
claims for payments. Generally, criminal penalties subjecting participants to
fines and imprisonment require that the entity act knowingly, willfully or with
fraudulent intent. Civil statutes provide for monetary penalties. The Company
also may be subject to criminal laws regarding failure to disclose known
overpayments under Medicare or Medicaid.

Various states prohibit a physician from sharing or "splitting" fees with
persons not authorized to practice medicine. The Company believes that its
charges to its clients do not violate applicable fee splitting prohibitions. If
this belief is incorrect and the Company is determined to be engaged in fee
splitting arrangements with its clients, those clients would be subject to
charges of professional misconduct and penalties ranging from censure and
reprimand to revocation of their medical licenses. In addition, the Company
could be deprived of access to the courts to collect fees due from those
clients, thereby materially and adversely affecting the Company's revenues and
prospects.

Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Federal
Fair Debt Act") sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. The Federal
Fair Debt Act also provides for, among other things, a civil right of action
against any debt collector who fails to comply with the provisions thereof.
Various states have also promulgated laws and regulations that

-8-

govern credit collection practices. In general, these laws and regulations
prohibit certain fraudulent and oppressive credit collection practices and also
may impose license or registration requirements upon collection agencies. In
addition, state credit collection laws and regulations generally provide for
criminal fines, civil penalties, injunctions and jail terms for collection
agency personnel who fail to comply with such laws and regulations and may
entitle states to recover unclaimed refunds from overcollections. The accounts
receivable management services the Company provides to its clients are not
considered debt collection services. However, as the activities of several of
the Company's subsidiaries include collection services, the Company may be
subjected to regulation as a "debt collector" under the Federal Fair Debt Act
and as a "collection agency" under certain state collection agency laws and
regulations.

Various states regulate the provision of administrative and business
services by third parties to physician-sponsored health plans. In addition,
certain federal or state consumer protection laws may apply to the Company's
billing activities insofar as PSS bills patients directly for the cost of
physician services provided.

Comprehensive federal and state regulations govern the ownership and
operation of hospitals. Hospitals are paid a predetermined amount for operating
expenses relating to each Medicare patient admission based on the patient's
diagnosis. Additional changes in the reimbursement provisions of the Medicare
and Medicaid programs may continue to reduce the rate of increase of federal
expenditures for hospital inpatient costs and charges. Such changes could have
an adverse effect on the operations of hospitals in general, and consequently
reduce the amount of the Company's revenue related to its hospital clients.

The Company anticipates that various health care reform proposals may be
introduced at the federal or state level. The Company is unable to predict
whether any such proposals will apply to the operation of the Company's business
or whether, if adopted, any such proposals would materially adversely affect the
Company.

Employees

At March 15, 1997, the Company had approximately 2,000 full-time equivalent
employees. The Company is not a party to any labor union contract and believes
that its relations with its employees are satisfactory.

ITEM 2. PROPERTIES.

The Company's principal executive offices are located at Route 230 and Eby-
Chiques Road, Mt. Joy, Pennsylvania. The Company maintains approximately 25
additional significant offices in 14 states, 15 of which include processing
centers of varying sizes. The Company leases all of its facilities, which in the
aggregate constitute approximately 320,000 square feet of office space. Such
leases have terms remaining ranging from month-to-month to 8 years, in most
cases with options to renew.

The Company believes that its facilities are adequate for its current
needs. The Company expects to renew its current leases from time to time or to
lease new space as necessary. In addition, the Company expects to lease
additional space as necessary to accommodate possible expansion of the Company.

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ITEM 3. LEGAL PROCEEDINGS.

As of the date hereof, there are no legal proceedings pending against or
involving the Company that, in the opinion of management, could have a material
adverse effect on the business, financial condition or results of operations of
the Company.

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

The Company held its 1996 annual meeting of stockholders on November 8,
1996. In addition to electing directors, stockholders ratified the selection of
Deloitte & Touche LLP as the Company's independent auditors for 1996. A total of
6,143,329 votes were cast for, and 140,200 votes were withheld for each of
Messrs. Gilson, McCall, and Vague and for Ms. Campbell. A total of 6,143,129
votes were cast for, and 140,400 votes were withheld for each of Messrs.
Berkowitz and Potter. Messrs. Berkowitz, Gilson, McCall, Potter and Vague and
Ms. Campbell represented the slate of directors put forward by the Company. A
total of 6,283,229 votes were cast for and there were 300 abstentions with
respect to the ratification of Deloitte & Touche LLP as the Company's
independent auditors for 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company completed an initial public offering of 4,025,000 shares of
Common Stock in February 1996. The Common Stock is traded in the over-the-
counter market and prices are reported on the Nasdaq National Market System
under the symbol "PHSS."

The following table sets forth, for the periods indicated, the high and low
closing bid quotations for the Common Stock on the Nasdaq National Market System
from February 12, 1996 through December 31, 1996. The bid prices reflect inter-
dealer quotations, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.

High Low
------ ------

February 12 - March 31, 1996 21 5/8 14 1/2
Second Quarter 1996 25 3/4 17 1/2
Third Quarter 1996 25 1/2 13 3/8
Fourth Quarter 1996 24 14 3/4

At March 15, 1997 there were 98 holders of record of Common Stock. The
Company has never paid dividends on its Common Stock and does not anticipate
doing so in the foreseeable future. In addition, under the terms of its Loan
Agreement with Corestates Bank, N.A., the Company is restricted in its ability
to pay cash dividends.

The information called for by this Item for a description of unregistered
share issuances in 1996 is incorporated herein by reference to the information
set forth under "Acquisitions -- Acquired Businesses" at Item 1 of this Annual
Report on Form 10-K. The securities issued as described at Item 1 were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.

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ITEM 6. SELECTED FINANCIAL DATA.

The selected financial data as of December 31, 1995 and 1996 and for the
fiscal years ended December 31, 1994, 1995 and 1996 have been derived from the
consolidated financial statements included elsewhere in this filing which have
been audited by Deloitte & Touche LLP, independent public accountants, whose
report thereon is also included elsewhere in this filing. The selected financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and notes thereto as of December 31, 1995 and
1996 for the fiscal years ended December 31, 1994, 1995 and 1996 included
elsewhere in this filing.

Year ended December 31,
---------------------------------------------------------------------
1992 1993(1) 1994 1995 1996
---- ------ ---- ---- ----
(In thousands, except per share data)

Income Statement Data: $28,475 $44,311 $55,847 $59,514 $75,191
Revenues ======= ======= ======= ======= =======

Pro forma net income (loss) 2,943 1,735 399 (941) (9,642)
Preferred stock dividends 200 213 $ 231 281 36
------- ------- ------- ------- -------
Pro forma net income (loss)
applicable to common stock $ 2,743 $ 1,522 $ 168 $(1,222) $(9,678)
======= ======= ======= ======= =======

Pro forma earnings (loss) per share $ 0.61 $ 0.34 $ 0.04 $ (0.27) $ (1.17)
======= ======= ======= ======= =======

Weighted average shares 4,526,888 4,526,888 4,526,888 4,526,888 8,269,779
========= ========= ========= ========= =========

December 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)

Balance Sheet Data:
Working capital $ 5,045 $ 8,003 $ 6,739 $ 5,399 $14,020
======= ======= ======= ======= =======

Total assets $36,825 $43,508 $42,302 $43,115 $91,905
======= ======= ======= ======= =======

Long-term obligations (including
related party and current portion) $23,018 $24,762 $25,835 $24,398 $25,898
======= ======= ======= ======= =======

Redeemable preferred stock $ 2,000 $ 2,000 $ 2,120 $ 2,932 $ -
======= ======= ======= ======= =======

Stockholders' equity $ 3,951 $ 6,891 $ 5,859 $ 4,073 $45,713
======= ======= ======= ======= =======

(1) The results for the year ended December 31, 1993 include the results of The
Spring Anesthesia Group, Inc. from the date of acquisition, August 1, 1993,
through December 31, 1993.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

The Company is a leading provider of business management services to
hospitals and hospital-affiliated physicians. The Company's services include
preparation and follow-up on bills for medical services provided, assisting
providers in qualifying patients for state medicare eligibility, collecting past
due accounts, and providing other business management services on an outsource
basis. The Company is generally compensated with a management fee based upon
net receipts of its clients.

On February 12, 1996, the Company sold 4,025,000 shares of Common Stock for
$12 per share in its initial public offering of Common Stock. The net proceeds
of such offering of approximately $43,556,000 were used to repay all outstanding
short and long-term debt (except for the subordinated note issued in connection
with the Company's acquisition of The Spring Anesthesia Group, Inc. ("Spring")
in 1993), redeem all outstanding shares of preferred stock and acquire three
businesses (NCHC Group, MIS and DPS). See "Acquisitions."

Acquisitions

On February 15, 1996, the Company acquired 100 percent of the outstanding
common stock and substantially all the assets and liabilities of the companies
that made up the NCHC Group for approximately $8,000,000 in cash and deferred
payments.

On February 15, 1996, the Company acquired substantially all the assets and
liabilities of MMS for approximately $2,500,000 in cash.

On February 15, 1996, the Company acquired substantially all the assets and
liabilities of DPS for approximately $1,150,000 in cash and deferred payments.
The payment of the deferred payments is subject to DPS' retention of clients.

On May 8, 1996, the Company acquired substantially all the assets and
liabilities of PBS for approximately $3,000,000 in cash.

On May 21, 1996, the Company acquired substantially all the assets and
liabilities of ALM for approximately $1,600,000 in cash and deferred payments
plus 11,628 shares of Common Stock valued at approximately $250,000. The
payment of the deferred payments is subject to ALM's retention of clients.

On September 3, 1996, the Company acquired 100 percent of the outstanding
common stock and membership interests of the MIS Group for approximately
$3,697,000 in cash plus 285,998 shares of Common Stock valued at approximately
$6,184,700 plus the assumption of approximately $3,521,000 in notes payable. In
connection with this acquisition, the Company accrued approximately $2,000,000
for the costs of exiting certain redundant activities.

On December 16, 1996, the Company acquired 100 percent of the outstanding
common stock of the MARS Group for approximately $7,117,000 in cash plus 175,439
shares of Common Stock valued at approximately $2,105,000.

Each of the foregoing acquisitions was accounted for under the purchase
method of accounting, and, accordingly, the net assets acquired were recorded at
their fair values on the date of acquisition and the results of operations at
each of these companies is included in the Company's consolidated statement of
operations from the respective dates of acquisitions. Excess purchase price over
fair value of net assets acquired is being amortized on the straight-line method
over 20 years.

-12-

On June 28, 1996, the Company merged with SSI by exchanging 944,992 shares
of Common Stock for all the outstanding shares of common stock of SSI.

On August 31, 1996, the Company merged with EE&C by exchanging 1,026,852
shares of Common Stock for all the outstanding shares of common stock of EE&C.
In addition, the Company also repaid outstanding indebtedness of EE&C in an
aggregate amount of $2,622,971 by issuing an additional of 131,148 shares of
common stock.

On December 31, 1996, the Company merged with RPM by exchanging 315,048
shares of Common Stock for all the outstanding shares of common stock of RPM.

Each of these transactions has been accounted for as pooling of interests,
and accordingly, all previously issued financial statements of the Company have
been restated to include SSI, EE&C and RPM.

On February 5, 1997, the Company acquired 100 percent of the outstanding
common stock of Physerv for approximately $10,109,000 in cash plus 563,934
shares of Common Stock valued at approximately $6,000,000. The Company intends
to merge the operations of its subsidiary Spring into Physerv as soon as is
practicable. In connection with the merger of Spring into Physerv, the Company
may recognize a charge in the quarter ending March 31, 1997 for the costs of
exiting certain redundant facilities and activities.

-13-

RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, the percentages
of net revenue represented by certain items reflected in the Company's statement
of operations.

Year Ended December 31,
-------------------------------
1996 1995 1994
--------------------------------

Revenues 100.0% 100.0% 100.0%
--------- -------- ---------

Salaries and wages 53.3% 57.2% 53.9%
General and administrative 36.2% 34.4% 33.9%
Depreciation and amortization 6.9% 7.5% 7.7%
Interest expense, net 0.5% 2.9% 3.2%
Other (income) expense 0.1% 0.0% 0.3%
Merger costs 4.4% 0.0% 0.0%
Restructuring and other charges 12.1% 0.0% 0.0%
--------- -------- ---------
Income (loss) before income taxes (13.6%) (2.1%) 1.1%
Income taxes 1.9% (0.8%) (1.0%)
--------- -------- ---------
Net income (loss) (15.5%) (1.2%) 2.1%
Pro forma income taxes (3.3%) 0.3% 1.4%
--------- -------- ---------
Pro forma net income (loss) (12.2%) (1.6%) 0.7%
========= ======== =========

Revenues

Revenues increased approximately 26.3% to $75,191,000 for the year ended
December 31, 1996 from $59,513,000 for the year ended December 31, 1995.
Revenues increased in 1995 by 7.3% from $55,448,000 for the year ended December
31, 1994. Such increase in 1996 resulted primarily from businesses acquired
during the year ended December 31, 1996 plus increased revenues from the
addition of new clients, offset, in part, by decreased revenues from lost
clients. In addition, the Company's revenues during the year ended December 31,
1996 were adversely affected by operating inefficiencies in the processing of
physician charges at Spring, the Company's subsidiary located in Stockton,
California. See "Merger Costs and Restructuring and Other Charges." The increase
in 1995 compared to 1994 resulted primarily from the addition of new clients,
offset in part by decreased revenues from lost clients.

Salaries and Wages

Salaries and wages increased approximately 17.8% to $40,072,000 for the
year ended December 31, 1996 from $34,016,000 for the year ended December 31,
1995. Salaries and wages increased in 1995 by 13.8% from $29,883,000 for the
year ended December 31, 1994. Such increase in 1996 resulted primarily from
businesses acquired during the year ended December 31, 1996 and increases in the
number of clients served by the Company. See "Merger Costs and Restructuring and
Other Charges." Such increase in 1995 resulted primarily from additional
personal costs associated with increased levels of revenue in 1995 compared to
1994.

-14-

General and Administrative Expenses

General and administrative expenses increased approximately 33.2% to
$27,252,000 for the year ended December 31, 1996 from $20,455,000 for the year
ended December 31, 1995. General and administrative expenses increased 8.7% in
1995 from $18,814,000 for the year ended December 31, 1994. Such increase in
1996 resulted primarily from businesses acquired during the year ended December
31, 1996 and increases in the number of clients served by the Company. In
addition, the Company incurred increased general and administrative expenses
during the year ended December 31, 1996 in an attempt to increase the processing
of physician charges at Spring. See "Merger Costs and Restructuring and Other
Charges." Such increase in 1995 resulted primarily from additional costs
associated with increased levels of revenue in 1995 compared to 1994.

Depreciation and Amortization

Depreciation and amortization increased approximately 16.7% to $5,210,000
for the year ended December 31, 1996 from $4,465,000 for the year ended December
31, 1995. Depreciation and amortization expense in 1995 increased by 5.3% from
$4,242,000 for the year ended December 31, 1994. Such increase in 1996 resulted
primarily from businesses acquired during the year ended December 31, 1996. Such
increase in 1995 resulted primarily from purchases of equipment during that
year.

Interest Expense, net

Interest expense, net, decreased approximately 46.6% to $1,073,000 for the
year ended December 31, 1996 from $2,012,000 for the year ended December 31,
1995. Such expense in 1995 represented an increase of 14.4% from $1,758,000 for
the year ended December 31, 1994. Such decrease in 1996 resulted from decreased
levels of short and long-term debt after repayment of such borrowings out of
proceeds from the Company's initial public offering of Common Stock. Such
increase in 1995 resulted from increased levels of borrowings compared to 1994.

Merger Costs and Restructuring and Other Charges

In the three months ended June 30, 1996, the Company recorded a
restructuring charge of approximately $2,500,000 related to the write-off of
certain computer hardware and software and certain non-recurring expenses
associated with a limited restructuring of operations at Spring, and to the
write-off of certain computer hardware and software at SSI. In the three months
ended December 31, 1996, the Company recorded a charge of approximately
$6,578,000 related to the impairment of certain intangible assets at Spring.

-15-

Three Months Ended June 30, 1996

At the time of the SSI merger, the Company determined that it would replace
certain SSI computer hardware and software with its other operating software,
and accordingly recorded a charge of approximately $900,000 in the three months
ended June 30, 1996.

Three Months Ended December 31, 1996

During the three months ended December 31, 1996, the Spring operating
inefficiencies led to client dissatisfaction. The Company incurred increased
salary and general and administrative costs in an attempt to increase client
satisfaction. However, these efforts were unsuccessful, and led to the loss of
clients, loss of related revenues, and increased levels of operating expenses.
As a result, in accordance with FASB 121, the Company determined that certain
identifiable intangible assets (primarily customer contracts), and goodwill,
were not recoverable from future cash flows of Spring, and accordingly, an
impairment loss of approximately $6,578,000 was recorded. In addition, in
conjunction with the Company's acquisition on February 5, 1997 of Physerv, which
like Spring, serves only anesthesiologists, the Company has decided to fold the
remaining Spring business into Physerv, with the goal of developing a
profitable, national approach to the anesthesia market. This will entail exiting
the processing of physician charges in remote Spring locations and performing
such processing activities at more efficient central anesthesia processing
locations. As a result of this assimilation, the Company may record a charge in
the three months ending March 31, 1997 related to exiting processing activities
at Spring.

The Company incurred approximately $3,325,00 in transaction fees and other
merger related costs in connection with the SSI, EE&C and RPM mergers which are
reflected in the Company's results of operations for the year ended December 31,
1996.

Income Taxes and Pro Forma Income Taxes

The Company's historical effective rate for income taxes (benefit) changed
to 13.7% for the year ended December 31, 1996 from (39.7%) for the year ended
December 31, 1995 and from (93.3%) for the year ended December 31, 1994. The
change in the effective tax rate for the year ended December 31, 1996 was
primarily attributable to nondeductible restructuring and other charges,
nondeductible merger costs incurred in connection with the SSI, EE&C and RPM
pooling of interest transactions and the change in status of both EE&C and RPM
from cash basis "S" Corporations to accrual basis "C" Corporations. The change
in the effective tax rate for the year ended December 31, 1995 was primarily
attributable to a benefit associated with changes in state income tax rates in
1994 that did not reoccur in 1995 as well as a much greater amount of Subchapter
S earnings in 1994 compared to 1995. Such changes also resulted from differing
levels in each year of pretax income or loss and the effect on such levels of
items not deductible for federal income tax purposes.

-16-

Pro forma income taxes are presented for all periods prior to August 31,
1996 for EE&C and December 31, 1996 for RPM to show what income taxes would have
been had EE&C and RPM been taxed as "C" Corporations for those periods.

Pro Forma Net Income (Loss) and Pro Forma Net Income (Loss) Per Share

Pro forma net income (loss) and pro forma net income (loss) per share
result from the accumulation of the items described above and the increase in
the weighted average number of shares outstanding resulting from the Company's
initial public offering of Common Stock and issuance of shares of Common Stock
in certain of the Company's acquisitions. See "Acquisitions".

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital and cash equivalents were $14,020,000 and
$3,826,000, respectively, at December 31, 1996 compared to $5,399,000 and
$1,692,000, respectively, at December 31, 1995. Such increase in working
capital resulted primarily from the excess of accounts receivable of companies
acquired in 1996 over accounts payable and accrued expenses of those same
companies.

On December 13, 1996, the Company entered into a Loan Agreement (the
"Agreement") with Corestates Bank, N.A., which provides the Company with a
$30,000,000 revolving line of credit for acquisitions through January 1, 1999
and a $5,000,000 revolving line of credit for working capital through June 30,
1998. Under the Agreement, the Company may, at any time, borrow, repay and
reborrow amounts up to the stated limits provided certain financial ratios and
tests of the Company are within predetermined limits, and may, at any time,
convert amounts borrowed to term loans that must be repaid by January 1, 2004.
Borrowings under the Agreement may be at fixed or floating rates of interest
which range from the bank's prime rate of interest to approximately two points
below the bank's prime rate of interest. On December 31, 1996, the Company had
borrowed $12,017,000 on the acquisition line and $2,500,000 on the working
capital line at a weighted average interest rate of 6.3%.

The Company's total short and long-term debt (including amounts owed to
related parties) was $22,222,000 at December 31, 1996 (including the $5,500,000
Spring 7.6% acquisition subordinated note), compared to $21,668,000 at December
31, 1995.

The Company believes anticipated cash flow from operations, working
capital, cash and cash equivalents on hand and borrowing capacity from its lines
of credit are adequate for its anticipated financing needs.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements Page

Report of Independent Auditors................................................................ F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996.................................. F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996............................................................ F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996............................................................ F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996............................................................ F-5
Notes to Consolidated Financial Statements.................................................... F-6

-17-

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information called for by this Item is incorporated herein by reference
to the Company's Proxy Statement for the 1997 Stockholders Meeting.

ITEM 11. EXECUTIVE COMPENSATION.

The information called for by this Item is incorporated herein by reference
to the Company's Proxy Statement for the 1997 Stockholders Meeting.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information called for by this Item is incorporated herein by reference
to the Company's Proxy Statement for the 1997 Stockholders Meeting.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information called for by this Item is incorporated herein by reference
to the Company's Proxy Statement for the 1997 Stockholders Meeting.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.

(a) Documents filed as part of this Report:

1 and 2. See "Index to Financial Statements" at Item 8 of this Annual
Report on Form 10-K. Schedules not included herein are omitted because they are
not applicable or the required information appears in the financial statements
or notes thereto.

-18-

3. Exhibits:

Exhibit No. Description

2.1 Stock Purchase Agreement, dated September 11,
1995, among the Shareholders of North Coast Health
Care Management, Inc. and Physician Support
Systems, Inc. (1)

2.2 Asset Purchase Agreement, dated September 25,
1995, among North Coast Account Systems, Inc.,
Medical Dental Invoicing Services, Inc. and
Physician Support Systems, Inc. (1)

2.3 Amended and Restated Asset Purchase Agreement,
dated December 7, 1995, among Medical Management
Support, Inc., the shareholders of Medical
Management Support, Inc. and PSS-Medical
Management Support, Inc. (1)

2.4 Asset Purchase Agreement, dated October 16, 1995
among Data Processing Systems, Inc., McGriff,
Seibels & Williams, PSS - Data Processing Systems,
Inc. and Physicians Support Systems, Inc. (1)

2.5 Asset Purchase Agreement, dated May 8, 1996, among
PBS Northwest, Incorporated, the Shareholders of
PBS Northwest, Incorporated and PSS PBS Northwest,
Inc. (3)

2.6 Asset Purchase Agreement, dated May 17, 1996,
among ALM, Inc., the Shareholders of ALM, Inc.,
PSS ALM, Inc. and Physician Support Systems, Inc.
(4)

2.7 Agreement and Plan of Merger, dated as of June 28,
1996, among Synergistic Systems, Inc., Physician
Support Systems, Inc. and PSS Synergistic Systems,
Inc. (5)

2.8 Agreement and Plan of Merger, dated as of August
30, 1996, among Physician Support Systems, Inc.,
PSS EE&C Financial Services, Inc. and EE&C
Financial Services, Inc. (6)

2.9 Agreement and Plan of Merger, dated as of August
30, 1996, among Physician Support Systems, Inc.,
PSS EE&C Health Services, Inc., PSS Med-Data
Interface Systems, Inc., PSS Medical Intercept
Systems, Inc., EE&C Health Services, Inc.,
Med-Data Interface Systems, LLC and Medical
Intercept Systems, LLC (7)

2.10 Stock Purchase Agreement, dated as of December 13,
1996, among Physician Support Systems, Inc., PSS
C-CARE, Inc., George J. Weinroth, Herman
Mattleman, James Greenberg, Stanley Slipakoff,
Anthony J. Mckiewicz, Anthony Diluca, John C.
Miller III and Dennis Gaspari (8)

-19-

2.11 Agreement and Plan of Merger, dated as of December
31, 1996, among Physician Support Systems, Inc.,
PSS Revenue Production Management, Inc. and
Revenue Production Management, Inc. (9)

2.12 Stock Purchase Agreement, dated as of February 3,
1997, among Physician Support Systems, Inc., PSI
Acquisition Corp., Hamid Mirafzali, Shadan
Mirafzali, Nader J. Samii, as independent trustee
of the Neda Mirafzali Family Trust dated November
4, 1996 and Nadir J. Samii, as Independent Trustee
of the Leela Mirafzali Family Trust dated November
4, 1996 (10)

4.1 Form of Physician Support Systems, Inc. Amended and
Restated 1996 Stock Option Plan

4.2 Form of Synergistic Systems, Inc. 1996 Stock Option
Plan

4.3 Form of Certificate representing Common Stock

10.1 Employment Agreement, dated August 9, 1995,
between Bruce B. Schmoyer and Physician Support
Systems, Inc. (1)

10.2 Employment Agreement, dated as of February 14,
1996, by and between Physician Support Systems,
Inc. and David S. Geller (2)

10.3 Employment Agreement, dated as of July 8, 1996,
between Synergistic Systems, Inc. and Jean M.
Campbell (5)

10.4 Employment Agreement, dated as of August 30, 1996,
between EE&C Financial Services, Inc. and Peter D.
Cooper (6)

10.5 Employment Agreement, dated as of August 30, 1996,
between PSS EE&C Health Services, Inc. and James
Robertson (7)

-20-

10.6 Employment Agreement, dated as of December 13,
1996, between C-Care, Inc. and George J. Weinroth

10.7 Employment Agreement, dated as of December 13,
1996, between C-Care, Inc. and Anthony J.
Mackiewicz

10.8 Employment Agreement, dated as of December 13,
1996, between C-Care, Inc. and Stanley Slipakoff

10.9 Employment Agreement, dated as of December 13,
1996, between C-Care, Inc. and Anthony Diluca

10.10 Employment Agreement, dated as of December 31,
1996, between Revenue Production Management, Inc.
and Raymond E. Clutts

10.11 Employment Agreement, dated as of December 31,
1996, between Revenue Production Management, Inc.
and Paul A. Grabowski

10.12 Employment Agreement, dated as of December 31,
1996, between Revenue Production Management, Inc.
and Neil J. Greene

10.13 Employment Agreement, dated as of February 3,
1997, between Physician Support Systems, Inc. and
Hamid Mirafzali (10)

10.14 Agreement of Lease dated August 30, 1991 between
Physician Support Systems, Inc. and Prospect
Realty Company (1)

10.15 Office Lease Agreement dated July 20, 1994 between
Spring Anesthesia Group, Inc. and American Savings
Bank, F.A. (1)

10.16 Loan Agreement dated December 13, 1996 between
CoreStates Bank, N.A. and Physician Support
Systems, Inc. and its subsidiaries

10.17 Agreement dated as of December 18, 1995 among
Medical Management Sciences, Inc., Managed
Imaging, Inc. and Physician Support Systems, Inc.
(1)

10.18 Promissory Note of PSS Investment, Inc. dated
August 12, 1993 (assumed by The Spring Anesthesia
Group, Inc. pursuant to a merger) (1)

-21-

10.19 Registration Rights Agreement, dated as of June
28, 1996, among Physician Support Systems, Inc.
and each stockholder of Synergistic Systems, Inc.
and Jean M. Campbell, as representative of the
shareholders (5)

10.20 Registration Rights Agreement, dated as of August
30, 1996, among Physician Support Systems, Inc.,
Eltman, Eltman & Cooper, P.C., each of the
shareholders of EE&C Financial Services, Inc. and
Peter D. Cooper, as representative of the
shareholders (6)

10.21 Registration Rights Agreement, dated as of August
30, 1996, among Physician Support Systems, Inc.,
each of the shareholders of EE&C Health Services,
Inc., Med-Data Interface Systems, LLC and Medical
Intercept Systems, LLC and Peter D. Cooper, as
representative of the shareholders (7)

10.22 Registration Rights Agreement, dated as of
December 13, 1996, among Physician Support Systems
Inc., George J. Weinroth, Herman Mattleman, James
Greenberg, Stanley Slipakoff, Anthony J.
Mackiewicz, Anthony Diluca, John C. Miller III and
Dennis Gaspari (8)

10.23 Registration Rights Agreement, dated as of
December 31, 1996, among Physician Support
Systems, Inc. and the former stockholders of
Revenue Production Management, Inc. (9)

10.24 Registration Rights Agreement, dated as of
February 3, 1997, among Physician Support Systems,
Inc., Hamid Mirafzali, Shadan Mirafzali, Nader J.
Samii, as Independent Trustee of the Neda
Mirafzali Family Trust, and Nader J. Samii, as
Independent Trustee of the Leela Mirafzali Family
Trust (10)

21 Subsidiaries

27 Financial Data Schedule

_________________________

(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 No. 33-80731, incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1996.
(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated May 14, 1996, as amended, incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 4, 1996, as amended, incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated July 8, 1996, as amended, incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated September 13, 1996, as amended, incorporated hereby by reference.
(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated September 16, 1996, as amended, incorporated hereby by reference.
(8) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated December 30, 1996, as amended, incorporated herein by reference.
(9) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated January 8, 1997, as amended, incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 18, 1997, incorporated herein by reference.

-22-

(b) Reports on Form 8-K

One report on Form 8-K was filed during the quarter ended December 31,
1996:

Item Reported Financial Statements Filed Date of Report
- -------------------------------- --------------------------- -----------------

Acquisition of C-CARE, Inc., No (1) December 30, 1996
H.O.P.E. Enterprises Group,
Inc. and Professional Medical
Recovery Service, Inc.

(1) The financial statements required with respect to the acquisition were
filed by Amendment to the Form 8-K dated February 28, 1997.

-23-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
March 31, 1997.

PHYSICIAN SUPPORT SYSTEMS, INC.

By /s/ DAVID S. GELLER
-------------------
David S. Geller
Senior Vice President

Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated on March 31, 1997.

Signature Title
--------- -----

/s/PETER W. GILSON President, Chief Executive Officer
- ------------------------------ and Director (principal executive
Peter W. Gilson officer)

/s/ HAMILTON F. POTTER III Executive Vice President, Chief
- ------------------------------ Operating Officer and Director
Hamilton F. Potter III

/s/ DAVID S. GELLER Senior Vice President, Chief
- ------------------------------ Financial Officer and Secretary
David S. Geller (principal financial and
accounting officer)

/s/ MORTIMER BERKOWITZ III Director
- ------------------------------
Mortimer Berkowitz III

/s/ JEAN CAMPBELL Director
- ------------------------------
Jean Campbell

/s/ RICHARD W. VAGUE Director
- ------------------------------
Richard W. Vague

-24-

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
PHYSICIAN SUPPORT SYSTEMS, INC.
Mt. Joy, Pennsylvania

We have audited the accompanying consolidated balance sheets of Physician
Support Systems, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Physician Support Systems, Inc. and
Subsidiaries as of December 31, 1995 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
March 20, 1997
New York, New York

F-1

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

December 31,
-------------------------
1995 1996
---- ----

ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,691,758 $ 3,826,018
Accounts receivable (net of allowances of
$2,309,548 and $2,014,752 respectively)............... 10,970,430 17,458,338
Accounts receivable -- unbilled........................ 6,580,002 11,149,811
Prepaid expenses....................................... 948,990 1,475,566
Due from related parties............................... 2,396,114 -
Other current assets................................... 220,544 516,123
----------- ------------
Total current assets........................... 22,807,838 34,425,856

Property and equipment -- net............................. 5,876,158 9,092,630
Intangible assets -- net.................................. 11,965,026 44,556,022
Due from related parties.................................. 1,983,450 1,054,038
Other assets.............................................. 482,203 2,776,902
----------- ------------

$43,114,675 $91,905,448
=========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable....................................... $ 3,029,488 $ 2,135,924
Accrued expenses....................................... 7,935,195 16,805,042
Short-term borrowings.................................. 746,365 -
Current portion of long-term debt...................... 2,804,159 -
Current portion of other long-term liabilities......... 372,297 969,623
Current portion of due to related parties.............. 2,231,316 463,736
Deferred income taxes.................................. 289,818 31,347
----------- ------------
Total current liabilities...................... 17,408,638 20,405,672
----------- ------------

Long-term debt............................................ 14,971,783 20,017,027
----------- ------------
Other long-term liabilities............................... 1,814,942 3,676,052
----------- ------------
Due to related parties.................................... 915,988 771,695
----------- ------------
Deferred income taxes..................................... 998,049 1,322,263
----------- ------------
Commitments and contingencies

Redeemable preferred stock................................ 2,932,032 -
----------- ------------
Stockholders' equity (deficiency):
Preferred stock, par value $.01 per share:
authorized 10,000,000 shares; none outstanding
Common stock, par value $.001 per share:
authorized 100,000,000 shares; outstanding 4,526,888
and 9,156,101 shares, respectively................... 4,527 9,156
Additional paid-in capital............................. 479,696 55,194,229
Retained earnings (accumulated deficit)................ 3,589,020 (9,490,646)
----------- ------------
4,073,243 45,712,739
----------- ------------

$43,114,675 $91,905,448
=========== ============

See notes to consolidated financial statements.

F-2

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,
---------------------------------
1994 1995 1996
---- ---- ----

Revenues....................................... $55,447,832 $59,513,733 $ 75,190,943
----------- ----------- ------------

Operating expenses:
Salaries and wages........................... 29,882,898 34,016,350 40,071,578
General and administrative................... 18,813,647 20,455,088 27,251,773
Depreciation and amortization................ 4,241,958 4,464,739 5,209,539
Interest expense............................. 1,758,050 2,011,951 1,073,383
Interest (income)............................ (13,475) (186,077) (668,806)
Other (income) expense....................... 163,982 (22,732) 110,604
Merger costs................................. - - 3,325,000
Restructuring and other charges.............. - - 9,077,734
----------- ----------- ------------
Income (loss) before income taxes (benefit).... 600,772 (1,225,586) (10,259,862)
Income taxes (benefit)......................... (560,446) (486,737) 1,409,101
----------- ----------- ------------
Net income (loss).............................. 1,161,218 (738,849) (11,668,963)
Proforma income taxes (benefit)................ 762,390 202,528 (2,026,651)
----------- ----------- ------------

Proforma net income (loss)..................... 398,828 (941,377) (9,642,312)

Preferred stock dividends...................... 230,800 280,980 36,320
----------- ----------- ------------
Proforma net income (loss) applicable
to common stock.............................. $ 168,028 $(1,222,357) $ (9,678,632)
=========== =========== ============

Proforma earnings (loss) per share............. $ 0.04 $ (0.27) $ (1.17)
====== ======= =======

Weighted average shares outstanding............ 4,526,888 4,526,888 8,269,779
=========== =========== ============

See notes to consolidated financial statements.

F-3

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Retained
Additional Earnings Total
Common Stock Paid-in (Accumulated Stockholders'
Shares Amount Capital Deficit) Equity

Balance, December 31, 1993............. 4,526,888 $4,527 $ 479,696 $ 6,424,330 $ 6,908,553

Net income........................... - - - 1,161,218 1,161,218
Redeemable preferred stock
issued in lieu of cash dividends.... - - - (120,000) (120,000)
Redeemable preferred stock
distributions....................... - - - (106,000) (106,000)
Common stock dividends............... - - - (1,966,475) (1,966,475)
--------- ------ ------------ ------------ ------------

Balance, December 31, 1994............. 4,526,888 4,527 479,696 5,393,073 5,877,296
Net loss............................. - - - (738,849) (738,849)
Redeemable preferred stock
issued in lieu of cash dividends.... - - - (262,032) (262,032)
Accrued preferred stock
dividends........................... - - - (81,275) (81,275)
Common stock dividends............... - - - (721,897) (721,897)
--------- ------ ------------ ------------ ------------

Balance, December 31, 1995............. 4,526,888 4,527 479,696 3,589,020 4,073,243

Issuance of common stock in
initial public offering............. 4,025,000 4,025 43,552,192 - 43,556,217
Issuance of common stock in
acquisitions........................ 473,065 473 8,539,501 - 8,539,974
Issuance of common stock in
exchange for stockholder note....... 131,148 131 2,622,840 - 2,622,971
Net loss............................. - - - (11,668,963) (11,668,963)
Redeemable preferred stock
distributions....................... - - - (36,320) (36,320)
Common stock dividends............... - - - (1,374,383) (1,374,383)
--------- ------ ------------ ------------ ------------

Balance, December 31, 1996............. 9,156,101 $9,156 $55,194,229 $ (9,490,646) $ 45,712,739
========= ====== ============ ============ ============

See notes to consolidated financial statements.

F-4

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
--------------------------------
1994 1995 1996
---- ---- ----

Cash flows from operating activities:
Net income (loss)........................................ $ 1,161,218 $ (738,849) $(11,668,963)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization......................... 4,241,957 4,464,806 5,209,539
Deferred income taxes................................. (853,532) (570,346) 250,963
Loss on disposal of property and equipment............ 206,974 10,716 110,604
Provision for doubtful accounts receivable............ 1,061,375 1,148,081 (1,420,709)
Other long-term liabilities........................... 675,266 154,448 608,625
Accrued preferred stock dividends..................... - (81,275) -
Restructuring and other charges....................... - - 6,753,535
Changes in operating assets and liabilities:
Accounts receivable................................. (479,770) (2,852,645) (169,786)
Accounts receivable -- unbilled..................... (381,548) (1,066,711) (530,344)
Prepaid expenses.................................... (843,247) 435,560 (369,513)
Other current assets................................ (112,309) 227,654 (272,144)
Other assets........................................ 42,497 (20,526) (2,266,072)
Accounts payable.................................... 717,580 1,391,151 (1,618,468)
Accrued expenses.................................... 221,855 1,858,797 125,015
----------- ----------- -----------
Net cash provided by (used in) operating
activities..................................... 5,658,316 4,360,861 (5,257,718)
----------- ----------- -----------

Cash flows from investing activities:
Acquisitions, net of cash acquired....................... - - (27,677,301)
Deferred purchase price.................................. - - (1,666,667)
Capital expenditures..................................... (1,866,060) (1,283,425) (1,774,356)
Proceeds from disposal of property and equipment......... 163,651 - -
----------- ----------- ------------
Net cash (used in) investing activities............. (1,702,409) (1,283,425) (31,118,324)
----------- ----------- ------------

Cash flows from financing activities:
Net proceeds from issuance of common stock............... - - 43,556,217
Proceeds from long-term borrowings....................... 1,019,928 800,000 18,610,778
Proceeds from short-term borrowings...................... - 600,000 -
Principal payments on long-term debt..................... (1,649,708) (1,541,894) (19,670,145)
Principal payments on capital lease obligations.......... (403,669) (302,078) (538,355)
Principal payments on short-term borrowings.............. - - (746,365)
Due to (from) related parties............................ (920,555) (3,577,241) 1,640,907
Common stock dividends................................... (1,966,475) (721,897) (1,374,383)
Issuance of redeemable preferred stock................... - 550,000 -
Redemption of redeemable preferred stock................. - - (2,932,032)
Redeemable preferred stock distributions................. (106,000) - (36,320)
----------- ----------- -----------
Net cash provided by (used in) financing activities. (4,026,479) (4,193,110) 38,510,302
----------- ----------- -----------

Net increase (decrease) in cash and cash equivalents....... (70,572) (1,115,674) 2,134,260
Cash and cash equivalents, beginning of period............. 2,878,004 2,807,432 1,691,758
----------- ----------- -----------

Cash and cash equivalents, end of period................... $ 2,807,432 $ 1,691,758 $ 3,826,018
=========== =========== ===========

See notes to consolidated financial statements.

F-5

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

1. Basis of Presentation and Summary of Significant Accounting Policies

a. Description of the Business -- Physician Support Systems, Inc. (a
Delaware corporation) and Subsidiaries (the "Company") are engaged in the
business of providing business management services to hospitals and hospital-
affiliated physicians.

b. Principles of Consolidation -- The consolidated financial statements
include the accounts of Physician Support Systems Inc. and its subsidiaries,
including the retroactive effect of all mergers which have been accounted for
under the pooling of interests method of accounting. All significant
intercompany balances and transactions have been eliminated in consolidation.

c. Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

d. Revenue Recognition -- The Company earns business management fees
primarily as a percentage of amounts collected on behalf of its clients from
patients and third-party payors. For clients where the amount and timing of
collection of their accounts receivable can be reliably estimated, the Company
estimates the fees that it will invoice those clients upon collection of their
accounts receivable and recognizes such revenues when substantially all services
to be performed by the Company have been completed.

Accounts receivable primarily represents amounts invoiced to clients. The
Company provided 1,581,732, 1,148,417 and (127,025) for doubtful accounts in the
years ended December 31, 1994, 1995 and 1996, and wrote off 583,560, 336 and
1,173,626 against its allowance for doubtful accounts in the years ended
December 31, 1994, 1995 and 1996, respectively. Also included in accounts
receivable at December 31, 1995 are reimbursements for professional fees
incurred in connection with a proposed business transaction.

Accounts receivable -- unbilled represents amounts recognized for services
rendered but not yet invoiced and is based on the Company's estimate of fees
that will be invoiced to clients when accounts receivable from patients and
third-party payors are collected. This amount is calculated by applying the
Company's management fee percentage to an estimate of what clients will
ultimately collect from patients and third-party payors on their accounts
receivable. The Company revises its estimate of accounts receivable - unbilled
each month based on its clients' charges and collections for that month.
Separately, the Company provides for additional costs necessary to complete the
clients' collection process.

e. Cash and Cash Equivalents -- The Company considers its highly liquid
overnight investments to be cash equivalents.

f. Cash in Escrow -- The Company holds cash collected on behalf of its
clients in escrow and remits amounts due to these clients weekly and monthly.
Approximately $4,052,368 and $3,335,619 of cash in escrow was offset against
amounts due to clients on the Company's balance sheet at December 31, 1995 and
1996, respectively.

g. Property and Equipment -- Depreciation and amortization are computed on a
straight-line basis over the shorter of estimated useful lives of the assets or
lease terms. Expenditures which increase value or extend useful lives are
capitalized, while maintenance and repairs are charged to operations as
incurred.

F-6

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

h. Intangible Assets -- Amortization is computed on a straight-line basis
over the estimated lives of intangible assets. From time to time the Company
compares the carrying value of its intangible assets to an estimate of the
Company's fair value in order to evaluate the reasonableness of the carrying
value and remaining amortization period of the goodwill. See Note 15. Fair value
is computed using projections of future cash flows.

i. Income Taxes -- Deferred income tax assets and liabilities are computed
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Income taxes/benefit is the
tax payable/receivable for the period plus or minus the change during the period
in deferred income tax assets and liabilities.

j. Fair Value of Financial Instruments -- Management considers that the
carrying amount of financial instruments, including cash, receivables, accounts
payable and accrued expenses, and current maturities of long-term debt,
approximates fair value. Interest on long-term debt is primarily payable at
variable rates which approximates fair market value.

k. Pro Forma Income Taxes -- The Company has acquired certain entities in
merger transactions accounted for as pooling of interests, which prior to the
merger had elected "S" corporation status for income tax purposes. As a result
of the mergers, these acquired entities terminated their "S" corporation
elections. Pro forma income taxes represent the income tax provision (benefit)
that would have been recognized for periods prior to the mergers had the
acquired entities been taxed as "C" corporations.

l. Pro Forma Earnings (Loss) Per Share -- Proforma earnings (loss) per share
is calculated using the weighted average number of common shares outstanding
during each of the periods retroactively restated to give effect to the 1,400-
for-one stock split. See Note 14.

m. Reclassifications -- Certain reclassifications have been made in the 1995
financial statements to conform to the 1996 presentation.

2. Business Combinations

On February 15, 1996, the Company acquired 100 percent of the outstanding
common stock and substantially all of the assets and liabilities of the North
Coast Health Care Management Group ("NCHC") for approximately $8,000,000 in cash
and deferred payments.

On February 15, 1996, the Company acquired substantially all of the assets
and liabilities of Medical Management Support, Inc. ("MMS") for approximately
$2,500,000 in cash.

On February 15, 1996, the Company acquired substantially all of the assets
and liabilities of Data Processing Systems, Inc. ("DPS") for approximately
$1,150,000 in cash and deferred payments. The payment of the deferred payments
is subject to DPS' retention of clients.

On May 8, 1996, the Company acquired substantially all of the assets and
liabilities of PBS Northwest, Inc. ("PBS") for approximately $3,000,000 in cash.

On May 21, 1996, the Company acquired substantially all of the assets and
liabilities of ALM, Inc. ("ALM") for approximately $1,600,000 in cash and
deferred payments plus 11,628 shares of common stock valued at approximately
$250,000. The payment of the deferred payments is subject to ALM's retention of
clients.

F-7

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

On September 3, 1996, the Company acquired 100 percent of the outstanding
common stock and membership interests of Medical Intercept Systems Group ("MIS")
for approximately $3,697,000 in cash plus 285,998 shares of common stock valued
at approximately $6,184,700 plus the assumption of approximately $3,521,000 in
notes payable. In connection with this acquisition, the Company accrued
approximately $2,000,000 for the costs of exiting certain redundant activities.

On December 16, 1996, the Company acquired 100 percent of the outstanding
common stock of the MARS Group ("MARS") for approximately $7,117,000 in cash
plus 175,439 shares of common stock valued at approximately $2,105,000.

Each of the foregoing acquisitions has been accounted for under the purchase
method of accounting, and, accordingly, the net assets acquired were recorded at
their fair values on the dates of acquisition and the results of operations of
each of these companies are included in the Company's consolidated statement of
operations from the respective dates of acquisition. Excess purchase price over
fair value of net assets acquired of approximately $39,752,000 is being
amortized on the straight-line method over 20 years.

On June 28, 1996, the Company merged with Synergistic Systems, Inc. ("SSI")
by exchanging 944,992 shares of common stock of the Company for all the
outstanding shares of common stock of SSI.

On August 31, 1996, the Company merged with EE&C Financial Services, Inc.
("EE&C") by exchanging 1,026,852 shares of common stock of the Company for all
the outstanding shares of common stock of EE&C. In addition, the Company also
repaid outstanding indebtedness of EE&C in an aggregate amount of $2,622,971 by
issuing an additional 131,148 shares of common stock.

On December 31, 1996, the Company merged with Revenue Production Management.
Inc. ("RPM") by exchanging 315,048 shares of common stock of the Company for all
the outstanding shares of common stock of RPM.

Each of the foregoing transactions has been accounted for as a pooling of
interests, and accordingly, all previously issued financial statements of the
Company have been restated to include SSI, EE&C and RPM. A reconciliation of
revenues, net income (loss) per share of the Company as previously reported, and
combined, is as follows:

($000S)
-----------------------------------------------
As
Previously
Reported SSI EE&C RPM Combined

Year ended December 31, 1994
Revenues $18,773 $9,589 $21,818 $5,268 $ 55,448
Pro forma net income (loss) (1,067) 341 717 408 399
Preferred stock dividends 231 231
Pro forma earnings (loss) per
share $ (0.58) $ 0.04
======= ========

Weighted average shares 2,240 4,527
======= ========

F-8

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

Year ended December 31, 1995
Revenues $19,584 $9,831 $23,620 $6,479 $ 59,514
Pro forma net income (loss) (1,274) 25 34 274 (941)
Preferred stock dividends 281 281
Pro forma earnings (loss) per share $ (0.69) $ (0.27)
======= ========

Weighted average shares 2,240 4,527
======= ========

Quarter ended March 31, 1996
Revenues $ 6,399 $2,652 $5,776 $1,903 $ 16,730
Pro forma net income (loss) (58) 24 149 170 285
Preferred stock dividends 36 36
Pro forma earnings (loss) per share $ (0.02) $ (0.04)
======= ========

Weighted average shares 4,398 6,669
======= ========

Quarter ended June 30, 1996
Revenues $10,337 (*) $5,451 $1,752 $ 17,540
Pro forma net income (loss) (2,331) (617) 67 (2,881)
Pro forma earnings (loss) per share $ (0.32) $ (0.33)
======= ========

Weighted average shares 7,262 8,604
======= ========

Quarter ended September 30, 1996
Revenues $17,943 (*) (*) $1,832 $ 19,775
Pro forma net income (loss) (406) 51 (355)
Pro forma earnings (loss) per share $ (0.05) $ (0.04)
======= ========

Weighted average shares 8,510 8,825
======= ========

(*) Included in "As Previously Reported"

In connection with the SSI, EE&C and RPM mergers, the Company incurred
approximately $3,325,000 in transaction fees and other merger related costs
which are reflected in the Company's results of operations for the year ended
December 31, 1996.

On February 5, 1997, the Company acquired 100 percent of the outstanding
common stock of Physerv Solutions, Inc. ("Physerv") for approximately
$10,109,000 in cash plus 563,934 shares of common stock valued at approximately
$6,000,000. The Company intends to merge the operations of its subsidiary The
Spring Anesthesia Group, Inc. ("Spring") into Physerv as soon as is practicable.

The unaudited consolidated results of operations of the Company on a pro
forma basis as if the Company had sold 4,025,000 shares of common stock for $12
per share, repaid all outstanding short and long-term debt (except for the
Spring acquisition subordinated note), redeemed all outstanding shares of
preferred stock and consummated the purchase acquisitions of NCHC, MMS, DPS,
PBS, ALM, MIS, MARS and Physerv on January 1, 1995 are as follows:

Year Ended December 31,
1995 1996
---- ----

Revenue ........................... $ 90,726,000 $100,724,000
Proforma net income (loss) ........ (2,068,000) (9,482,000)
Proforma earnings (loss) per share. (0.21) (0.99)
Weighted average shares ........... 9,720,000 9,617,000

F-9

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

3. Property and Equipment

Property and equipment consists of the following:

December 31,
Estimated ------------------
Useful Life 1995 1996
----------- ---- ----

Furniture and fixtures................................ 7 $ 1,563,366 $ 2,086,138
Equipment............................................. 5 7,381,137 11,222,168
Computer software..................................... 5 2,861,106 3,440,130
Leasehold improvements................................ 10 856,381 1,702,829
----------- -----------
12,661,990 18,451,265
Less accumulated depreciation and amortization........ 6,785,832 9,358,635
----------- -----------
$ 5,876,158 $ 9,092,630
=========== ===========

4. Intangible Assets

Intangible assets consist of the following:

December 31,
Estimated ------------------
Useful Life 1995 1996
----------- ---- ----

Physician contracts................................... 6 - 10 $ 9,883,290 $ 8,433,290
Noncompetition agreements............................. 5 3,727,042 3,895,000
Excess purchase price over fair value of net
assets acquired...................................... 20 6,076,005 40,071,903
Other................................................. 5 441,458 244,159
----------- -----------
20,127,795 52,644,352
Less accumulated amortization......................... 8,162,769 8,088,330
----------- -----------
$11,965,026 $44,556,022
=========== ===========

5. Accrued Expenses

Accrued expenses consist of the following:

December 31,
------------------
1995 1996
---- ----

Estimated costs to complete the collection
process for accounts receivable-unbilled............. $ 1,185,082 $ 2,286,714
Accrued payroll, benefits and related liabilities..... 2,477,920 3,189,971
Accrued restructuring charges......................... 387,891 4,628,374
Accrued professional fees............................. 2,046,128 2,664,960
Other................................................. 1,838,174 4,035,023
----------- -----------
$ 7,935,195 $16,805,042
=========== ===========

No item included in other accrued expense totaled more than 5% of accrued
expenses at December 31, 1995 or 1996.

F-10

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

6. Long-Term Debt

Long-term debt consists of the following:

December 31,
------------------
1995 1996
---- ----

Bank term note, 7.6% until August 11, 1996, national
commercial rate plus 1.5% thereafter payable monthly,
$133,333 to $150,000 through August 1, 1998..................... $ 5,166,667 $ -
Subordinated notes, 13%, payable $1,500,000 on August 30,
1997 and 1998................................................... 3,000,000 -
Subordinated notes, 9% on the first $1,350,000 due August 30,
1997, 0% on the remainder, payable on August 30, 1998........... 1,830,763 -
Bank term notes, various interest rates, payable monthly
through May 2000................................................ 2,278,512 -
Acquisition Line borrowings, overnight market rate
(6.18% at December 31, 1996).................................... - 12,017,027
Working Capital Line borrowings, Intermediate Market
Rate (6.83% at December 31, 1996)............................... - 2,500,000
Spring acquisition subordinated note, 7.6%, payable on
August 12, 2003................................................. 5,500,000 5,500,000
----------- -----------
17,775,942 20,017,027
Less current portion............................................. 2,804,159 -
----------- -----------
$14,971,783 $20,017,027
=========== ===========

On December 13, 1996, the Company entered into a Loan Agreement (the
"Agreement") with its bank which was comprised of a $30,000,000 Acquisition
Revolving Credit Facility (the "Acquisition Line") and a $5,000,000 Working
Capital Line of Credit (the "Working Capital Line"). Under the Agreement, the
Company may borrow, repay and reborrow amounts on the Acquisition Line through
January 1, 1999. At any time prior to January 1, 1999, the Company may convert
any Acquisition Line borrowings into a term loan ("Term Loan") with a repayment
term of no more than 5 years from the date of conversion. On January 1, 1999,
all borrowings under the Acquisition line automatically convert into a Term Loan
that will be payable in monthly installments through January 1, 2004.
Acquisition Line borrowings may, at the Company's option, bear interest at the
Overnight Market Rate (federal funds rate plus 0.87%) or the Adjusted LIBOR Rate
(London Interbank Offered Rate plus 0.85%). Interest on Term Loans may, at the
Company's option, bear interest at the Intermediate Market Rate (Overnight
Market rate plus 0.30%) or a fixed rate of interest quoted by the bank at the
time of a Term Loan conversion. The Company may borrow under the Working
Capital Line through June 30, 1998, with Working Capital Line borrowings bearing
interest at the lesser of the bank's prime rate or the Overnight Market Rate
plus 0.65%.

F-11

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

7. Other Long-Term Liabilities

Other long-term liabilities consist of the following:

December 31,
-----------------
1995 1996
---- ----

Capitalized lease obligations.............................. $1,026,885 $2,910,952
Pension liability (Note 11)................................ 31,578 67,578
Deferred purchase price.................................... - 350,000
Deferred rent.............................................. 828,776 1,123,999
Other...................................................... 300,000 193,146
---------- ----------
2,187,239 4,645,675
---------- ----------
Less current portion:
Capitalized lease obligations........................... 322,297 909,239
Other................................................... 50,000 60,384
---------- ----------
372,297 969,623
---------- ----------

$1,814,942 $3,676,052
========== ==========

The following is a schedule of future minimum lease payments under capital
leases and the present value of the minimum lease payments as of December 31,
1996:

Year Ending
December 31,
------------

1997................................................ $1,157,135
1998................................................ 1,077,155
1999................................................ 857,412
2000................................................ 210,859
2001................................................ 15,990
----------

Total minimum lease payments.......................... 3,318,551
Less amount representing interest..................... 407,599
----------

Present value of minimum lease payments (of which
$909,239 is due within one year).................... $2,910,952
==========

F-12

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

8. Income Taxes

Income taxes consist of the following:

Year Ended December 31,
-------------------------------------
1994 1995 1996
---------- ----------- ------------

Current:
Federal................................ $ 240,698 $ 22,969 $ 434,438
State.................................. 82,186 53,955 237,152
--------- ---------- -----------
322,884 76,924 671,590
--------- ---------- -----------
Deferred:
Federal................................ (565,112) (487,457) 667,040
State.................................. (318,218) (76,204) 70,471
--------- ---------- -----------
(883,330) (563,661) 737,511
--------- ---------- -----------
Recorded provision for income taxes...... (560,446) (486,737) 1,409,101

Pro forma income taxes................... 762,390 202,528 (2,026,651)
--------- ---------- -----------

Total income taxes....................... $ 201,944 $ (284,209) $ (617,550)
========= ========== ===========

Deferred income tax assets and liabilities consist of the following:

December 31,
----------------
1995 1996
---- ----

Deferred income tax assets:
Net operating loss carryforwards....... $1,219,821 $ 781,473
Valuation reserve for state net
operating loss carryforwards.......... (89,374) (156,776)
Operating improvement reserves......... 145,858 1,781,803
Landlord allowances.................... 238,493 366,893
Bad debt reserve....................... 217,466 821,815
Vacation accrual....................... 277,515 483,960
Other.................................. 4,124 66,154
---------- -----------
2,013,903 4,145,322
---------- -----------
Deferred income tax liabilities:
Physician contracts.................... 667,625 -
Unbilled accounts receivable, net...... 2,149,427 3,528,231
Depreciation and amortization.......... 484,718 263,795
S Corporation cash to accrual
conversions........................... - 1,706,906
---------- -----------
3,301,770 5,498,932
---------- -----------

Net deferred income tax liability........ $1,287,867 $ 1,353,610
========== ===========

F-13

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

The net deferred income tax liability is classified in the consolidated
balance sheet as follows:

December 31,
------------------
1995 1996
---- ----

Net current liability.................... $ 289,818 $ 31,347
Net long-term liability.................. 998,049 1,322,263
---------- -----------
Net deferred income tax liability........ $1,287,867 $ 1,353,610
========== ===========

A reconciliation of the statutory Federal income tax rate and the effective
rate of the provision for income taxes consists of the following:

December 31,
-------------------------
1994 1995 1996
------- ------- -------

Statutory Federal income tax rate................... 34.0% (34.0)% (34.0)%
State income taxes, net of Federal income tax
benefits........................................... (4.5) (3.6) 1.8
Merger costs........................................ - - 11.0
Restructuring and other charges..................... - - 16.0
Nondeductible items................................. 19.3 10.3 1.7
Change in state tax laws allowing previously
disallowed prior years state net operating loss
deduction.......................................... (27.2) - -
State net operating loss carryforwards valuation
allowance.......................................... 11.5 1.6 0.7
Effect of changes in state income tax rates on
deferred income tax assets and liabilities......... (18.8) - -
Subchapter S earnings not subject to tax............ (107.8) (14.0) (0.8)
Cash to accrual adjustment.......................... - - 17.3
------ ------ ------
Effective income tax rate........................... (93.5) (39.7) 13.7

Pro forma tax adjustment............................ 126.9 16.5 (19.7)
------ ------ ------

Pro forma income tax rate........................... 33.4% (23.2)% (6.0)%
====== ====== ======

F-14

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

9. Supplemental Cash Flow Information

Supplemental cash flow information consists of the following:

Year Ended December 31,
-------------------------------
1994 1995 1996
------ ------ ------

Supplemental investing activity:
Fair value of assets acquired ........... $ -- $ -- $ 51,532,204
Stock issued in acquisitions ............ -- -- ( 8,539,975)
Cash acquired ........................... -- -- ( 713,180)
Liabilities assumed ..................... -- -- (10,339,749)
Deferred purchase price ................. -- -- ( 2,262,000)
Costs of exiting certain redundant
facilities and activities ............. -- -- ( 2,000,000)
---------- ---------- ------------
Net cash paid for acquisition ........... $ -- $ -- $ 27,677,301
========== ========== ============

Supplemental disclosure of cash flow
information:
Cash paid for interest .................. $1,474,097 $ 463,387 $ 4,313,118
========== ========== ============

Capital lease obligations incurred in
acquisition of equipment .............. $ 639,500 $ 251,490 $ 1,976,561
========== ========== ============

Cash paid for taxes ..................... $ 381,877 $ 232,976 $ 808,406
========== ========== ============

F-15

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

10. Related Party Transactions

The Company has the following amounts receivable from related parties:

December 31,
------------------
1995 1996
---- ----

Notes receivable - shareholders ...................... $1,983,450 $1,054,038
Due from affiliated companies ........................ 2,396,114 -
---------- ----------
$4,379,564 $1,054,038
========== ==========

The Company has the following amounts due to related parties:

December 31,
------------------
1995 1996
---- ----

Payable to shareholders - due on demand ............. $1,852,706 $ 315,000
Unsecured note due to an affiliated
company with interest
at 11% matures December 31, 1996 .................... 255,746 -
Payable to a shareholder due in monthly
installments with interest
at 7.5% due December 2004 ........................... 1,038,852 920,431
---------- ----------
3,147,304 1,235,431
Less current portion 2,231,316 463,736
---------- ----------

$ 915,988 $ 771,695
========== ==========

Legal services provided by a related party were $2,869,885, $3,400,182, and
$2,549,657 for the years ended December 31, 1994, 1995 and 1996, respectively.

The schedule of repayments of notes payable to related parties by year and in
the aggregate is as follows:

Year Ending
December 31,
-------------
1997 ........................... $ 463,736
1998 ........................... 130,792
1999 ........................... 153,759
2000 ........................... 132,320
2001 ........................... 99,193
Thereafter 255,631
-----------

$ 1,235,431
===========

11. Employee Benefit Plans

Spring provides pension benefits to eligible employees under a noncontributory
defined benefit pension plan (the "Plan"). Benefits are earned on the basis of
credited service and employees' highest five consecutive plan years' average
compensation. The Plan was frozen effective July 1, 1993. Accordingly, no
further benefits accrue to eligible employees after July 1, 1993, the
accumulated benefit obligation becomes equal to the projected benefit obligation
as of that date, and all benefits become vested as of that date. The Company
makes contributions to the plan as necessary to satisfy the minimum funding
requirements of ERISA.

F-16

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

The following table summarizes the significant assumptions used in determining
the pension obligations as of December 31, 1995 and 1996:

Discount rate -- pre-retirement................. 7.0%
Discount rate -- post-retirement................ 5.0%
Expected long-term rate of return on assets..... 7.0%

Assets of the plan consist primarily of investments in stocks and corporate
and government bonds.

Pension cost includes the following components:

Year Ended December 31,
--------------------------------------
1994 1995 1996
---------- ----------- -------------

Service cost -- benefits earned during
the period............................ $ -- $ -- $ --
Interest cost on projected benefit
obligation............................ (142,660) (132,450) (113,819)
Return on plan assets -- actual........ 69,574 236,165 197,607
Net amortization and deferral.......... 66,166 (115,681) (92,452)
--------- ---------- -----------
Net pension cost.................... $ (6,920) $ (11,966) $ (8,664)
========= ========== ===========

The funded status of the pension plan at December 31, 1995 and 1996 was as
follows:

December 31,
-------------------
1995 1996
---- ----

Projected benefit obligation (100%
vested)............................... $(1,981,163) $(1,382,710)
Plan assets at fair value.............. 1,938,358 1,425,602
----------- -----------
Projected benefit obligation (in
excess of) less than plan assets...... (42,805) 42,892
Unrecognized net (gain) loss........... 11,227 (83,134)
---------- -----------
Accrued pension cost................ $ (31,578) $ (40,242)
========== ===========

The Company maintains several non-contributory 401(k) plans for the benefit of
its employees. For the years ended December 31, 1994, 1995 and 1996, the
Company's contributions to its 401(k) plans were $70,823, $83,475 and $102,794
respectively. In order to maintain its compliance with ERISA, the Company
intends to consolidate all its 401(k) plans into one plan prior to December 31,
1998.

F-17

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

12. Commitments and Contingencies

a. Operating Leases -- Future minimum annual rental commitments under
noncancelable operating leases are as follows:

Year Ending
December 31,
------------

1997................................. $ 3,723,081
1998................................. 3,363,605
1999................................. 3,284,637
2000................................. 2,752,749
2001................................. 2,766,683
Thereafter........................... 4,982,689
-----------

$20,873,444
===========

Rent expense was approximately $2,183,727, $2,417,817 and $3,420,316 for the
years ended December 31, 1994, 1995 and 1996, respectively.

b. Letter of Credit -- The Company has a letter of credit from a bank in the
amount of approximately $163,945 at December 31, 1996 in connection with one of
its self-insured employee medical plans.

c. Litigation - The Company is involved in certain litigation in the normal
course of business. In the opinion of management, liabilities arising from such
litigation will not have a material adverse effect on the Company's financial
position.

13. Redeemable Preferred Stock

On August 30, 1991, the Company sold 2,000 shares of 10% Preferred Stock,
Series A (the "Series A Stock") and 2,000 shares of 10% Preferred Stock, Series
B (the "Series B Stock") (together, the "10% Preferred Stock"), stated value
$500 per share, for $2,000,000. On February 28, 1994, February 28, 1995 and
August 31, 1995, the Company issued stock dividends of 120 shares, 127.2 shares
and 134.832 shares, respectively, of 10% Preferred Stock, Series A and 120
shares, 127.2 shares and 134.832 shares, respectively, of 10% Preferred Stock,
Series B in lieu of cash dividends. On December 21, 1995, the Company sold 1,100
shares of 10% Redeemable Preferred Stock, Series A, stated value $500 per share,
for $550,000.

On February 15, 1996, the Company redeemed all outstanding shares of preferred
stock (see Note 14).

At December 31, 1995 and 1996, redeemable preferred stock consisted of the
following:

December 31,
-----------------
1995 1996
---------- -----

Par value $.01 per share, authorized 10,000 shares:

Series A, stated value $500 per share,
outstanding 3,482,032 and 0 shares, respectively .......... $1,741,016 $ -

Series B, stated value $500 per share,
outstanding 2,482,032 and 0 shares, respectively .......... 1,191,016 -
---------- -----

$2,932,032 $ -
========== =====

F-18

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

14. Common Stock

a. Sale of Common Stock -- On February 12, 1996, the Company authorized the
issuance of up to 10,000,000 shares of preferred stock, increased the number of
authorized shares of common stock from 5,000 to 100,000,000, changed the par
value of its common stock from $.01 to $.001 per share and effected a 1,400-for-
one stock split. All numbers of common shares and per share data in the
accompanying financial statements have been retroactively adjusted to effect the
stock split. In addition, on February 12, 1996, the Company sold 4,025,000
shares of common stock for $12 per share in its initial public offering of
common stock. The net proceeds of such offering of approximately $43,556,000
were used to repay all outstanding short and long-term debt except for the
Spring acquisition subordinated note, redeem all outstanding shares of preferred
stock and acquire NCHC, MMS and PPS.

b. Physician Support Systems, Inc. Stock Option Plan -- On February 9, 1996,
the Company adopted the Physician Support System, Inc. Stock Option Plan (the
"Original Plan"). On October 2, 1996, the Company amended and restated the
Original Plan by adopting the Physician Support System, Inc. Amended and
Restated Stock Option Plan, which was further amended in December 1996 (the
"Plan"). A total of 849,750 authorized but unissued shares of common stock are
reserved for issuance under the Plan. All options issued under the Plan through
December 31, 1996 have an exercise price of not less than 100% of the fair
market value of a share of the Company's common stock on the date of the grant,
vest over five years and must be exercised within ten years from the date of the
grant. Through December 31, 1996, the Company has issued 483,998 options (of
which 19,000 were forfeited as of December 31, 1996) under the Plan at exercise
prices ranging from $12.00 to $22.00.

c. Synergistic Systems, Inc. Stock Option Plan -- On December 23, 1996,
Synergistic Systems, Inc. adopted the Synergistic Systems, Inc. Stock Option
Plan (the "SSI Plan"). The Company has reserved a total of 90,000 authorized but
unissued shares of common stock for issuance under the SSI Plan. All options
issued under the SSI Plan through December 31, 1996 have an exercise price of
not less than 100% of the fair market value of a share of the Company's common
stock on the date of the grant, vest over five years and must be exercised
within ten years from the date of the grant. Through December 31, 1996, the
Company has issued 87,750 options under the SSI Plan at exercise prices ranging
from $15.60 to $19.12, which include options granted by SSI prior to being
acquired by the Company which were assumed by the Company.

A summary of the combined status, and changes during the year ended December
31, 1996 of the Plan and the SSI Plan is presented below:

Shares Exercise Price
------- --------------

Outstanding at January 1, 1996 ......... - -
Granted ................................ 571,748 $12.00 - 22.00
Exercised .............................. - -
Forfeited .............................. 19,000 $12.00 - 22.00
------- --------------

Outstanding at December 31, 1996 552,748 $12.00 - 21.75
======= ==============

Options exercisable at December 31, 1996 - $ -
======= ==============

The following table summarizes information related to options outstanding
at December 31, 1996:

Weighted-Average
Range of Outstanding at Remaining Weighted-Average
Exercise Prices December 31, 1996 Contractual Life Exercise Price
--------------- ----------------- ---------------- ----------------

$12.00-15.875 218,250 4.31 years $14.15
$18.75-21.75 334,498 4.73 years $20.70

F-19

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

The Company has chosen to continue to apply the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25") to the measurement of compensation
cost related to stock based compensation awards. APB 25 measures such
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company has chosen to adopt only the disclosure provisions of Financial
Accounting Standards Board Statement No. 123 ("SFAS 123"), which measures
compensation cost related to stock based compensation awards based on the fair
value of the equity instrument awarded. If compensation cost had been determined
under SFAS 123, pro forma net income (loss) and pro forma earnings (loss) per
share would have been reduced to the pro forma amounts below for the year ended
December 31, 1996:

Pro forma net income (loss):
As reported .................................... $(9,642,312)
Pro-forma ...................................... $(9,944,279)

Pro forma earnings (loss) per share:
As reported .................................... $ (1.17)
Pro forma ...................................... $ (1.20)

In calculating pro forma net income (loss) under SFAS 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for the
period ended December 31, 1996:

Expected volatility ............................... 71.97%
Expected lives .................................... 5 years
Risk-free interest rate ........................... 5.00%
Expected dividend yield ........................... 0.00%

Weighted-average fair value of options granted
during the year ended December 31 (per option) .. $12.05

The pro forma effect of applying SFAS 123 is not necessarily indicative of the
effect on reported net income for future years.

F-20

PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1994, 1995 and 1996

15. Merger Costs and Restructuring and Other Charges

Spring's results in the three months ended June 30, 1996 were adversely
affected by operating inefficiencies in the processing of physician charges
which resulted in lower revenues during that period. In addition, the Company
incurred increased salary and general and administrative expenses in an attempt
to increase production. To address these operating inefficiencies, among other
actions, the Company decided to replace certain computer hardware and software
at Spring with other operating software. The Company recorded a restructuring
charge in the three months ended June 30, 1996 of approximately $1,600,000
related to the write-off of certain computer hardware and software, and costs
associated with the introduction of a new management team, some limited
severance activity and other transaction items. During the three months ended
December 31, 1996, the Spring operating inefficiencies led to client
dissatisfaction. The Company incurred increased salary and general and
administrative costs in an attempt to increase client satisfaction. However,
these efforts were unsuccessful, and led to the loss of clients and loss of
related revenues. As a result, in accordance with FASB 121, the Company has
determined that certain identifiable intangible assets (primarily customer
contracts), and goodwill, were not recoverable from future cash flows of Spring,
and accordingly, an impairment loss of approximately $6,578,000 was recorded. In
addition, in conjunction with the Company's acquisition on February 5, 1997 of
Physerv, which like Spring, serves only anesthesiologists, the Company has
decided to fold the remaining Spring business into Physerv, in order to develop
a profitable, national approach to the anesthesia market. This will entail
exiting the processing of physician charges in remote Spring locations and
performing such processing activities at more efficient central anesthesia
processing locations. As a result of this assimilation, the Company may record a
charge in the three months ending March 31, 1997 related to exiting processing
activities at Spring.

At the time of the SSI merger, the Company determined that it would replace
certain SSI computer hardware and software with its proprietary operating
software, and accordingly recorded a charge of approximately $900,000 in the
three months ended June 30, 1996.

The Company incurred approximately $3,325,000 in transaction fees and other
merger related costs in connection with the SSI, EE&C and RPM mergers which are
reflected in the Company's results of operations for the year ended December 31,
1996.

F-21

EXHIBIT INDEX
-------------

Exhibit No. Description
----------- -----------