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                             Commission File No.
   December 31, 1996                                        0-15586

                                    GHS, INC.
             (Exact name of Registrant as specified in its charter)

      Delaware                                          52-1373960
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                    Identification Number)

1350 Piccard Drive, Suite 360, Rockville, Maryland          20850
(Address of principal executive office)                   (Zip Code)

Registrant's telephone number, including area code:  (301) 417-9808
      Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class                   Name of Each Exchange on Which Registered
      None                                   Not Applicable
      Securities Registered Pursuant to Section 12(g) of the Act:
                  Common Stock, par value $.01 per share

      Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed in Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (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 (229.405 of this chapter) 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. [ X ].

      The aggregate market value of Registrant's Common Stock held by
non-affiliates was approximately $____________ on April 1, 1997, based upon the
average of the bid and asked prices as reported on NASDAQ.

      The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding as of March 14, 1997, was 6,947,828.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Certain exhibits (to this Annual Report on Form 10K for the Registrant's
fiscal year ended December 31, 1996) are incorporated by reference as listed on
the index of exhibits in Part IV, ITEM 14.


                                       1
<PAGE>

                                     Part I

ITEM 1. BUSINESS

GHS, Inc. (the Company) provides management services, computer systems,
technology, and management to the health care industry. The Company provides
these products and services primarily via its two operating subsidiaries, Global
Health Systems, Inc. and U.S. NeuroSurgical, Inc.(R). In addition the Company is
a minority partner in Florida Specialty Networks, Ltd. As used herein, unless
the context indicates otherwise, the term "Company", "Registrant" and "GHS,
Inc." means GHS, Inc. and its subsidiaries. The Company, a Delaware corporation,
was formed in December 1984 under the name "Global Health Systems, Inc." GHS,
Inc. was given its present name in October 1988, when it assigned substantially
all of its assets and liabilities to its wholly-owned subsidiary, Global Health
Systems, Inc., a Delaware corporation formed in September 1988 to continue the
business of the Company. The Company's executive offices are located at 1350
Piccard Drive, Suite 360, Rockville, Maryland 20850, and its telephone number is
(301) 417-9808.

Recent Events

On March 10, 1997, GHS, Inc. and Health Management Systems, Inc. (HMS),
announced that they entered into a definitive asset purchase agreement pursuant
to which HMS will acquire substantially all of the assets of GHS' subsidiaries,
Global Health Systems, Inc. and GHS Management Services. These subsidiaries
provide computerized record-based processing systems and services for managed
care, public health and ambulatory care facilities.

The purchase agreement calls for consideration to GHS by HMS of $2,100,000 in
cash, subject to certain closing adjustments. The closing is subject to certain
conditions, including the receipt of consents required for the assignment of
certain contracts and official notice to GHS' shareholders pursuant to federal
securities and state laws. Stockholders of GHS holding a majority of the
outstanding shares of GHS common stock have consented to this sale to HMS. GHS
will retain its subsidiary, US NeuroSurgical, Inc., a company that owns and
operates Gamma Knife Centers, as well as its interest in Florida Specialty
Networks, Ltd., a company that manages medical specialty networks. Upon the
closing of the sale, HMS will employ each of GHS' current employees,


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<PAGE>

including Mr. Alan Gold. Mr. Gold will also remain as the Chairman and President
of GHS following the closing and run GHS's remaining operations.

Global Health Systems, Inc.

General

      Global Health Systems, Inc. (Global), provides computerized integrated
patient record-based processing systems and services for managed care facilities
in the public and private sector. The Company currently supports more than 100
client sites in 15 states and the Republic of Iceland. Global offers systems
either as turnkey products or under facilities management agreements providing
hardware, implementation, training, maintenance, and in some cases, billing,
claims processing, and other operational support.

      The Company has expanded its scope of services to provide executive
healthcare management services via long term contracts with health care plans
including HMOs and newly emerging health systems like PSNs (Provider Service
Networks), PHOs (Physician Hospital Organizations), and MSOs (Management Service
Organizations). These services include planning and development, executive
management, finance, information systems, membership services, claims
processing, utilization management, provider relations, and quality assurance.

Global Health Information System (GHiS)

      Global's major product, the Global Health Information System (GHiS), is a
totally integrated, patient record-based information system designed, developed,
and continuously tailored to meet the needs of managed care organizations. The
system has evolved over more than a decade from an on-line ambulatory care
system supporting FFS billing and electronic medical records, into a
comprehensive information system for managed care organizations. The GHiS
automates the financial, medical, and administrative functions of the facility
in a single, integrated data base. The information in the data base is instantly
available for displaying, printing, and reporting to any authorized user, within
a facility or at geographically dispersed locations.


                                       3
<PAGE>

The GHiS contains on-line real time, integrated modules which can be sold as an
integrated whole, or in some instances, as a separate stand-alone system. System
modules include Registration/Enrollment/Eligibility; Claims Processing; Service
Authorizations; Utilization Reports; Regimen Tracking/Protocols; Case
Management; Laboratory; Pharmacy; Medical Records; Report Generator; Member
Services; Billing/Capitation; Patient and Resource Scheduling; Credentialling;
and Provider Contracts.

Software Licensing and Product Protection

      Global's license agreements with clients contain provisions designed to
prevent disclosure and unauthorized use of the Company's products. Because
software applications generally cannot be patented, the Company relies upon such
license agreements and confidentiality agreements to protect its proprietary
knowledge. Clients are required to sign contracts restricting use to their own
operations and prohibiting disclosure to third-parties. Further, clients are not
provided with the software source code. Despite these restrictions it may be
possible for competitors to obtain the Company's trade secrets, which could
adversely affect the Company's business.

Hardware

      Global's systems are hardware independent and are offered on a variety of
hardware platforms from International Business Machines, Digital Equipment
Corporation, Hewlett Packard, Data General, and other hardware companies that
can support UNIX. The systems can operate on mini or mainframe computers.
Hardware support services are not included with the systems, but clients are
encouraged to obtain hardware maintenance coverage with the hardware vendor or
with third-party maintenance vendors.


                                       4
<PAGE>

Implementation, Training, Warranty, Maintenance, Facilities Management, and
Management Services

      Global offers systems either as turnkey products, facilities management
agreements, or as part of a contingent fee/service bureau structure. As part of
the turnkey system approach, Global provides customer support services from
pre-installation through post-implementation. Global works with the customer to
plan the implementation of the system and provides software modifications to
customer specifications. Technical specialists install the software and train
users on-site with a simulated training data base.

      Global provides annual maintenance contracts for software support and
enhancements to maintain the integrity of the system after purchase. Under the
facilities management approach, Global provides the services described above
including claims processing and also employs one or more system managers who are
responsible for operating and maintaining the system for the facility.
Maintenance and facilities management contracts accounted for approximately 32%
of the Company's revenues for the year ended December 31, 1996.

      Global provides management services to managed care organizations and
public health agencies. These services are an expansion of Global's facilities
management approach. Services are offered for a fixed price, a percentage of
capitation or revenues, a rate per member per month, or a rate per system user.

Product Development

      Changing client needs as well as technological changes in hardware
necessitate constant software enhancement and/or expansion. In addition,
government regulatory changes such as reimbursement schemes require the
development of new software modules to support shifting needs of existing
clients and new clients. For example, under a managed care scenario it is
necessary to track costs, financial exposure, and utilization review. Product
development projects have been undertaken primarily in response to


                                       5
<PAGE>

specific client requests and to satisfy needs of Global's management services
clients. In the fiscal years ended December 31, 1996, 1995, and 1994 the Company
expended approximately $231,000, $320,000, and $124,000, respectively, for
research, development, and enhancement of computer software systems.

Competition

      There are several hundred companies involved in the national medical
information systems and services market. Many of these companies are
considerably larger and financially stronger than the Company. These companies
provide varying combinations of hardware, software and services. Major
competitors include Shared Medical, IDX, and Computer Sciences Corporation.

Marketing and Customers

      Global markets products and services from its headquarters in Rockville,
Maryland, directly through a marketing staff and sales staff to large
municipalities and managed care providers. The marketing department responds to
Requests for Proposals (RFPs), exhibits at trade conventions, conducts direct
mail, telemarketing and public relations campaigns, and advertises occasionally
in health care computing publications.

      Clients are currently distributed geographically through 15 states, the
District of Columbia and the Republic of Iceland. Systems are operating at more
than 100 locations nationwide with approximately 25% of such locations in
California.

      Global's turnkey contracts cover both the system sale and the ongoing
maintenance. Revenue related to the system sale is generally recognized in
accordance with the Company's revenue recognition policy. However, billings are
made in installments based on milestones reached in accordance with the contract
provisions. The maintenance portion of the contract extends 2 to 5 years after
system installation with revenue recognized as billed, generally monthly.

      Global's facilities management and management service contracts are billed
monthly for the life of the contract term, generally, two to five years.


                                       6
<PAGE>

Backlog

      As of December 31, 1996, Global's backlog was approximately $1,740,000 as
compared to approximately $1,320,000 as of December 31, 1995. These backlog
figures represent services deliverable under maintenance contracts. Maintenance
contracts generally end at various times during the year, and are expected to be
renewed for additional one year periods. Facilities management and management
services contracts generally extend for a period of five years.

Florida Specialty Networks

      The Company has installed the GHiS in Florida as part of a joint venture
with Florida Specialty Networks (FSN). FSN is a managed care organization in the
business of providing capitated medical specialty and subspecialty services to
HMO patients. FSN processes claims for more than 3,000,000 patients of multiple
HMOs, for 25 medical specialties. The Network version of the GHiS provides FSN
the ability to segregate financial accounts by patient, by network, by HMO,
while simultaneously creating a fully integrated on-line patient record of all
data to facilitate Utilization Management and Quality Assurance. GHS has a 20%
ownership of FSN. In 1996, GHS received $146,000 from FSN.

      FSN's business expanded in 1996 with new networks and contracts with a
national managed care organization. Under these contracts, FSN develops
specialty networks in cities where the organization has large enrollment. During
1996, FSN developed networks for this agreement in New York, New Jersey,
Tennessee and Oklahoma.

U. S. NeuroSurgical, Inc.

      US NeuroSurgical, Inc.(R) (USN) of which the Company owns 100%, was
organized in July, 1993 to own and operate stereotactic radiosurgery centers,
utilizing the Gamma Knife technology. USN's business strategy is to provide a
mechanism whereby hospitals, physicians, and patients can have access to Gamma
Knife treatment capability,


                                       7
<PAGE>

a high capital cost item. USN provides the Gamma Knife to medical facilities on
a "cost per treatment" basis. USN owns the Gamma Knife units, and is reimbursed
by the facility where it is housed, based on utilization.

      USN's principal target market is medical centers in major health care
catchment areas that have physicians experienced with and dedicated to the use
of the Gamma Knife. USN seeks cooperative ventures with these facilities. USN
believes that, as of December 31, 1996, there were approximately thirty Gamma
Knife treatment centers in the United States.

      In July 1993, USN purchased its first Leksell Gamma Knife from Elekta
Instruments, Inc. (Elekta), for the purpose of installing it at the Research
Medical Center (RMC) in Kansas City, Missouri. USN paid approximately $3,000,000
for the Gamma Knife. In September 1993, USN entered into a lease/purchase
agreement with Financing for Science International, Inc. (FSI), a medical
equipment leasing company, to finance the Gamma Knife purchase. FSI was acquired
by FINOVA Capital Corporation in 1996 and they presently hold the lease.

      USN opened its first Gamma Knife Center on the premises of RMC in
September 1994. RMC is part of Health Midwest, a consortium of eleven hospitals
and numerous affiliates. USN formed a cooperative venture with RMC in September,
1993. Per an agreement with RMC, GHS, Inc. sold 500,000 shares of its common
stock for $500,000 to RMC to secure additional working capital in order to
enable USN to develop and construct a Gamma Knife Facility. USN has installed
the Gamma Knife in the facility, where it is being utilized by neurosurgeons
credentialled by RMC. USN is reimbursed for use of the Gamma Knife by RMC based
on a percentage of the fees collected by RMC for Gamma Knife procedures.
Pursuant to a ground lease agreement, RMC leased to USN the land on which to
build the Gamma Knife facility.

      USN plans to open a second treatment center on the campus of New York
University (NYU) Medical Center in New York, New York. The Company has secured a
lease purchase agreement with DVI Financial Services, Inc.. In September 1996,
DVI made a progress payment in the amount of $1,160,000 to Elekta and refunded
the


                                       8
<PAGE>

$290,000 to USN that was made as a deposit. As a result, USN is currently paying
interest only on $2,610,000. The Certificate of Need (CON) has been obtained
from New York State allowing construction and operation of the Gamma Knife
Center. The Company expects that the Center will open in the spring of 1997. The
agreement with DVI provides for a $2,900,000 lease for the Gamma Knife and up to
$900,000 in construction financing. In November 1996, DVI placed $825,000 in an
escrow account to cover the estimated costs of completing the NYU Center. Of the
$825,000, $300,000 is a three year term loan to USN and $525,000 was advanced as
an accounts receivables credit line.

Gamma Knife Technology

      The Leksell Gamma Knife is a unique stereotactic radiosurgical device used
to treat brain tumors and other malformations of the brain without invasive
surgery. The Gamma Knife delivers a single, high dose of ionizing radiation
emanating from 201 cobalt-60 sources positioned about a hemispherical, precision
machined cavity. The lesion is first targeted with precision accuracy using
advanced imaging and three dimensional treatment planning techniques such as CT
Scans, MR Scans, conventional X-rays, or angiography. Each individual beam is
focused on a common target producing an intense concentration of radiation at
the target site, destroying the lesion while spreading the entry radiation dose
uniformly and harmlessly over the patient's skull . The mechanical precision at
the target site is +/- 0.1mm (1/10 of 1 millimeter). Because of the steep
fall-off in the radiation intensity surrounding the target, the lesion can be
destroyed, while sparing the surrounding tissue.

      The procedure, performed in a single treatment, sharply reduces hospital
stay and eliminates post-surgical bleeding and infection. When compared with
conventional neurosurgery, Gamma Knife treatment is less expensive. However, not
all patients are candidates for radiosurgery since the decision to use the Gamma
Knife depends on the type, size, and location of the lesion.


                                       9
<PAGE>

Regulatory Environment

      The levels of revenues and profitability of companies involved in the
health services industry, such as USN, may be affected by the continuing efforts
of governmental and third party payors to contain or reduce the costs of health
care through various means. Although the Company does not believe that the
business activities of USN will be materially affected by changes in the
regulatory environment, it is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effects healthcare reform may have
on USN's business, and no assurance can be given that any such reforms will not
have a material effect on USN.

      In addition, the provision of medical services in the United States is
dependent on the availability of reimbursement to consumers from third party
payors, such as government and private insurance companies. Although, patients
are ultimately responsible for services rendered, the Company expects that the
majority of USN's revenues will be derived from reimbursements by third party
payors. Medicare has authorized reimbursement for Gamma Knife treatment. Over
the last several years, such third party payors are increasingly challenging the
cost effectiveness of medical products and services and taking other
cost-containment measures. Therefore, although treatment costs using the Gamma
Knife compare favorably to traditional invasive brain surgery it is unclear how
this trend among third party payors and future regulatory reforms affecting
governmental reimbursement will affect procedures in the higher end of the cost
scale.

      The Company is planning to establish future Gamma Knife centers.
Completion of future centers will require approvals and arrangements with
hospitals, health care organizations, or other third parties, including certain
regulatory authorities. The Food and Drug Administration has issued the
requisite pre-market approval for the Gamma Knife to be utilized by USN. In
addition, many states require hospitals to obtain a Certificate of Need (CON)
before they can acquire a significant piece of medical 


                                       10
<PAGE>

equipment. The Company plans to enter into future ventures in which that "need"
will be demonstrable, but it can have no assurance that Certificates of Need
will be granted in every case.

      In addition, the Nuclear Regulatory Commission must issue a permit to USN
to permit loading the COBALT at each Gamma Knife site. While the Company
believes that it can obtain a NRC permit for each Gamma Knife machine, there is
no assurance that it will.

Liability Insurance

      Although the Company does not directly provide medical services, it has
obtained professional medical liability insurance, and has general liability
insurance as well. The Company believes that its insurance is adequate for
providing treatment facilities and non-medical services although there can be no
assurance that the coverage limits of such insurance will be adequate or that
coverage will not be reduced or become unavailable in the future.

Competition

      The health care industry, in general, is highly competitive and the
Company expects to have substantial competition from other independent
organizations, as well as from hospitals in establishing future Gamma Knife
centers. There are other companies that provide the Gamma Knife on a "cost per
treatment basis". In addition, larger hospitals may be expected to install Gamma
Knife technology as part of their regular inpatient services. Some of these
competitors have greater financial and other resources than the Company.
Principal competitive factors include quality and timeliness of test results,
ability to develop and maintain relationships with referring physicians,
facility location, convenience of scheduling and availability of patient
appointment times. The Company believes that cost containment measures will
encourage hospitals to seek companies that are providing the technology, instead
of incurring the capital cost of establishing their own Gamma Knife centers.


                                       11
<PAGE>

Gamma Knife Supply and Servicing

      Currently the only company that manufactures, sells, and services the
Gamma Knife is Elekta Instruments, Inc., a subsidiary of AB Elekta of Stockholm,
Sweden. Any interruption in the supply or services from Elekta would adversely
affect USN's plans to open additional Gamma Knife treatment centers as well as
to maintain those centers in existence.

Gamma Knife Financing

      The Company secured financing from FSI for the first Gamma Knife
installation at the RMC site, and obtained a lease commitment from DVI Financial
Services for its second Gamma Knife installation planned for New York. The Gamma
Knife is an expensive piece of equipment presently costing approximately
$3,000,000. Therefore, the Company's development of new Gamma Knife centers is
dependent on its ability to secure favorable financing. The Company believes
that it will continue to be successful in obtaining financing but can give no
absolute assurance that it will.

New Technology/Possible Obsolescence

      Gamma Knife technology may be subject to technological change.
Consequently, the Company will have to rely on the Gamma Knife's manufacturer,
Elekta, to introduce improvements or upgrades in order to keep pace with
technological change. Any such improvements or upgrades which the Company may be
required to introduce will require additional financing. In addition, newly
developed techniques and devices for performing brain surgery may render the
Gamma Knife less competitive or obsolete.

Employees

      GHS, Inc. has twenty-one full-time employees and five part-time employees.
Of these employees, two are engaged in sales and marketing, eighteen in
technical and functional site support and/or development, four in administration
and office support, one


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<PAGE>

in site development, and one is a medical director. Upon the closing of the sale
with HMS, all employees will be retained by HMS.

ITEM 2. PROPERTIES

      The Company's base facility, from which it conducts substantially all of
its operations, are located in Rockville, Maryland, and occupy approximately
2,350 square feet which is currently leased on a month to month basis. The
current rent is approximately $34,000 per year. In December 1994, the Company
opened a second office in Sacramento, California. This office occupies 1,600
square feet, and the annual rent is approximately $28,000. USN occupies
approximately 1,600 square feet in its RMC facility. This facility is located on
the campus of RMC in Kansas City, Missouri. The ground rent is not material.

ITEM 3. LEGAL PROCEEDINGS

      None.

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

      None


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<PAGE>

                                         PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
        MATTERS

      The Company's Common Stock trades in the over-the-counter market, NASDAQ
symbol GHSI. The range of high and low bid quotations as reported by NASDAQ
System for the two years ended December 31, 1996 are set forth below.

      Period                            High Bid           Low Bid
      ------                            --------           -------

January 1 - March 31, 1995                1.00                .75

April 1 - June 30, 1995                    .75                .75

July 1 - September 30, 1995                .75                .75

October 1 - December 31, 1995              .625               .375

      Period                            High Bid           Low Bid
      ------                            --------           -------

January 1 - March 31, 1996                $.625              $.50

April 1 - June 30, 1996                    .625               .31

July 1 - September 30, 1996                .75                .375

October 1 - December 31, 1996              .56                .125

      The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.

As of March 31, 1997, there were approximately 113 holders of record of the
Company's Common Stock.

      To date the Company declared no dividends on its Common Stock and does not
anticipate declaring dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

      Set forth below is the selected financial data pertaining to the financial
condition and operations of the Company for the years ended December 31, 1992
through 1996. The latest financial statements of the Company are included in
Item 14 in Part IV of this 


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<PAGE>

report. The information set forth should be read in conjunction with such
financial statements and the notes thereto.

<TABLE>
<CAPTION>
                                                              Year Ended
                                                             December 31,
                                  ----------------------------------------------------------------------

                                         1996           1995           1994           1993          1992

<S>                               <C>            <C>            <C>            <C>           <C>        
Statement of
Operations Data:

Revenue                           $ 4,232,000    $ 4,445,000    $ 2,335,000    $ 2,493,000   $ 2,062,000
Net income (loss)                     168,000       (176,000)      (666,000)        53,000        60,000

Net income (loss)
per share                                 .02           (.03)          (.10)           .01           .01

Weighted Average
Common Shares                       6,947,828      6,947,828      6,935,016      5,817,677     5,185,328
Outstanding

<CAPTION>
                                                                  As at
                                                              December 31,
                                  ----------------------------------------------------------------------

                                         1996           1995           1994           1993          1992
Balance Sheet
Data:

<S>                              <C>             <C>            <C>            <C>           <C>        
  Working Capital                ($   824,000)       579,000        883,000      1,861,000   $ 1,105,000
  Total Assets                      8,635,000      7,339,000      5,885,000      6,991,000   $ 2,012,000
  Long term debt                    3,944,000      2,838,000      2,236,000      2,694,000            --
  Common Stock issued
  with put option                     500,000        500,000        500,000        500,000            --
Total Stock-
  holders equity                  $ 2,097,000      1,929,000      2,105,000      2,748,000   $ 1,456,000
</TABLE>


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

      The following discussion should be read in conjunction with the Financial
Statements and Notes set forth elsewhere in this report.


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<PAGE>

Results of Operations

1996 Compared to 1995

Total revenues declined 5% in 1996 to $4,232,000 from $4,445,000 in 1995. New
systems sales decreased 50% to $884,000 from $1,777,000 in 1995. The decrease
was attributable to lower hardware sales as the Company focused on services as
compared to turnkey systems sales. Maintenance revenue increased 27% to
$1,370,000 from $1,083,000 in 1995. This increase was attributable to the
Company's success in selling facilities management to clients to expand the
capability of the GHiS at their facilities. Claims processing increased by 74%
to $526,000. Revenues of the Company's other subsidiary, US NeuroSurgical, Inc.
(USN), grew 13% to $1,452,000 from $1,283,000 in 1995. The revenue growth
reflects the increased acceptance of the Center and the community.

Total expenses increased 5% to $4,361,000 from $4,140,000 1995. Systems costs
dropped to $1,047,000 from $1,651,000 a year earlier. This decrease was a result
of lower hardware purchases in 1996. Maintenance expense increased to $942,000
from $583,000 in 1995. This increase was caused by higher than anticipated
expenses associated with the start up of new services for clients. Selling,
general and administrative expenses increased by 57% to $1,571,000 from $999,000
a year earlier. The increase was caused by higher insurance costs related to USN
and increased reserves for doubtful Global Health Systems, Inc. accounts
receivable. Patient expenses associated with the operation of the Kansas City
Center were $574,000 for the year, down from $751,000 in the prior year. The
Company had interest expense of $309,000 in 1996 compared to $504,000 in 1995.
An additional $249,000 of 1996 interest costs attributable to the NYU
construction costs were capitalized. The company realized a deferred tax benefit
from the pending HMS sale of $463,000 in 1996. The effect of the capitalized
interest costs and deferred tax benefit was net income of $168,000 in 1996
against a $176,000 net loss in 1995.


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<PAGE>

1995 Compared to 1994

Total revenues increased 89% in 1995 to $4,445,000 from $2,335,000 in 1994. New
systems sales increased 39% to $1,777,000 from $1,282,000 in 1994. The increase
was attributable to a new contract with the Chicago Department of Health (CDOH)
to set up and manage public health information systems for the city. Maintenance
revenue increased 61% to $1,083,000 from $672,000 in 1994. This also was
attributable to the contract with CDOH. The company continues to focus on using
facilities management to expand the capability of the GHiS for its clients. The
Company's other subsidiary, US NeuroSurgical, Inc. (USN) had its first full year
of revenue from its center at the Research Medical Center in Kansas City,
Missouri. There were revenues of $1,283,000 in 1995 from USN.

      Total expenses increased 47% to $4,140,000 from $2,801,000 in 1994. System
costs increased to $1,651,000 from $847,000 a year earlier. This increase was
caused by the large hardware order for CDOH. Maintenance expense increased to
$583,000 from $487,000 in 1994. This increase is not significant when it is
compared to the revenue increase in this area. Selling, general and
administrative expense declined 14% to $999,000 from $1,161,000 a year earlier.
The decrease is attributable to cost control measures implemented on travel,
office expenses and some salary reductions. The higher revenues were achieved
without any additions to administrative staff. Patient expenses associated with
the operation of the Kansas City Center were $751,000 for the year. The Company
had interest expense of $504,000 in 1995 compared to $308,000 in 1994. USN
continued to pay down its lease in Kansas City and began interest payments on
its second Gamma Knife. As a result of the increased interest payments the net
loss was $176,000.

Liquidity and Capital Resources

      The Company had a working capital ratio of .6 in 1996, as compared to 1.3
in 1995. This was due to an increase in operating expenses and a decrease in
gross profit on software systems. As of December 31, 1996, net cash provided by
operating activities was $145,000, as compared to net cash provided of $438,000
in 1995.


                                       17
<PAGE>

Depreciation and amortization expense was $631,000 in 1996, as compared to
$617,000 in 1995. Accounts receivable decreased by $307,000 in 1996 from 1995.
Unbilled accounts receivable decreased $545,000 in 1996. The decreases reflect
improved billing and collections efforts. In 1995 unbilled accounts receivable
increased by $465,000 and billed accounts receivable increased by $251,000 from
1994.

      In 1996, net cash used in investing activities was $1,517,000. The Company
made a $1,160,000 progress payment on its second Gamma Knife and received back
the $290,000 deposit on the NYU Gamma Knife from DVI. In 1995, net cash used in
investing activities was $1,243,000. The Company made a $1,160,000 progress
payment on the NYU Gamma Knife.

      In 1996, net cash provided by financing activities was $1,333,000. The
Company paid $522,000 towards the lease obligations on its Kansas City Gamma
Knife and made a $1,160,000 progress payment for NYU. In addition, the Company
paid $825,000 into an escrow account to fund NYU construction. The Company also
is responsible for making interest payments on the progress payment on its
second Gamma Knife.

      In 1995, net cash provided by financing activities was $850,000. In 1995,
the Company paid $430,000 towards the Kansas City lease. The Company made a
$1,160,000 progress payment for the NYU Gamma Knife.

      USN has a five year operating lease for Kansas City that began in
September 1994. The annual payments are $805,000. The Company is making interest
payments on progress payments for its NYU Gamma Knife and on the construction
loan for NYU. The progress payments have been for $2,610,000 plus $825,000 in
the construction escrow account. The interest rate is 10% annually.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The Financial Statements and Supplementary Data are listed under Item 14
in this Annual Report of Form 10-K and attached hereto.


                                       18
<PAGE>

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The directors and executive officers of the Company are as follows:

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

   Alan Gold                        52                      President & Chairman

   Jerry M. Brown, Ph.D.            58                      Director

   William F. Leimkuhler            45                      Director

      Alan Gold has served as President and a director since the Company's
formation. He was one of the founders of Global Health Systems, the predecessor
of the Company, serving as its President since its formation in July 1983. From
1981 to 1983 he served as Executive Vice-President of Libra Group, a company
located in Rockville, Maryland, engaged in health care automation, where he was
President of Global Health Foundation and Libra Research and Executive Vice
President of Libra Technology.

      Jerry M. Brown, Ph.D. He was elected to the GHS board in July, 1993, and
served as President of US NeuroSurgical, Inc. until August, 1995. From 1990 to
1993 he was an independent consultant to the health care industry. Dr. Brown
served in the US Army Medical Department from 1967 - 1990, retiring as a
Lieutenant Colonel.

      William F. Leimkuhler has served as director of the Company since its
incorporation in 1984. Since January 1994, Mr. Leimkuhler has been the Vice
President of Allen & Company Incorporated, an investment banking firm. From 1984
to December, 1993, Mr. Leimkuhler was a partner with the law firm of Werbel
McMillin & 


                                       19
<PAGE>

Carnelutti, which has served as counsel to the Company on various matters since
the Company's formation.

      Each director is elected for a one year period ending on the date of the
next annual meeting of shareholders of the Company, and until his or her
successor is duly elected and qualified. Officers serve at the will of the Board
of Directors.

      ITEM 11 EXECUTIVE COMPENSATION

      The information below sets forth the compensation for the year ended
December 31, 1995, for each executive officer of the Company:

                           Summary Compensation Table
                           --------------------------

                                Annual Compensation 
Name and                        ------------------- 
Principal Position      Year        Salary($)
------------------      ----        ---------
Alan Gold,
President & Director    1996        $150,000
                        1995        $150,000
                        1994        $144,400

      The Company and Mr. Gold are parties to an employment agreement giving
either the Company or Mr. Gold the option to terminate the agreement by giving
the other party 6 months written notice.

Stock Option Plan

      Effective March 7, 1986, and as amended June 18, 1987, the Company adopted
a 1986 Stock Option Plan (the "Plan") pursuant to which options to purchase up
to 750,000 shares of the Company's Common Stock may be granted to directors,
officers and other key employees of the Company. As of March 31, 1997, 360,000
options were outstanding under the Plan. The Plan is administered by the Board
of Directors. The options may be either incentive stock options conforming to
the provisions of Section 422A of the Internal Revenue Code, or non-qualified
options. The purchase price for shares under each option, incentive or
non-qualified, is determined by the Board but will


                                       20
<PAGE>

not be less than 100% and 90%, respectively, of the fair market value of the
Common Stock at the time the option is granted. If an employee at the time the
option is proposed to be granted owns more than 10% of the voting stock of the
Company, the option price for incentive options will not be less than 110% of
the fair market value of the Common Stock on the date of grant and the option
will continue in effect for not more than five years. No options may be granted
under the Plan after 1996. The exercise price must be paid in full upon exercise
of an option, in cash or in shares of Common Stock of the Company. Options are
nontransferable except by will or by the laws of descent and distribution.

       Aggregate Unexercised Options & Option Values at December 31, 1995
       ------------------------------------------------------------------

                                                     Value of Unexercised In-The
                  Number of Unexercised Options      Money Options at December
                  at December 31, 1996 (#)           31, 1996 ($)
Name              Exercisable/Unexercisable          Exercisable/Unexercisable
----              -------------------------          -------------------------

Alan Gold                137,000 / 12,000              $34,250/3,000 (1)
                         ----------------

(1)   Based on average of closing bid and asked prices of the Company's common
      stock on December 31, 1996.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth, as of March 23, 1997 certain information
with respect to each beneficial owner of more than 5% of the Company's Common
Stock and each director and executive officer of the Company:

                                      Number of Shares
 Name and Address                       Beneficially          Percent of
of Beneficial Owner                      Owned (1)             Class
-------------------                      ---------             -----
Alan Gold (2)                            535,420                7.6%
1350 Piccard Drive
Rockville, MD  20850

William F. Leimkuhler                    --                      --
711 Fifth Avenue
New York, NY  10022

Jerry M. Brown, Ph.D.                     28,500                 0.4%


                                       21
<PAGE>

1205 Stratford Drive
Anderson, SC 29621

Stanley S. Shuman (3)                  1,071,250                15.4%
711 Fifth Avenue
New York, NY  10022

Allen & Company Incorporated (4)       2,022,000                28.6%
711 Fifth Avenue
New York, NY  10022

Research Medical Center                  500,000                 7.2%
2316 East Meyer Blvd.
Kansas City, MO 64132

Charles Elsner                           400,000                 5.8%
c/o The Forschner Group Inc.
151 Long Hill Crossroads
Shelton, CT 96484

All Directors and Officers               563,920                 8.0%
as a group (three persons) (2)

----------

(1)   Unless otherwise indicated, all shares are beneficially owned and sole
      voting and investment power is held by the person named above.

(2)   Includes 420,500 shares held jointly by Mr. Gold and his wife, Ms. Susan
      Greenwald, as joint tenants with right of survivorship and 124,000
      exercisable stock options.

(3)   Includes 210,250 shares held in certain trusts for the benefit of Mr.
      Shuman's children, of which shares Mr. Shuman disclaims beneficial
      interest. Also includes warrants to purchase 20,000 shares of Common Stock
      beneficially owned by Mr. Shuman.

(4)   In addition to those shares beneficially owned by Allen & Company, certain
      officers of Allen and their families, including Mr. Shuman, own 1,721,750
      shares. Also includes warrants to purchase 120,000 shares of common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In September 1996 the Company exercised its option to purchase the 20%
interest in USN owned by A Hyman Kirshenbaum, M.D. and Jerry Brown, Ph.D..
Pursuant to an agreement with Messieurs. Kirshenbaum and Brown, the number of
GHS, Inc. shares to be issued to such individuals, as a result of the exercise
of such options, is 33,200.


                                       22
<PAGE>

PART IV

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

(a)   The following documents are filed as part of this report:

                                                           Page No.
                                                           --------
   Financial Statements of the Company
      Report of Independent Auditors                          F-1
      Balance Sheet as of December 31, 1996 and 1995          F-2
      Statements of Operations for the years ended
           December 31, 1996, 1995, and 1994.                 F-3
      Statement of Changes in Stockholders' Equity
           for the period January 1, 1994 through
           December 31, 1996                                  F-4
      Statements of Cash Flows for the year ended
           December 31, 1996, 1995, and 1994.                 F-5
      Notes to Financial Statements                           F-6
      Report of Independent Auditors with respect 
           to Supplementary Schedules                         S-1
      Valuation and Qualifying Accounts                       S-2

            All other schedules have been omitted as the conditions requiring
      their filing are not present or the information required therein has been
      included in the notes to the financial statements.

 (b)  Reports on Form 8-K

            During the three months ended December 31, 1996, the Company did not
      file any reports on Form 8-K with the Securities and Exchange Commission.

(c)   Exhibits

      3     Articles of Incorporation and By-laws

            (a) Restated Certificate of Incorporation and by-laws of the Company
            (incorporated by reference to exhibits 3.1 and 3.2 of the Company's
            Registration Statement No. 33-4532-W on Form S-18)

            (b) Certificate of Amendment dated June 18, 1987 (incorporated by
            reference to exhibit 3(b) of the Company's 1987 Annual Report on
            Form 10-K).

            (c) Certificate of Amendment dated November 17, 1989 (pursuant to
            which the Company changed its name to GHS, Inc.) (incorporated by
            reference to exhibit 3(c) of the Company's 1988 Annual Report on
            Form 10-K).


                                       23
<PAGE>

      10    Material Contracts

            (a) Office Lease dated November 1, 1990 (incorporated by reference
            to Exhibit 10.2 of the Company's Registration Statement No.
            33-4532-W on form S-18).

            (b) Employment Agreement dated December 14, 1984 between the Company
            and Alan Gold, as amended March 7, 1986 (incorporated by reference
            to Exhibit 10.3 of the Company's Registration Statement No.
            33-4532-W on form S-18).

            (c) Stock Option Plan dated March 7, 1986 (incorporated by reference
            to Exhibit 10.4 of the Company's Registration Statement No.
            33-4532-W on form S-18).

            (d) Asset Purchase Agreement dated as of December 13, 1984 between
            GHS Acquisition Corp., Datalab, Inc., Global Health Systems, Inc.
            and GHS, Inc. (pursuant to which the Company acquired substantially
            all the assets, and assumed certain liabilities, of Global Health
            Systems MD) (incorporated by reference to Exhibit 10.5 of the
            Company's Registration Statement No. 33-4532-W on form S-18).

            (e) Assignment and Assumption Agreement dated as of November 22,
            1988 between Global Health Systems, Inc. and Global Health Computer
            Systems, Inc. (pursuant to which the parent transferred assets,
            liabilities and current operations to the subsidiary) (Incorporated
            by reference to exhibit 10(j) of the Company's 1988 Annual Report on
            Form 10K)

            (f) Gamma Knife Neuroradiosurgery Equipment Agreement dated August,
            1993 between Research Medical Center and US NeuroSurgical
            (incorporated by reference to Exhibit 10h to the Company's Quarterly
            Report or Form 10-Q for the quarter ended September 30, 1993).

            (g) Agreement for Issuance and Sale of Stock dated August, 1993
            between Research Medical Center and GHS, Inc. (incorporated by
            reference to Exhibit 10i to the Company's Quarterly Report or Form
            10-Q for the quarter ended September 30, 1993).

            (h) Ground Lease Agreement dated August, 1993 between Research
            Medical Center and US NeuroSurgical (incorporated by reference to
            Exhibit 10j to the Company's Quarterly Report or Form 10-Q for the
            quarter ended September 30, 1993).

            (i) LGK Agreement dated July 12, 1993 between Elekta Instruments,
            Inc. and US NeuroSurgical (incorporated by reference to Exhibit 10k
            to


                                       24
<PAGE>

            the Company's Quarterly Report or Form 10-Q for the quarter ended
            September 30, 1993).

            (j) Financing for Science International Commitment dated August 16,
            1993 between Financing for Science International, Inc. and US
            NeuroSurgical (incorporated by reference to Exhibit 10l to the
            Company's Quarterly Report or Form 10-Q for the quarter ended
            September 30, 1993.)

            (k) Employment Agreement dated September 1, 1993 between US
            NeuroSurgical and Jerry M. Brown, Ph.D. (incorporated by reference
            to Exhibit 10m to the Company's Quarterly Report or Form 10-Q for
            the quarter ended September 30, 1993.)

            (l) Agreement dated July 23, 1993 between GHS, Inc., and A. Hyman
            Kirshenbaum, M.D., and Jerry M. Brown, Ph.D., (incorporated by
            reference to Exhibit 10n to the Company's Quarterly Report or Form
            10-Q/A for the quarter ended September 31, 1993.)

            (m)   Amendment dated October 27, 1994 to Employment Agreement
            between U.S. NeuroSurgical and Jerry Brown, Ph.D. (incorporated by
            reference to Exhibit 10m to the Company's 1994 Annual Report on Form
            10-K).

            (n) Agreement dated October 28, 1994 between U.S. NeuroSurgical,
            Inc. and Financing for Science and Industry, Inc. (incorporated by
            reference 10n to the Company's 1994 Annual Report on Form 10-K).

            (o) Agreement dated December 29, 1993, between U.S. NeuroSurgical,
            Inc. and Elekta Instruments, Inc. (incorporated by reference 10o to
            the Company's 1994 Annual Report on Form 10-K).

            (p) Agreement dated November 26, 1996, between US NeuroSurgical,
            Inc. and New York University on behalf of New York University
            Medical Center.

            (q) Agreement dated August 1, 1996, between US NeuroSurgical, Inc.
            and DVI Financial Services, Inc.

            (r) Asset Purchase Agreement dated March 10, 1997 between Health
            Management Systems, Inc. and GHS, Inc..


                                       25
<PAGE>

SIGNATURES

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

Dated: April 08, 1996

                              GHS, Inc.
                              (Registrant)


                        By    /s/ Alan Gold
                          -------------------------------------------------
                              Alan Gold
                              President and Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


April 08, 1996          /s/ Alan Gold
                        ---------------------------------------------------
                              Alan Gold
                              President and Director
                              (Chief Executive, Financial Officer)


April 08, 1996          /s/ William F. Leimkuhler
                        ---------------------------------------------------
                              William F. Leimkuhler
                              Director


April 08, 1996          ___________________________________________________
                              Jerry M. Brown, Ph.D.
                              Director


                                       26
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland

      We have audited the accompanying consolidated balance sheets of GHS, Inc.
and subsidiaries as at December 31, 1996 and December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year 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, the financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of GHS, Inc. and
subsidiaries at December 31, 1996 and December 31, 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.

New York, New York
March 13, 1997


                                       F-1
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                               -------------------------
                         A S S E T S                                               1996         1995
                         -----------                                           -----------   -----------

<S>                                                                            <C>           <C>        
Current assets:
   Cash and cash equivalents ................................................  $   159,000   $   198,000
   Accounts receivable (net of allowance for doubtful
     accounts of $164,000 in 1996 and $14,000 in 1995) ......................      994,000     1,451,000
   Unbilled accounts receivable .............................................       31,000       576,000
   Contract installments receivable .........................................                     15,000
   Inventory ................................................................                     12,000
   Refundable deposits ......................................................                    290,000
   Other current assets .....................................................       86,000        91,000
                                                                               -----------   -----------
          Total current assets ..............................................    1,270,000     2,633,000

Furniture and equipment .....................................................       77,000        56,000
Software development costs ..................................................      180,000       291,000
Other assets ................................................................      198,000        98,000
Deferred tax asset ..........................................................      463,000
Gamma Knife Venture assets:
   Gamma Knife ..............................................................    1,933,000     2,348,000
   Progress payments - Gamma Knife ..........................................    2,610,000     1,160,000
   Unamortized leasehold costs ..............................................      954,000       661,000
   Deposits .................................................................       43,000        65,000
   Cash held in escrow ......................................................      907,000        27,000
                                                                               -----------   -----------

          T O T A L .........................................................  $ 8,635,000   $ 7,339,000
                                                                               ===========   ===========

                    L I A B I L I T I E S
                    ---------------------

Current liabilities:
   Accounts payable and accrued expenses ....................................  $   845,000   $ 1,337,000
   Loans payable - officer ..................................................                     20,000
   Notes payable - other ....................................................                    100,000
   Accrued costs to complete contracts ......................................                     25,000
   Loan payable - Gamma Knife - current portion .............................       63,000        55,000
   Obligation under capital lease - current portion:
     Demand loan ............................................................      525,000
     Gamma Knife Venture ....................................................      592,000       512,000
     Equipment ..............................................................       69,000         5,000
                                                                               -----------   -----------
          Total current liabilities .........................................    2,094,000     2,054,000
                                                                               -----------   -----------

Obligation under capital lease:
   Gamma Knife ..............................................................    1,132,000     1,724,000
   Equipment ................................................................      265,000         9,000
                                                                               -----------   -----------
                                                                                 1,397,000     1,733,000
                                                                               -----------   -----------

Loan payable - Gamma Knife ..................................................    2,547,000     1,105,000
                                                                               -----------   -----------

Minority interest ...........................................................                     18,000
                                                                                             -----------

Common stock - par value $.01; 500,000 shares issued with
   put option ...............................................................      500,000       500,000
                                                                               -----------   -----------

Commitments and other matters

                    STOCKHOLDERS' EQUITY
                    --------------------

Preferred stock - 1,000,000 shares authorized; none issued
Common stock - par value $.01; 25,000,000 shares
   authorized; 6,447,828 issued and outstanding in
   1996 and 1995 ............................................................       65,000        65,000
Additional paid-in capital ..................................................    3,082,000     3,082,000
(Deficit)  ..................................................................   (1,050,000)   (1,218,000)
                                                                               -----------   -----------
          Total stockholders' equity ........................................    2,097,000     1,929,000
                                                                               -----------   -----------

          T O T A L .........................................................  $ 8,635,000   $ 7,339,000
                                                                               ===========   ===========
</TABLE>

              The accompanying notes to financial statements are an
                              integral part hereof.


                                       F-2
<PAGE>

                                GHS, INC. AND SUBSIDIARIES

                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                               Year Ended December 31,
                                        ---------------------------------------
                                            1996          1995          1994
                                        -----------   -----------   -----------
Revenue:
   Software systems ..................  $   884,000   $ 1,777,000   $ 1,282,000
   Maintenance .......................    1,370,000     1,083,000       672,000
   Claims processing .................      526,000       302,000
   Patient revenue ...................    1,452,000     1,283,000       381,000
                                        -----------   -----------   -----------

          T o t a l ..................    4,232,000     4,445,000     2,335,000
                                        -----------   -----------   -----------

Costs and expenses:
   Software systems ..................    1,047,000     1,651,000       847,000
   Maintenance .......................      942,000       583,000       487,000
   Claims processing expense .........      227,000       156,000
   Patient expenses ..................      574,000       751,000       306,000
   Selling, general and
     administrative ..................    1,571,000       999,000     1,161,000
                                        -----------   -----------   -----------

          T o t a l ..................    4,361,000     4,140,000     2,801,000
                                        -----------   -----------   -----------

Income (loss) from operations
   before items below ................     (129,000)      305,000      (466,000)
                                        -----------   -----------   -----------

Interest expense .....................     (309,000)     (504,000)     (308,000)
Interest income ......................        2,000         1,000        23,000
Income from equity investee ..........      157,000
                                        -----------   -----------   -----------

                                           (150,000)     (503,000)     (285,000)
                                        -----------   -----------   -----------

(Loss) before income tax benefit
   and minority interest .............     (279,000)     (198,000)     (751,000)
Deferred income tax benefit ..........      463,000
                                        -----------   -----------   -----------

Income (loss) before minority
   interest ..........................      184,000      (198,000)     (751,000)
Minority interest ....................      (16,000)       22,000        85,000
                                        -----------   -----------   -----------

NET INCOME (LOSS)  ...................  $   168,000   $  (176,000)  $  (666,000)
                                        ===========   ===========   ===========

Net income (loss) per share ..........  $       .02   $      (.03)  $      (.10)
                                        ===========   ===========   ===========

Weighted average common shares
   outstanding .......................    6,947,828     6,947,828     6,935,016
                                        ===========   ===========   ===========

                 The accompanying notes to financial statements
                          are an integral part hereof.


                                       F-3
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                  Common Stock *
                              ---------------------
                               Number                   Additional
                                 of                      Paid-in
                               Shares       Amount       Capital        (Deficit)        Total
                              ---------     -------     ----------     ------------    ----------

<S>                           <C>           <C>         <C>            <C>             <C>       
Balance - January 1,
   1994. . . . . . . .        6,424,328     $65,000     $3,059,000     $  (376,000)    $2,748,000

Issuance of common
   stock for services
   rendered. . . . . .           23,500                     23,000                         23,000

Net (loss) for the
   year ended
   December 31, 1994 .                                                    (666,000)      (666,000)
                              ---------     -------     ----------     ------------    ----------

Balance - December 31,
   1994. . . . . . . .        6,447,828      65,000      3,082,000      (1,042,000)     2,105,000

Net (loss) for the
   year ended
   December 31, 1995 .                                                    (176,000)      (176,000)
                              ---------     -------     ----------     ------------    ----------

Balance - December 31,
   1995. . . . . . . .        6,447,828      65,000      3,082,000      (1,218,000)     1,929,000

Net income for the
   year ended
   December 31, 1996 .                                                     168,000        168,000
                              ---------     -------     ----------     ------------    ----------

BALANCE - DECEMBER 31,
   1996. . . . . . . .        6,447,828     $65,000     $3,082,000     $(1,050,000)    $2,097,000
                              =========     =======     ==========     ============    ==========
</TABLE>

*  Excluding shares with put option

                 The accompanying notes to financial statements
                          are an integral part hereof.


                                            F-4
<PAGE>

                                GHS, INC. AND SUBSIDIARIES

                           CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
                                                                                  --------------------------------------------------
                                                                                      1996               1995                1994
                                                                                  -----------        ------------         ----------

<S>                                                                               <C>                <C>                  <C>       
Cash flows from operating activities:
   Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $   168,000        $  (176,000)         $(666,000)
   Adjustments to reconcile net income (loss) to net cash provided by
     (used in) operating activities:
       Depreciation and amortization. . . . . . . . . . . . . . . . . . . . .         631,000            617,000            341,000
       Provision for bad debts. . . . . . . . . . . . . . . . . . . . . . . .         150,000
       Gain from equity investee. . . . . . . . . . . . . . . . . . . . . . .        (157,000)
       Minority interest in net income (loss) of consolidated subsidiary. . .          16,000            (22,000)           (85,000)
       Changes in operating assets and liabilities:
         (Increase) decrease in accounts receivable . . . . . . . . . . . . .         307,000           (251,000)            84,000
         (Increase) decrease in unbilled accounts receivable. . . . . . . . .         545,000           (465,000)           315,000
         Decrease in contract installments receivable . . . . . . . . . . . .          15,000             19,000             15,000
         Decrease in inventory. . . . . . . . . . . . . . . . . . . . . . . .          12,000
         Decrease in other current assets . . . . . . . . . . . . . . . . . .           5,000
         Decrease in refundable deposits. . . . . . . . . . . . . . . . . . .         290,000
         Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . .        (463,000)
         (Increase) in cash held in escrow. . . . . . . . . . . . . . . . . .        (880,000)
         (Increase) decrease in other assets. . . . . . . . . . . . . . . . .          57,000            (86,000)            62,000
         (Decrease) increase in accounts payable and accrued expenses and
           accrued costs to complete contracts. . . . . . . . . . . . . . . .        (551,000)           802,000           (159,000)
                                                                                  -----------        ------------         ----------

             Net cash provided by (used in) operating activities. . . . . . .         145,000            438,000            (93,000)
                                                                                  -----------        ------------         ----------

Cash flows from investing activities:
   Furniture and equipment purchases. . . . . . . . . . . . . . . . . . . . .         (39,000)           (33,000)           (24,000)
   Software development costs . . . . . . . . . . . . . . . . . . . . . . . .         (50,000)           (50,000)          (350,000)
   Investment in joint venture. . . . . . . . . . . . . . . . . . . . . . . .                                                (4,000)
   Refunds on Gamma Knife . . . . . . . . . . . . . . . . . . . . . . . . . .          22,000                               148,000
   Progress payments - Gamma Knife. . . . . . . . . . . . . . . . . . . . . .      (1,450,000)        (1,160,000)
   Cost incurred with leasehold improvements. . . . . . . . . . . . . . . . .                                              (520,000)
                                                                                  -----------        ------------         ----------

             Net cash (used in) investing activities. . . . . . . . . . . . .      (1,517,000)        (1,243,000)          (750,000)
                                                                                  -----------        ------------         ----------

Cash flows from financing activities:
   Payments of capital lease obligations. . . . . . . . . . . . . . . . . . .        (522,000)          (430,000)          (220,000)
   Loan payable - officer . . . . . . . . . . . . . . . . . . . . . . . . . .         (20,000)            20,000
   Notes payable - other. . . . . . . . . . . . . . . . . . . . . . . . . . .        (100,000)           100,000
   Loan payable - Gamma Knife . . . . . . . . . . . . . . . . . . . . . . . .       1,975,000          1,160,000
   Release from escrow of proceeds from sale of common shares with put option                                               500,000
                                                                                  -----------        ------------         ----------

             Net cash provided by financing activities. . . . . . . . . . . .       1,333,000            850,000            280,000
                                                                                  -----------        ------------         ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . .         (39,000)            45,000           (563,000)

Cash and cash equivalents - beginning of period . . . . . . . . . . . . . . .         198,000            153,000            716,000
                                                                                  -----------        ------------         ----------

CASH AND CASH EQUIVALENTS - END OF PERIOD . . . . . . . . . . . . . . . . . .     $   159,000        $   198,000          $ 153,000
                                                                                  ===========        ============         ==========

Supplemental disclosures of cash flow information:
   Cash paid for:
     Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $   316,000        $   510,000          $ 275,000
     Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          13,000              3,000              3,000

Supplemental disclosures of noncash financing activities:
   Property acquired under capital lease obligations. . . . . . . . . . . . .         330,000             14,000
   Issuance of common stock for services rendered . . . . . . . . . . . . . .                                                23,000
</TABLE>

                 The accompanying notes to financial statements
                          are an integral part hereof.


                                       F-5
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE A) - The Company and its Significant Accounting Policies:

      [1] Basis of preparation:

            GHS, Inc. (the "Company") through its subsidiaries, Global Health
Systems, Inc. and GHS Management Services Inc. develops, installs and maintains
computerized processing systems for managed care, public health and ambulatory
care facilities.

            The Company's subsidiary, U.S. Neuro Surgical, Inc. ("U.S. Neuro")
owns and operates stereotactic radiosurgery centers, utilizing the Gamma Knife
technology, which commenced operations in September 1994.

            During 1995, the Company formed a new subsidiary, U.S. Neurosurgical
Physics, Inc. ("USNP") to administer the billing and collection of the
Physicist's fee for operating the Gamma Knife.

            The consolidated financial statements include the accounts of GHS,
Inc., its wholly owned subsidiaries, Global Health Systems, Inc., GHS Management
Services, Inc., U.S. Neurosurgical Physics, Inc., and U.S. Neuro. The Company
accounts for its investment in a computerized processing systems provider on the
equity method.

            During March 1997 the Company entered into an asset purchase
agreement pursuant to which Health Management Systems, Inc. will acquire
substantially all of the assets, except for accounts receivable, of the
Company's subsidiaries, Global Health Systems, Inc. and GHS Management Services,
Inc. The purchase price is $2,100,000 subject to certain closing adjustments.
The Company will retain its subsidiaries, US Neuro, which owns and operates the
Gamma Knife Center, and USNP.

      The financial statements include the following, as at and for the year
ended December 31, 1996, applicable to the assets to be sold:

          Assets                                            $  264,000
          Revenue                                            2,780,000
          (Loss) before taxes                                 (620,000)

      [2] Revenue recognition:

            Revenue from sales of software systems is recognized when the
product is delivered and obligations remaining after delivery are not considered
to be significant. Estimated costs in connection with installing the systems are
accrued when the revenue is recognized. Income from software maintenance
agreements is recognized ratably over

(continued)


                                       F-6
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE A) - The Company and its Significant Accounting Policies:
           (continued)

      [2] Revenue recognition: (continued)

the periods covered by such agreements. Contract installments receivable arising
from sales of systems with extended payment terms are discounted to present
value. Finance charges representing the discount to present value of the
contract amount are credited to income over the term of the contract.

            Unbilled accounts receivable represent revenues which have been
recognized, on delivery of the product, and will become billable at future dates
in accordance with contract provisions.

            Patient revenue is recognized when the Gamma Knife procedure is
rendered.

      [3] Inventories:

            Inventories are stated at the lower of cost (on the first-in,
first-out method) or market and consist of computer equipment and peripheral
devices.

      [4] Depreciation:

            The cost of furniture and equipment is depreciated on the
straight-line method over the estimated useful lives of such assets. Leasehold
improvements are amortized over the life of the lease.

      [5] Software development:

            Costs associated with product development subsequent to
establishment of technological feasibility including enhancements to software
products, are capitalized and amortized as required by Statement of Financial
Accounting Standards No. 86. Costs incurred prior to achieving technological
feasibility are expensed as incurred. Amortization is generally provided on the
straight-line method over two to five years commencing when the product is
available for general release to customers.

      [6] Earnings per share:

            Earnings per share is based on the net income divided by the
weighted average number of common shares outstanding during the year. Common
stock equivalents consisting of stock options and warrants are included when
dilutive.

(continued)


                                      F-7
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

         (NOTE A) - The Company and its Significant Accounting Policies:
           (continued)

      [7] Statement of cash flows:

            For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.

      [8] Estimates and assumptions:

            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 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.

      [9] Fair values of financial instruments:

            The estimated fair value of financial instruments has been
determined based on available market information and appropriate valuation
methodologies. The carrying amounts of cash, accounts receivable, unbilled
accounts receivable, other current assets and accounts payable approximate fair
value at December 31, 1996 and December 31, 1995 because of the short maturity
of these financial instruments. The estimated carrying value of the obligations
under capital lease and loans payable approximate fair value because the
interest rates on these instruments approximate the market prices at December
31, 1996 and December 31, 1995. The fair value estimates were based on
information available to management as of December 31, 1996 and December 31,
1995.

      [10] Stock-based compensation:

            The Company accounts for employee stock option grants under the
basis of Accounting Principles Board Opinion No. 25. In fiscal 1996 the Company
adopted the "disclosures only" alternative available under Financial Accounting
Standards Board No. 123 ("FASB 123") for its employee stock option grants. The
pro forma net income and net earnings per share disclosure required by FASB 123
is not disclosed as there were no stock options granted during 1996 or 1995.

(continued)


                                      F-8
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE B) - Agreements With Research Medical Center ("RMC"):

      [1] Gamma Knife neuroradiosurgery equipment agreement:

            U.S. Neuro entered into a neuroradiosurgery equipment agreement (the
"equipment agreement") with RMC for a period of 21 years which commenced with
the completion of the neuroradiosurgery facility (the "facility") in September
1994. The equipment agreement, among other matters, requires U.S. Neuro to
provide (i) the exclusive use of the Gamma Knife equipment (the "equipment") to
RMC, (ii) the necessary technical personnel for the proper operation of the
equipment, (iii) sufficient supplies for the equipment, (iv) the operation,
maintenance and repair of the equipment, (v) all basic hardware and software
updates to the equipment and, (vi) an uptime guarantee. In return, RMC will pay
U.S. Neuro 80% of RMC's fees for the use of the equipment and the facility. The
equipment agreement terminates automatically upon termination of the ground
lease agreement (see Note B[2]) and may be terminated by mutual agreement in the
sixth year of the ground lease term.

      [2] Ground Lease Agreement:

            U.S. Neuro entered into a lease with RMC for the premises, defined
as land situated in Kansas City, Missouri together with the facility which the
Company was required to construct thereon. The lease term is for a period of 21
years commencing September 1994. Rent at $2.25 per square foot is payable
annually in advance. The terms of the lease include escalation clauses for
increases in certain operating expenses and for payment of real estate taxes and
utilities. Title to all improvements upon the land vest in RMC.

(NOTE C) - Furniture and Equipment:

      Furniture and equipment is stated at cost and is summarized as follows:

                                              December 31,
                                          -------------------
                                             1996       1995
                                          --------   --------
          Equipment. . . . . . . . . . .  $125,000   $181,000
          Furniture. . . . . . . . . . .    38,000     41,000
                                          --------   --------

                    T o t a l. . . . . .   163,000    222,000

          Less accumulated depreciation.    86,000    166,000
                                          --------   --------

                    B a l a n c e. . . .  $ 77,000   $ 56,000
                                          ========   ========

(continued)


                                      F-9
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE C) - Furniture and Equipment: (continued)

      Equipment, under a capital lease, and leasehold interest, is stated at
cost and is summarized as follows:

                                                December 31,
                               -----------------------------------------------
                                        1996                      1995
                               -----------------------   ---------------------
                                Leasehold                Leasehold
                                Interest     Equipment   Interest    Equipment
                               ----------   ----------   --------   ----------

Cost. . . . . . . . . . . . .  $1,036,000   $2,900,000   $708,000   $2,900,000
Accumulated depreciation and
   amortization . . . . . . .      82,000      967,000     47,000      552,000
                               ----------   ----------   --------   ----------

          T o t a l . . . . .  $  954,000   $1,933,000   $661,000   $2,348,000
                               ==========   ==========   ========   ==========

      Depreciation aggregated approximately $433,000, $467,000 and $168,000 for
the years ended December 31, 1996, December 31, 1995 and December 31, 1994,
respectively.

      Included in the above depreciation expense is approximately $415,000,
$414,000 and $138,000 for the years ended December 31, 1996, December 31, 1995
and December 31, 1994 for assets acquired under capital leases.

(NOTE D) - Software Development Costs:

      Software development costs are summarized as follows:

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

     Balance - beginning of
        period. . . . . . . . .  $ 291,000   $ 389,000   $ 210,000
     Additions for the period .     50,000      50,000     350,000
     Amortization . . . . . . .   (161,000)   (148,000)   (171,000)
                                 ---------   ---------   ---------

     Balance - end of period. .  $ 180,000   $ 291,000   $ 389,000
                                 ---------   ---------   ---------
      Research and development expense, exclusive of amortization of capitalized
software development costs, was approximately $231,000, $320,000 and $124,000
for the years ended December 31, 1996, December 31, 1995 and December 31, 1994,
respectively, and is included in software systems costs.

(continued)


                                      F-10
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE E) - Costs Incurred In Connection With Leasehold Interest:

      In a prior year, the Company granted a 20% interest in U.S. Neuro to two
related parties ("related parties") for services rendered in connection with the
leasehold interest, which it valued at $125,000 and credited to minority
interest. Under the terms of the agreement between GHS and the related parties,
GHS has the right to buy for cash or common stock the 20% interest owned by the
related parties at any time during each of the third through sixth full fiscal
years of the agreement. In September 1996, GHS decided to buy the minority
interest for common stock. The number of shares for the purchase, has been
estimated to be 33,200 by the Company which is subject to review by the related
parties. The value of such shares approximated the minority interest and
accordingly no adjustment was made to the basis of the Company's investment in
U.S. Neuro. In 1996, the subsidiary earned $80,000 through September 30, 1996 of
which $16,000 was allocated to the 20% interest. Such earnings are net of a
management fee of $119,000 charged by GHS. In 1995, the subsidiary incurred a
loss of $115,000 of which $22,000 was allocated to the 20% interest.

      In July 1994, the Company issued 24,000 shares of its common stock to an
employee in consideration for services rendered in connection with the leasehold
interest. The Company valued the shares at a fair value of $24,000 which it has
included in leasehold cost.

      In connection with the grant of the 20% interest, the Company entered into
an agreement with the related parties which provided for reimbursement to such
parties of their reasonable expenditures towards establishing U.S. Neuro.

      The Company agreed to repay up to $250,000 of such valid, documented
expenses by issuing up to 125,000 shares of GHS, Inc. common stock and up to
$125,000 in U.S. Neuro notes payable from pre-tax earnings of U.S. Neuro. One of
the parties (Dr. Brown) claims that GHS, Inc. will owe 62,500 shares of GHS,
Inc. stock and interest bearing notes totaling $62,500, when he provides
documentation to the Company. The Company has requested documentation of the
claimed expenses since August 1993. No documentation has been produced. However,
the Company acting in good faith issued 62,500 shares of GHS, Inc. common stock
during 1993 and 1994. Dr. Brown has not documented any valid expenses. The
Company has paid $30,000 for legal fees incurred prior to September 1, 1993 by
Dr. Brown. The Company may take action to recover the 62,500 shares of GHS, Inc.
stock issued to Dr. Brown.

(continued)


                                      F-11
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE E) - Costs Incurred In Connection With Leasehold Interest:
           (continued)

      Dr. Brown entered into a three year employment contract with the Company
in September 1993. Dr. Brown claims that his contract was unilaterally modified
by the Company in November of 1994 and he was terminated without proper
authority in August 1995. Dr. Brown also claims that he has been denied
reimbursement of legitimate expenses of more than $20,000. The Company believes
that Dr. Brown's claims are completely without merit. Upon signing his
employment agreement Dr. Brown requested a $60,000 pay advance. The advance was
granted as a loan with monthly repayments culminating in December 1995. Dr.
Brown still owes the Company $6,900 on this loan. In November 1994, the Company
negotiated an incentive compensation plan with Dr. Brown whereby he was paid a
salary of $150,000 per annum with quarterly adjustments against his salary if
the Gamma Knife operation did not meet minimum performance standards. The
agreement guaranteed Dr. Brown a minimum salary of $100,000 per annum.

      Dr. Brown was paid salary through August 1995 at which time he was
terminated as an employee and removed from the U.S. Neuro Board of Directors.
During the terms of his employment with U.S. Neuro, Dr. Brown was fully
reimbursed for expenses which he submitted as incurred in connection with his
responsibilities at U.S. Neuro; however, the Company did not reimburse him for
travel and expenses that he incurred which were for personal business or not
pre-authorized by the Company.

(NOTE F) - Obligation Under Capital Lease and Loans Payable:

      Gamma Knife Venture:

      U.S. Neuro purchased a Gamma Knife ("Knife 1") from Elekta Instruments
("Elekta") for $2,900,000. The purchase was financed by Financing for Science
International ("FFSI") under a 5 year capital lease bearing interest at
approximately 12.7% per annum. During September 1996, Finova Capital Corp.
bought out FFSI and became the lien holder. The lease is guaranteed by GHS, Inc.
and Global Health Systems, Inc.

      On December 6, 1994, U.S. Neuro entered into an additional purchase
agreement with Elekta to buy a second Gamma Knife ("Knife 2") for $2,900,000 for
which it made a deposit of $290,000 in 1994. The knife initially was financed by
Financing for Science, however, during 1996 the Company refinanced this knife
with DVI Financial Services Inc. ("DVI") at which time the Company's deposit was
returned. This equipment lease provides for the funding of the Gamma Knife of

(continued)


                                      F-12
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE F) - Obligation Under Capital Lease and Loans Payable:
           (continued)

      Gamma Knife Venture: (continued)

$2,900,000. Interest to be charged on the equipment lease will be the higher of
12.7% or that rate adjusted for any increase in the thirty month Treasury Note
rate. At December 31, 1996 the Company had a liability of $2,610,000 for
progress payments for the Gamma Knife. In addition, the Company has entered into
a three year loan with DVI for $300,000 and a demand loan of $535,000, both of
which bear interest at approximately 13.7% per annum. These loans are secured by
the accounts receivable of the Company and its subsidiaries. The two loans are
to fund the leasehold improvements required to install the Gamma Knife at New
York University Medical Center and are currently in an interest bearing escrow
account.

      In November 1996 U.S. Neuro entered into an agreement to provide Knife 2
to a hospital for a fee based on the number of patient procedures performed. The
agreement is for seven years.

      The Company anticipates the second Knife to be installed by June 1997 at
which time the final payment of $290,000 will be made.

      In addition, the Company has two leases for computer equipment which bear
interest at between 9% and 13%.

      Future lease payments on the equipment leases are as follows:

<TABLE>
<CAPTION>
   Year Ending                                   Three Year    Computer
   December 31,        Knife 1       Knife 2        Loan       Equipment       Total
 ---------------     ----------    ----------     --------      -------    ----------

<S>                  <C>           <C>            <C>           <C>        <C>       
    1997 . . .       $  805,000    $  263,000     $ 84,000      $16,000    $1,168,000
    1998 . . .          805,000       731,000      143,000       15,000     1,694,000
    1999 . . .          472,000       731,000      143,000       10,000     1,356,000
    2000 . . .                        731,000                                 731,000
    2001 . . .                        731,000                                 731,000
    2002 . . .                        731,000                                 731,000
    Thereafter                        245,000                                 245,000
                     ----------    ----------     --------      -------    ----------
                      2,082,000     4,163,000      370,000       41,000     6,656,000
Less interest.          358,000     1,263,000       70,000        7,000     1,698,000
Less:  final
   payment . .                        290,000                                 290,000
                     ----------    ----------     --------      -------    ----------

Present value
   of net
   minimum
   obligation.       $1,724,000    $2,610,000     $300,000      $34,000    $4,668,000
                     ==========    ==========     ========      =======    ==========
</TABLE>

(continued)


                                      F-13
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE G) - Common Stock Issued With Put Option:

      In a prior year the Company issued 500,000 shares of its common stock for
$1.00 per share to RMC. If the fair market value ("FMV") of the shares is equal
to or less than $1.25 per share, RMC has the right to resell the shares to GHS,
Inc. at $1.00 per share. If the FMV exceeds $1.25, GHS, Inc. has the right of
first refusal to repurchase the shares at a price equal to 80% of the FMV
("Transaction Price"). If GHS, Inc. elects not to exercise its right of first
refusal and RMC is unable to obtain a buyer for the shares at the Transaction
Price, RMC has the right to resell the shares to GHS, Inc. at a purchase price
equal to the greater of $1.00 per share or the Transaction Price.

      However, in no event shall the Company be required to purchase
shares of stock after the earlier of 2003 or such time as U.S. Neuro,
Inc. no longer occupies the premises (the "facility").

(NOTE H) - Stockholders' Equity:

      [1] Stock options:

            The Company has a stock option plan (the "Plan") for officers and
other key personnel of the Company. The Plan authorizes the granting of
incentive and nonqualified stock options to purchase up to 750,000 shares of the
Company's common stock at a price not less than 100% (90% as to nonqualified) of
the fair market value of the common stock on the date of grant.

            All options outstanding were granted to employees of the Company and
shall terminate immediately upon the termination of employment of the employee
by the Company or its subsidiaries or its parent.

            No part of any option granted under the Plan will be exercisable
less than one year or more than ten years after the date of grant.

            Listed below is information as to options granted and exercisable.
As of December 31, 1996 no options have been exercised.

                                    Number of Shares     
                                -------------------------  Exercisable
                                 1996     1995     1994       Price
                                -------  -------  -------  ------------

      Outstanding January 1. .  430,000  430,000  430,000      $1.00
      Options expired. . . . .   70,000                         1.00
                                -------  -------  -------

      Options outstanding. . .  360,000  430,000  430,000       1.00
                                =======  =======  =======

      Options exercisable. . .  338,375  364,875  307,750
                                =======  =======  =======

(continued)


                                      F-14
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE H) - Stockholders' Equity:

      [2] Preferred stock:

            The Company has authorized 1,000,000 shares of preferred stock, none
of which is issued. The rights and preferences of preferred stock are
established at the discretion of the Board of Directors upon issuance.

      [3] Issuance of warrants:

            On November 30, 1993, the Company granted warrants to a stockholder
to purchase 200,000 shares of the Company's common stock at a purchase price of
$1.00 per share, which equaled fair value at the date of grant. Such warrants
were granted as consideration for services rendered in connection with a private
placement of securities. The warrants contain registration and certain
anti-dilution rights and are exercisable through November 30, 1998.

(NOTE I) - Commitments and Other Matters:

      [1] In 1995 the Company entered into a lease for office premises which
expires in 2000. The terms of the lease include escalation clauses for increases
in certain operating expenses.

            The Company has a three year lease for an office facility in
Sacramento, California at a yearly rental of approximately $27,000.

            Minimum future obligations under operating leases as described above
are as follows:

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

                      1997. . . . . . . . . .  $ 68,000
                      1998. . . . . . . . . .    36,000
                      1999. . . . . . . . . .    34,000
                      2000. . . . . . . . . .    33,000
                                               --------

                                               $171,000
                                               ========

            Total rent expense aggregated $62,000, $61,000 and $33,000 for the
years ended December 31, 1996, December 31, 1995, and December 31, 1994,
respectively.

      [2] The Company maintains the majority of its cash at one bank.

      [3] The Company was contingently liable on an equipment lease of a
customer which provided for an annual rental of approximately $95,000 per year.
This lien was removed during February 1996.

(continued)


                                      F-15
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE J) - Taxes:

           Income tax (benefit) is comprised of the following:

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

                     Current:
                        Federal. . . . . . . .  $  - 0 -    $- 0 -  $- 0 -
                        State. . . . . . . . .     - 0 -     - 0 -   - 0 -
                                                ---------   ------  ------

                                                   - 0 -     - 0 -   - 0 -
                                                ---------   ------  ------

                     Deferred:
                        Federal. . . . . . . .   (404,000)   - 0 -   - 0 -
                        State. . . . . . . . .    (59,000)   - 0 -   - 0 -
                                                ---------   ------  ------

                                                 (463,000)   - 0 -   - 0 -
                                                ---------   ------  ------

                     Income tax benefit. . . .  $(463,000)  $- 0 -  $- 0 -
                                                =========   ======  ======

      The difference between income tax benefit at the statutory federal income
tax rate and income tax benefit reported in the statement of operations is as
follows:

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

           Income tax (benefit) at the
              federal statutory rate. . .  $(100,000) $(67,000) $(255,000)
           State income tax (benefit),
              net of federal taxes. . . .    (15,000)  (10,000)   (38,000)
           Change in valuation allowance.   (348,000)   77,000    293,000
                                           ---------  --------  ---------

                                           $(463,000) $ - 0 -   $  - 0 -
                                           =========  ========  =========

      Temporary differences which give rise to deferred tax asset are as
follows:

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

           Net operating loss
              carryforwards . . . . . . .  $1,013,000  $ 730,000  $ 570,000
           Allowance for doubtful
              accounts. . . . . . . . . .      64,000      6,000      6,000
           Unbilled accounts receivable .                 77,000     37,000
           Excess of tax depreciation
              over book depreciation. . .    (344,000)  (195,000)   (72,000)
           Valuation allowance. . . . . .    (270,000)  (618,000)  (541,000)
                                           ----------  ---------  ---------
           Deferred tax asset - net . . .  $  463,000  $  - 0 -   $  - 0 -
                                           ----------  ---------  ---------

(continued)


                                      F-16
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE J) - Taxes: (continued)

      In 1996 the Company reevaluated its deferred income tax asset and reversed
part of the valuation allowance related to this asset of $348,000. The
reevaluation was based on the fact that the Company entered into a contract in
March 1997 (see Note A) which, if closed, will result in a substantial gain.
Accordingly, management has concluded that it is more likely than not that part
of the deferred tax asset will be realized.

      At December 31, 1996, the Company has net operating loss carryforwards for
income tax purposes aggregating approximately $2,708,000, which expire in the
years 2008 through 2011.

(NOTE K) - Major Customers:

      For the year ended December 31, 1996, the Company earned revenues from a
municipality which accounted for 23% of revenues. Two customers represent 15%
and 48% of receivables at December 31, 1996. These sales and receivables are
from the computerized processing systems.

      For the year ended December 31, 1995, the Company earned revenues from a
municipality which accounted for 43% of revenues. Two customers represent 35%
and 27% of receivables at December 31, 1995. These sales and receivables are
from the computerized processing system segment. Also, one customer represents
72% of the unbilled accounts receivable.

      For the year ended December 31, 1994, the Company earned revenues from one
customer which accounted for 21% of revenues. Two customers represent 42% and
15% of receivables at December 31, 1994. These sales and receivables are from
the computerized processing system segment.

(continued)


                                      F-17
<PAGE>

                           GHS, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

(NOTE L) - Business Segments:

      The Company's business segments are the development, installation and
maintenance of computerized integrated processing systems and the operation of
stereotactic radiosurgery centers, utilizing the Gamma Knife technology.
Corporate assets are principally cash and cash equivalents. The following is the
Company's business segment data:

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

Revenue:
   Computerized processing
     systems. . . . . . . . . .  $2,780,000   $3,162,000   $1,954,000
   Gamma Knife. . . . . . . . .   1,452,000    1,283,000      381,000
                                 ----------   ----------   ----------
          T o t a l . . . . . .  $4,232,000   $4,445,000   $2,335,000
                                 ==========   ==========   ==========
Operating income (loss):
   Computerized processing
     systems. . . . . . . . . .  $ (463,000)  $ (136,000)  $ (327,000)
   Gamma Knife. . . . . . . . .     491,000      441,000     (139,000)
                                 ----------   ----------   ----------
   Operating income (loss). . .      28,000      305,000     (466,000)
                                 ----------   ----------   ----------

Interest (expense). . . . . . .    (309,000)    (504,000)    (308,000)
Investment income . . . . . . .       2,000        1,000       23,000
                                 ----------   ----------   ----------
          T o t a l . . . . . .    (307,000)    (503,000)    (285,000)
                                 ----------   ----------   ----------

Loss before income tax benefit
   and minority interest. . . .  $ (279,000)  $ (198,000)  $ (751,000)
                                 ==========   ==========   ==========

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

Assets:
   Computerized processing
     systems. . . . . . . . . .  $1,307,000   $2,505,000   $1,966,000
   Gamma Knife. . . . . . . . .   6,623,000    4,834,000    3,889,000
   Corporate assets . . . . . .     705,000                    30,000
                                 ----------   ----------   ----------
          T o t a l . . . . . .  $8,635,000   $7,339,000   $5,885,000
                                 ==========   ==========   ==========

Capital expenditures:
   Computerized processing
     systems. . . . . . . . . .  $   89,000   $   80,000   $  367,000
   Gamma Knife. . . . . . . . .     330,000        3,000      544,000
                                 ----------   ----------   ----------
          T o t a l . . . . . .  $  419,000   $   83,000   $  911,000
                                 ==========   ==========   ==========

Depreciation and amortization:
   Computerized processing
     systems. . . . . . . . . .  $  179,000   $  168,000   $  191,000
   Gamma Knife. . . . . . . . .     452,000      449,000      150,000
                                 ----------   ----------   ----------
          T o t a l . . . . . .  $  631,000   $  617,000   $  341,000
                                 ==========   ==========   ==========


                                      F-18
<PAGE>

                 REPORT OF INDEPENDENT AUDITORS WITH RESPECT TO
                             SUPPLEMENTARY SCHEDULES

Board of Directors and Stockholders
GHS, Inc.
Rockville, Maryland

      The audits referred to in our report dated March 13, 1997 includes
Schedule II. In our opinion, this schedule presents fairly the information set
forth therein in relation to the financial statements taken as a whole and in
compliance with the applicable accounting regulation of the Securities and
Exchange Commission.

New York, New York
March 13, 1997


                                       S-1
<PAGE>

                                                                     SCHEDULE II

                           GHS, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                  Column A                     Column B              Column C                      Column D            Column E
                                                                    Additions
                                               Balance        (1)                 (2)
                                                  at                          Charged to                                Balance
                                              beginning    Charged to            other                                    at
                                                  of       costs and          accounts -         Deductions -           end of
                Description                     period      expenses          describe (A)       describe (B)           period

Allowance for doubtful accounts:

<S>                                              <C>        <C>                                    <C>                 <C>     
   1996 . . . . . . . . . . . . . . . . . . . . .$14,000    $150,000                                                   $164,000
                                                 =======    ========                                                   ========

   1995 . . . . . . . . . . . . . . . . . . . . .$14,000                                                               $ 14,000
                                                 =======                                                               ========

   1994 . . . . . . . . . . . . . . . . . . . . .$14,000                                                               $ 14,000
                                                 =======                                                               ========

Reserve for inventory obsolescence:

   1996 . . . . . . . . . . . . . . . . . . . . .$15,000                                           $15,000 (B)         $ - 0 -
                                                 =======                                                               ========

   1995 . . . . . . . . . . . . . . . . . . . . .$15,000                                                               $ 15,000
                                                 =======                                                               ========

   1994 . . . . . . . . . . . . . . . . . . . . .$15,000                                                               $ 15,000
                                                 =======                                                               ========
</TABLE>

   (B) Liquidation of obsolete inventory.

                 The accompanying notes to financial statements
                          are an integral part hereof.


                                       S-2