FORM 10-KSB
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

          [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1995

          [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                         For the transition period from
                     ________________ to ________________.

                        Commission file number: 33-62613
                                                33-62613-01


                        INTEGRATED MEDICAL SYSTEMS, INC.
                  --------------------------------------------
                 (Name of small business issuer in its charter)

           Colorado                                       84-0970775
 ------------------------------               ------------------------------
(State or other jurisdiction of              (I.R.S. Employer Identification
 incorporation or organization)                          Number)

            15000 West 6th Avenue, Suite 400, Golden, Colorado 80401
            --------------------------------------------------------
               (Address of principal executive offices) (Zip Code)


Issuer's telephone number: (303) 279-6116

Securities registered pursuant to Section 12(b) or Section 12(g) of the Act:

                                      None
                                 --------------
                                (Title of Class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section  13 or 15(d) of  Exchange  Act  during  the past 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  [ ]

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will 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-KSB
or any amendment to this Form 10- KSB. [X]

     The issuer's revenue for its most recent fiscal year was $20,408,258.

     As of March 15, 1996 the aggregate market value of the Registrant's  voting
stock held by nonaffiliates was $ -0-.

     As of March 15, 1996  Registrant had 15,660,200  shares of its no par value
common stock and 5,622,323  shares of Series D non-voting  redeemable  preferred
stock issued and outstanding.

     Transitional Small Business Disclosure Format: YES [ ] NO [X]



<PAGE>



                                     PART I

ITEM 1.     BUSINESS

     Integrated  Medical  Systems,  Inc. ("IMS" or the "Company") was founded in
1985. IMS develops and operates computer-based communications networks that link
physicians with other  participants in healthcare  delivery and payment systems,
enabling such  participants to automate routine and specialized  messages and to
provide a practical  means for  providers  and payors to integrate  the services
they provide.  Healthcare,  especially  the individual  physician's  practice of
medicine,  generates  prolific  requirements  for  multi-location,  multi-system
clinical,  financial and administrative  communication and information  transfer
and  management.  IMS believes  that it is the nation's  leading  developer  and
operator of physician-focused,  multi-participant,  multi-media,  bi-directional
automated healthcare communications through a common user interface, in terms of
total number of  transactions,  variety of  transactions,  number of physicians,
number and variety of interfaced host healthcare information systems,  number of
institutions  (hospitals,  managed care plans, clinical laboratories,  ancillary
care  providers and  healthcare  information  and  administrative  services) and
number of operational networks and markets served.

     Acquisition of the Company by Eli Lilly and Company ("Lilly").  On December
18, 1995,  the  Shareholders  of the Company  approved an Agreement  and Plan of
Merger dated August 2, 1995 (the "Merger  Agreement")  providing  for the merger
(the  "Merger") of Trans-IMS  Corporation,  a  wholly-owned  subsidiary of Lilly
("Subsidiary"),  with and into the Company.  Prior to the Merger, Lilly, through
wholly-owned  subsidiaries,  owned shares of the Company's common stock ("Common
Stock") and all of the Company's  Series C Preferred  Stock  ("Series C Stock"),
which  together   constituted   approximately  28%  of  the  outstanding  voting
securities  of the Company.  As a result of the Merger,  (i) the Company  issued
5,263,995  shares of non-voting  Series D Preferred Stock ("Series D Stock") and
paid approximately  $21.4 million in cash contributed to the Company by Lilly in
exchange for all  outstanding  Common Stock and Series B Stock  Preferred  Stock
("Series  B  Stock")  held  by  persons  other  than  Lilly;  (ii)  all  options
exercisable  for shares of Common Stock were  exchanged for cash  contributed to
the  Company  by Lilly  or  options  to  acquire  Series D Stock or Lilly  Stock
(Company  employees only);  (iii) all warrants  exercisable for shares of Common
Stock were exchanged for cash contributed to the Company by Lilly or warrants to
acquire Series D Stock; and (iv) all Subsidiary stock and Company Series C Stock
held by Lilly subsidiaries was converted into Common Stock of the Company. Lilly
contributions   to  the  Company   related  to  options  and  warrants   totaled
approximately  $8.1  million.  As a result  of the  Merger,  Lilly  subsidiaries
acquired all of the voting stock of the Company.

     In addition,  pursuant to the Merger Agreement, Lilly entered into put-call
agreements with respect to the holders of 5,254,995 shares of Series D Preferred
Stock  pursuant  to which the  holders  will have the right to require  Lilly to
purchase  ("put") any or all of a holder's  shares of Series D Stock during each
of two put  periods  at a price of $8.00 per  share  plus any  unpaid  dividends
accrued to the purchase date ("Purchase  Price").  Further,  Lilly will have the
right to require a holder to sell  ("call") any or all of the holder's  Series D
Stock then held to Lilly at the  Purchase  Price in whole or in part at any time
or from time to time after the third anniversary of the Merger.

     The Company's  Articles of  Incorporation  were amended and restated in the
Articles of Merger to change the total authorized  capitalization of the Company
to 20,000,000 shares of Common Stock and 12,000,000 shares of Series D Preferred
Stock. The amended Articles of Incorporation  changed the rights and preferences
of the  Series B Stock  (which was  eliminated  as a result of  exchange  by the
holders pursuant to the Merger) and established certain preferences, limitations
and  relative  rights  with  respect  to the Series D Stock.  Under the  amended
Articles,  following  the  Merger,  the Series D Stock is superior in respect to
rights to payments upon liquidation, dissolution or winding up of the Company to
the Common Stock of the Company.  The amended  Articles provide that, other than
the right to elect  directors  following  certain  failures  in the  payment  of
dividends and redemption of the Series D Stock, there are no voting rights other
than those  required by Colorado  Business  Corporation  Act with respect to the

                                      - 2 -

<PAGE>


Series D Stock.  All  outstanding  Series B Stock was cancelled upon exchange by
holders  pursuant  to the Merger  and the  Company  is not  authorized  to issue
additional Series B Preferred. Also in connection with the Merger, the Company's
shareholders  approved an amendment to the Company's 1994 Stock Option Plan (the
"Plan") to increase the number of shares of Common Stock authorized to be issued
under the Plan.

     For  financial  reporting  purposes,  the  Merger  was  accounted  for as a
purchase  in  accordance   with  generally   accepted   accounting   principles.
Accordingly,  the  total  acquisition  cost  was  allocated  to the  assets  and
liabilities of the Company based on their relative  estimated fair market values
at the date of the Merger.  The Company's  results of  operations  and financial
position  will be included in Lilly's  consolidated  results of  operations  and
financial  position  from the date of the Merger.  See Notes (1) and (11) to the
Consolidated   Financial  Statements  included  under  Item  7.  for  additional
information.

     Effects of the  Merger.  The  Company  entered  into the Merger in order to
continue to fund the growth of its business,  to facilitate  expansion  into new
markets  and  to  provide  an   opportunity   for  liquidity  to  the  Company's
shareholders  and a continued  incentive  to  management  and  employees  of the
Company.   The  Merger   provided  Lilly  with  an  opportunity  to  expand  its
pharmaceutical  management  services  by  connecting  to  the  large  number  of
physicians  utilizing  the  Company's  IMS  MEDACOM(R)  networks.  Through these
networks,  Lilly expects to use the Company's  networks in conjunction  with the
pharmacy  benefit  management  business of Lilly's  subsidiary,  PCS, to further
develop a nationally  integrated  information  technology system for health care
providers  and  payors.   Lilly  also  intends  to  provide  disease  management
utilization tools to existing and future Company network subscribers, as well as
to expand its technological  intervention capabilities and connectivity not only
to physicians but to all disparate sources of the health care community.

                             Description of Business

     The first IMS medical  communication  network was deployed in 1988. IMS has
pioneered the concept of "open"  architecture  (available on a fee-for-use basis
regardless  of the user's  affiliation  or  computer  hardware/operating  system
requirements)  computer-based communication networks for delivery of information
in the  healthcare  field (the "IMS  MEDACOM(R)  Networks").  IMS has  developed
networks in more than 51 areas across the United States. IMS MEDACOM(R) Networks
are in 27 of the  largest  50  metropolitan  statistical  areas in the  country,
connect with over 35,000 physicians, 196 hospitals, 12 laboratories and at least
15 health plans and insurers.

     IMS  MEDACOM(R)   Networks  connect  healthcare   information  systems  and
departmental  workstations utilizing proprietary network controller software and
proprietary  message handling software on personal computers at the user's site.
IMS  MEDACOM(R)  Networks  increase  the  timeliness  and  accuracy  of clinical
communications,  ease the burden of  compliance  with managed care and financial
transaction  requirements  and  reduce  the  information  management  burden for
physicians,  hospitals and other network users.  Also,  unlimited  communication
between all  physicians in a given network is available.  The Company  estimates
that over 25 million total messages were delivered over IMS MEDACOM(R)  Networks
in 1995.

     The Company's core set of three software connectivity tools are: RELAY(TM),
which provides system  integration of diverse  formats;  ComCenter,  the network
switch which  distributes  messages among network  users;  and  PC-COM(TM),  the
software on each workstation which enables the user to access the network. These
software components are installed as a network in each healthcare market area in
which the Company  operates.  A local operations staff of IMS employees  manages
the  connectivity  of the  various  communications  software  of network  users,
provides  on-going  training  and  workstation  support  and works with  network
sponsors to  continually  expand  their  services and  applications  provided to
physicians and other users over the network.

     Physicians  gain access to networks  by  becoming  subscriber  s, for which
there are no costs or fees to the  physician.  Network  sponsors are  healthcare
institutions,  organizations  and  services  which  communicate  regularly  with


                                      - 3 -

<PAGE>


subscriber  physicians  in the normal  course of  business.  Sponsors pay annual
network  communications  or license fees that typically  relate to the number of
physician  subscribers  the  sponsor  chooses to reach on the  network.  As more
sponsors pay for network connectivity,  the Company receives additional license,
implementation and communications  fees and more physicians become  subscribers.
Growing  numbers of sponsors and physician  subscribers  connected with networks
lead to increased usage and acceptance and, ultimately, revenue to the Company.

Strategy

     The Company's objective is to be the leading provider of  physician-focused
automated   medical   communication   networks   and  services   which   deliver
decision-critical information to the healthcare industry. The Company's strategy
includes the following key elements:

o Focus  on  Physician  Office  Requirements:  The  Company  attracts  physician
participation  on networks by emphasizing  ease of use,  minimal  investment and
immediate and relevant  value to the practice.  There is no charge to physicians
for the Company's software, installation, training, on-going support or messages
and communications  services. A physician can use an existing office computer to
serve as the IMS MEDACOM(R) Network communications  workstation ("NCW") with the
Company's  PC-COM(TM)  software.  The Company  believes that its physician focus
creates  an  on-going   relationship  and  alliance  that  will  accelerate  the
attraction  of network  sponsors and generate new network uses and  applications
with potential revenue sources for the Company.

o Establish  IMS  MEDACOM(R)  Networks  in  Additional  Markets:  The Company is
working to develop owned and operated IMS MEDACOM(R)  Networks in the largest 50
markets  (based on numbers of practicing  physicians);  and become the "utility"
for computerized medical communications across the entire spectrum of healthcare
delivery  in the market  area.  In smaller  markets,  the Company  licenses  the
operation  of  its  IMS  MEDACOM(R)  Networks  to one or  more  qualified  local
operators.

o Add  Additional  Sponsors to Existing  Networks:  In the largest 50 markets in
which the Company  establishes  IMS MEDACOM(R)  Networks,  the addition of local
sponsors generates both significant  financial leverage and attracts  additional
physician participation which in turn increases the importance of the network in
the local  market.  The addition of national  sponsors  which  communicate  with
physicians  across  several IMS  MEDACOM(R)  Networks  also adds revenue for the
Company in both operated and licensed networks.

o  Technology  and Services  Leadership:  The Company has  established  a single
method of access for  physicians  and other  network  users which  combines open
architecture, ease of use and bi-directional communications and employs a common
look and feel for users. The system is simple, utilizes those computer operating
systems most commonly found in physicians' offices and is easily upgradable. The
Company  intends to extend this  presence  and  reputation  for  successful  new
service  integration  into  higher  speed  transmissions,  more  complex  system
interfaces and an array of physician "desktop" information management services.

IMS MEDACOM(R) Network

Design

     A network to support the electronic  exchange of text, voice,  graphics and
images  in the  health  care  industry  must  be  highly  reliable  and  provide
connectivity to any computer system in use by both subscribers and sponsors. The
Company provides this service through proprietary software which can run on most
hardware,  and which is delivered by a full range of field operational services,
which it has developed since 1985.

     Each IMS MEDACOM(R) Network has at its core the ComCenter, a communications
controller and switch which hosts proprietary IMS software.  The participants in
a  local healthcare  delivery  system  are  connected  as a  network through the


                                      - 4 -

<PAGE>



ComCenter  to  automate  routine  and  specialized  communications.  The network
converts   transactions   such   as   clinical   results   reporting,   referral
notifications,  admission forms,  medical  transcriptions,  consultant  reports,
clinical monitor  tracings,  medical records,  calendars,  prescriptions,  third
party claims and managed  care  encounter  protocols  from mail,  fax,  phone or
courier  distribution  to  a  common  computerized,   bi-  directional  pathway.
Physician offices (subscribers) join the network at no cost for the service when
the  Company's   PC-COM(TM)  software  is  installed  on  the  office  computer.
Healthcare  institutions,  such as  hospitals,  pay  implementation  and  annual
communications  and license fees to become  network  sponsors  with the right to
communicate  electronically with a designated group of physician  subscribers or
other users. The sponsors link into the local IMS MEDACOM(R)  Network using both
the Company's  RELAY(TM)  software  which  interfaces  to their own  proprietary
automated  systems and an  unlimited  site  license for  PC-COM(TM)  software to
enable in-house computers across the sponsor's organization to become NCWs. Each
institutional  department  or  function  of the  hospital  can  format  standard
automated  transactions  for an  unlimited  range of routine  communications  to
physicians  or  other  network  participants  using  the  Company's  proprietary
computer  protocols  (Script) and imbedding the Scripts in the  subscriber  NCWs
under a multi-level directory-driven communications module.

     The ComCenter  maintains the network  directory of users,  message ordering
system and  transaction  log.  In the  largest 50  markets,  each  ComCenter  is
installed in a centrally located office leased by the Company that houses an IMS
network staff which develops,  coordinates and supports the network. The network
staff also provides  training  with  scheduled  classes  covering all aspects of
network use and benefits along with new sponsor and subscriber  orientation  and
specialty training covering new sponsor applications or network enhancements.

     The  networks do not process data or provide and operate  value-added  data
management or storage applications. The IMS strategy is focused on connectivity,
message delivery,  automated message handling systems,  facilitating  functional
systems  integration  initiatives and enabling the practical  implementation  of
multi-provider  organized delivery systems. During 1995 the Company deployed its
ComCenter NT software,  based upon the MicroSoft Windows NT(R) network operating
system, to enhance its core strategy, gain flexibility in scaling ComCenters and
to add communications  options such as on-line sessions,  "near-time"  automated
response   host   inquires  and  single  point  access  for  national   sponsors
communicating across multiple networks.

     The IMS  MEDACOM(R)  Network  provides  multi-platform  functionality.  The
RELAY(TM)  software enables the network to permit sponsors to automate virtually
any  communication  to any network user from any host  computer  system that can
generate a print stream. Utilizing RELAY(TM), the Company has connected networks
with  healthcare  information  systems  sold  by all of the  major  computer  or
software vendors. The majority of the NCWs on the Company's various networks are
IBM-compatible,  DOS-based  personal  computers,  either stand-alone units or as
participants  on a local  area  network.  The  Company's  software  can  also be
installed on computers  operating under other operating  systems,  such as UNIX,
ZENIX and AIX. The Company has designed a MicroSoft  Windows(R)  based operating
system  version for its software which is scheduled for release to network users
during the first half of 1996.

     A key feature of IMS MEDACOM(R)  Networks is that  communication  for every
NCW is bi-directional.  As opposed to general purpose E-mail systems, or special
purpose  EDI  applications  (such  as  electronic  claims  submission),  the IMS
MEDACOM(R) Network permits a message to be launched to or from a designated NCW.
In this way,  network  participants are assured that their network messages have
been  received  at the  destination  and the  receiver  can  process the message
instantly because it is resident as electronic media on the NCW.

     The IMS MEDACOM(R)  Networks  connect  participants  using modems and basic
phone lines, and because the highest volume message usually consists of clinical
results from a local  source,  the majority of  communication  occurs within the
telephone  company's  local area,  eliminating  most long  distance  charges for
network participants.  Where higher-speed  bandwidth (such as fiber optic cable)
is  available  and  desired by  network  participants,  the entire  suite of IMS
MEDACOM(R) Network software is compatible with other transmission media.

                                      - 5 -

<PAGE>




Customizing the Network

     One of the  powerful  features  of the IMS  MEDACOM(R)  Network  is that it
allows  for  network  messages  to  contain  attached  data  files such as voice
messages,  medical  images  or text  from a word  processor.  This  permits  the
recipient to handle the  appropriate  disposition of the  transmitted  material.
Text files, such as those that might come from a word processor,  can be printed
or copied to a disk for  processing.  After the operator has printed the message
and  processed  any  attached  files,  the  system  can  automatically  send  an
acknowledgment  to the  message  originator,  indicating  that the  message  was
received and processed. Message forward and reply functions are also available.

     Customized screens can be created for different types of messages,  such as
hospital  pre-admissions,  patient  referrals and  eligibility.  In addition,  a
network sponsor can elect to broadcast a message to all its  participants on the
network  or to create a list of people to whom a single  message  is to be sent.
This latter facility might be used, for example,  by a hospital to send the next
day's surgery schedule to all surgeons.

Sources of Network Revenue

     There  are  generally  three  levels  of  participation  on IMS  MEDACOM(R)
Networks: local sponsors, national sponsors and physician subscribers.  Sponsors
pay various  fixed and  message  related  fees to  "communicate"  with  selected
physician Subscribers or other network users.

     Local Sponsors.  Local sponsors include local  organizations that desire to
use a network to improve the quality of their  services to  physicians,  improve
the efficiency of their operations and strengthen  relationships with physicians
or other users. Such  organizations  include  hospitals,  clinics,  specialists,
imaging  centers,  home care  agencies,  independent  pharmacies,  transcription
services,  etc.  These  entities  enter into one to five year  network  services
agreements and pay annual fees and other charges for network use.

     National Sponsors.  National sponsors include  healthcare  organizations or
providers  that desire to  communicate  with a wide range of physicians or other
network  users  in  multiple  markets.  Such  organizations  include  hospitals,
pharmaceutical  companies,  clinical  laboratories,   pharmacy  chains,  managed
care/insurance  companies,  medical  publishers,  etc.,  and  usually  are  also
sponsors of more than one,  and  generally  all,  other IMS medical  information
networks located throughout the United States.

     Physician  Subscribers.  Each  physician  or  medical  practice  is  a  key
influence or client for a wide range of local and national  sponsors.  Physician
subscribers  create revenue by attracting local and national  sponsors which pay
to use the network to communicate with subscribers. Although some sponsors' fees
are dependent upon the number of physicians with which  communication is sought,
no network revenue is provided by physicians.

Network Support

     The Company provides  extensive  centralized  network  monitoring field and
sponsor staff training, technical implementation resources and real time support
from its Golden,  Colorado offices. The network services division delivers:  (a)
network design services  including on-site sponsor  requirement  evaluations and
RELAY(TM)   specification   development;   (b)  RELAY(TM)  and  other  interface
programming,   testing  and  installation;   (c)  call-in  support  with  direct
technician  interfaces  who  operate an  automated  problem  logging,  tracking,
resolution and follow-up system; and (d) a national training center, housed in a
separate,  purpose-built  facility  with a  curriculum  that  covers  a  Company
orientation,  the industry, the Company's technology and products,  policies and
procedures and a variety of application and programming credentialing.


                                      - 6 -

<PAGE>



            IMS MEDACOM Network Locations

     IMS MEDACOM(R) Networks are currently serving the following market areas:

<TABLE>
<CAPTION>

<S>                                      <C>                                   <C>

oAlbany, New York(2)                      oHouston, Texas(1)                   oOrlando, Florida(1)(3)

oBirmingham, Alabama(3)                   oIndianapolis, Indiana(1)(3)         oPensacola, Florida(2)

oBoca Raton, Florida(2)                   oJackson, Mississippi(2)             oPhiladelphia, Pennsylvania(1)

oBoise, Idaho(2)                          oJacksonville, Florida(2)            oPhoenix, Arizona(1)(3)

oCapitol Region, Washington, D.C. area(1) oKansas City, Missouri(1)            oRichmond, Virginia(1)

oBoynton Beach, Florida(1)                oKnoxville, Tennessee(2)             oRockford, Illinois(3)

oChicago, Illinois(1)(3)                  oLexington, Kentucky(1)              oSacramento, California(1)

oCincinnati, Ohio(1)                      oLincoln, Nebraska(2)                oSan Antonio, Texas(1)

oColumbus, Ohio(1)                        oLittle Rock, Arkansas(3)            oSan Diego, California(1)

oColorado Springs, Colorado(1)            oLos Angeles, California(1)          oSan Jose, California(1)

oDallas-Ft. Worth, Texas(1)               oLouisville, Kentucky(1)             oSavannah, Georgia(2)

oDavenport, Iowa(2)                       oMemphis, Tennessee(1)               oSt. Louis, Missouri(1)

oDenver, Colorado(1)                      oMiami/Fort Lauderdale, Florida(1)   oTampa, Florida(1)

oFlint, Michigan(2)                       oMinneapolis, Minnesota(1)(3)        oTulsa, Oklahoma(2)

oGreat Falls, Montana(2)                  oMonroe, Louisiana(2)                oWichita, Kansas(2)

oHonolulu, Hawaii(2)
</TABLE>

-------------------

(1)            Network in one of the 50 largest markets.

(2)            Network operated by licensee.

(3)            Operated  under a  joint  venture  or  similar  arrangement.  See
               "Co-Ventures" below.

     In  markets  where  IMS  MEDACOM(R)  Networks  are in  place,  the  Company
estimates that there are approximately  150,000 physicians in practice, of which
20% are  subscribers  to an IMS  network.  Physician  subscribers  connected  to
MEDACOM(R)  Networks  have grown from 845 at December 31, 1991 to  approximately
35,000 at December 31, 1995, with more than half the growth occurring in 1995.

     At December 31, 1995,  IMS and networks  operated by IMS or affiliates  had
sponsorship  agreements with 124 sponsors.  One hundred one of the sponsors were
hospitals  or  hospital  systems,  managed  care  providers  or payors,  12 were
laboratories, and 11 were other categories.

     In addition,  IMS has network license agreements with 27 licensee hospitals
or  healthcare  organizations,  which  authorize the licensee to use IMS network
software to set up and operate a proprietary network in smaller markets. IMS and
national  sponsors  are  usually  authorized  to  communicate  with users of the
licensee's network. The licensee frequently retains IMS to manage its network or
to provide various ancillary  services.  Sponsors and licensees each pay initial
implementation fees, annual fees and other charges for specialized or additional
services for fixed contract terms,  generally five years,  renewable  thereafter
for negotiated fees.


                                      - 7 -

<PAGE>



Co-Ventures

     In selected  large  markets,  IMS has entered into various joint venture or
similar  relationships  with others to develop an IMS  MEDACOM(R)  Network.  The
areas of  interest  and  ownership  of present  joint  venture  participants  at
December 31, 1995 are summarized as follows:

<TABLE>
<CAPTION>

                                                        Co-Owner or
                                                          Venturer                    Type of Entity
         Name of Venture              Percent of        (Manager of                      (State of
(Corporate Name, if Applicable)        Interest           Venture)                     Organization)           Network Area
 -----------------------------        ----------  -----------------------------     -----------------  -----------------------------
<S>                                   <C>         <C>                               <C>                <C>
Illinois Medical Information
 Network, Inc. ....................      68%      HFN, Inc. (26%): Swedish Amer-    JV Corporation     Illinois, 2 Indiana counties,
                                                  ican Hospital (5%): Alexian       (Illinois)         and portion of Eastern Iowa
                                                  Brothers Medical Ctr. (1%)(HFN)

Arkansas Medical Information
 Network (IMS-NET of Arkansas,
 Inc.) ............................      51%      Baptist Medical System (Baptist)  JV Corporation     Arkansas
                                                                                    (Arkansas)

IMS-NET of Arizona Joint Venture,
 Ltd ..............................      50%      BC-BS of Arizona, Inc. (IMS-      JV Ltd. Partner-   Arizona
                                                  NET of Arizona, Inc., general     ship (Arizona) 
                                                  partner)

IMS-NET of Central Florida, Inc. ..      51%      Adventist Health                  JV Corporation     Orlando and central Florida
                                                  System/Sunbelt                    (Colorado)

Indiana Medical Communication
 Network LLC ......................      51%      Methodist Hospital of             JV Limited         Indiana (except 2 counties)
                                                  Indiana, Inc. (IMS)               Liability Company
                                                                                    (Colorado)
Minnesota Medical Communication
 Network LLC ......................      90%      Blue Cross and Blue Shield of     JV Limited         Minnesota
                                                  Minnesota (IMS)                   Liability Company
                                                                                    (Colorado)

</TABLE>

     Pursuant  to each  venture  arrangement,  an open  architecture  network is
established and operated as a separate business consistent with the operation of
other networks by IMS in other areas.  Local sponsors  contract with the venture
for network  participation.  IMS and the venturer are generally  reimbursed  for
services  provided to the venture and operating  profits are shared according to
ownership  interest.  Revenue from  national  sponsors who contract  with IMS is
shared  between IMS and the venture  entity.  Financial  information  from these
entities is included with the consolidated financial information for IMS and its
subsidiaries.  IMS may negotiate to increase its ownership interest in the above
entities from time to time.

     In October  1995,  IMS acquired the 51% interest  which it did not own in a
joint venture corporation  organized in 1991 to develop and operate a network in
and  around  Los  Angeles.  As a result  of the  acquisition,  the  venture  was
terminated,  the  corporation  became a wholly owned  subsidiary of IMS, and IMS
assumed  control  of the  network.  On January 2,  1996,  IMS  acquired  the 49%
interest which it did not own in a joint venture  partnership  organized in 1998
to develop  networks in Alabama and western  Florida.  IMS has not initiated any
venture relationships since 1993 and has no plans to do so in the future.

Product Development

     The  implementation  of the ComCenter NT  technology  has opened up a broad
range of product development opportunities for the Company,  including data file
level host system integration; a Windows(TM) version of the PC-Com(TM) software;
enhanced  UNIX  functionality;  broader  LAN  integration;  bridges  to the most
popular  institutional  E-Mail  systems;  real-time  remote  display of clinical
monitor  activity (ICU, CPU, fetal,  etc.);  enterprise- wide master indexing of
patient  activity  integrated from outside the institution  into the physician's


                                      - 8 -

<PAGE>



office;  a full  set of  financial/claim  EDI  activities  as well  as  practice
management  system  interfaces;  and enhanced  network access using single point
connection into multiple ComCenters of more than one network.

     The Company also recognizes  that technology and service venture  alliances
with major corporations in the healthcare,  technology and communications fields
can bring a valuable level of product  development  expertise and opportunity to
its networks.  The Company may join healthcare support service vendors to create
enhanced  value  applications  of their  core  activities  by  adding a  network
communications or similar functionality.  Arrangements have been initiated for a
technology and service  relationship in claims processing;  for point-of-service
materials   management;   and,  with  PCS,  for   automated   physician/pharmacy
communications.

     As of  December  31,  1995,  approximately  175  computer  programmers  and
technical  personnel  of the  Company  and  ventures  with which the  Company is
affiliated are involved at different  times and in varying  degrees,  in product
development  and  enhancement  and  software   support.   IMS  is  committed  to
identifying  existing software  systems/programs  and/or developing new programs
that bring added value to IMS  MEDACOM(R)  Network  participants.  Many of IMS's
network  applications  were developed in cooperation  with health care providers
and payors. The Company intends to continue this strategy of developing services
in cooperation with key customers in targeted market sectors.

Sales and Marketing

     The Company  markets its services and  software  licenses  through a direct
sales  force  consisting,  as of December  31,  1995,  of 15 direct  field sales
executives located throughout the United States,  regional sales vice presidents
for  both the  eastern  and  western  United  States,  and a vice  president  of
Technical  Sales  Support.  The Company's  sales offices are located in Arizona,
California, Georgia, Illinois, Massachusetts, Ohio, Pennsylvania, South Carolina
and Texas.  The sales force is managed by a Senior Vice President of Sales.  The
sales  executives  are  supported  by  General  Managers  and by a  Director  of
Operations  resident  at each IMS  MEDACOM(R)  Network.  Also,  the sales  staff
receives  marketing  and  administrative  support from the  Company's  strategic
development  division  which includes a director of marketing,  media  relations
manager and industry marketing specialists.

     The Company generates sales through referrals from sponsors and physicians,
healthcare  information systems consultants,  industry seminars and trade shows,
news articles in the trade and general business press, direct mail campaigns and
advertisements in trade journals.  In addition,  the Company's  relatively large
installed  physician  base attracts  direct  inquiries from national or regional
healthcare service  organizations that desire an automated  communications  link
with  their  affiliated  physicians  or other  providers.  Also,  as a result of
consolidations and the restructuring of local/regional  healthcare delivery into
integrated  systems,  the  Company's  base of  installed  institutions  provides
leveraged introductions to a number of new sales prospects.

     No  single  customer  accounted  for more than 10% of the  Company's  total
revenues for the year ended December 31, 1995. One customer,  a hospital  system
licensee under an NLA,  accounted for  approximately  19% of the Company's total
revenue in the prior fiscal year.

Competition

     The health care  communications  industry is  competitive.  Many hospitals,
third party administrators,  claims processing  organizations,  hospital systems
vendors,  system integrators,  insurers,  managed care organizations,  and a few
small companies provide physicians with some form of communications  link to one
or more specific  organizations.  Major  companies  which have provided  network
systems to the health care industry include IBM,  Physicians  Computer  Network,
Shared Medical Systems, Meditech and Ameritech and other regional Bell operating
companies. ln addition, certain companies have expressed an intention to provide
communications  solutions  to the  health  care  industry,  many of  which  have
substantially greater resources than the Company. IMS believes that its networks

                                      - 9 -

<PAGE>



allow users to  communicate  with more  physicians  and more  hospitals  using a
bidirectional  standardized  communications  format  than any  other  commercial
provider of similar communications in the medical field.

Employees

     As of December 31, 1995, the Company had 277 full-time employees,  of which
175 were  technical and engaged in  maintaining  or  developing  IMS products or
services,  25 were marketing and sales, 37 were involved in  administration  and
finance and 40 provided  nontechnical  operation  support in IMS business  units
which operated various  networks.  The Company's  network  ventures  employed an
additional 44 people.  None of the Company's  employees  were  represented  by a
union. The Company believes that its relationship with its employees is good.

ITEM 2.     PROPERTIES.

     The  Company's  corporate  offices are located at 15000 West Sixth  Avenue,
Golden,  Colorado. These premises are leased pursuant to a lease agreement which
expires on January  31,  1998 and has a renewal  term of five  years.  The lease
covers  approximately  28,000  square feet of office space for which the Company
pays  annual rent of  $240,225.  The Company  also leases  approximately  56,000
square feet of  additional  office  space in 26 offices  throughout  the country
where  network  services  are  provided.   These  offices  range  in  size  from
approximately 700 square feet to 3,000 square feet. The Company pays annual rent
in the aggregate amount of approximately $892,700 for this space.

     The Company  plans to lease space from time to time as it  establishes  new
networks.  The Company believes that its facilities are adequate for its present
operations.

ITEM 3.     LEGAL PROCEEDINGS.

     There are no material legal proceedings  currently pending, or, to the best
of the Company's  knowledge,  contemplated  against the Company by  governmental
authorities or others.

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

     A special  meeting  of  shareholders  of the  Company  was held on  Monday,
December  18, 1995 for the purpose of voting on the approval and adoption of the
Merger  Agreement.  The Merger  Agreement  provided  for the merger of Trans-IMS
Corporation,  a wholly-owned  subsidiary of Lilly, with and into the Company; an
amendment to the 1994 Employee  Stock Option Plan of the Company to increase the
number of shares  available under the Plan from 400,000 shares of Company Common
Stock to 838,600 shares of Company Common Stock, which equalled the total number
of shares subject to options which had been granted  previously  under the Plan;
and an amendment to the Articles of  Incorporation  of the Company which,  among
other things,  eliminated  the voting rights of the Series B Stock other than as
required by Colorado Law,  established Series D Stock and provided for parity of
the  Series B Stock and the  Series D Stock  upon  liquidation,  dissolution  or
winding up of the  Company.  The Merger  required  the  affirmative  vote of the
holders of at least two-thirds of the outstanding shares of Common Stock, Series
B Stock and Series C Stock voting together as a class,  and the affirmative vote
of at least  two-thirds of the outstanding  shares of each of the Series B Stock
and Series C Stock  voting as separate  classes.  The Merger was approved by the
required vote of each class of stock as well as all classes voting together. All
of the votes cast,  which  consisted  of 6,206,000  shares of the Common  Stock,
1,950,000  shares of the  Series B Stock and  3,500,000  shares of the  Series C
Stock,  voted in favor of the Merger  Agreement.  The Merger  was  effective  on
December 18, 1995.


                                     - 10 -

<PAGE>



                                     PART II

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

     (a) Market Information.  None of the Company's  securities have ever traded
in any established  public trading  market,  there is presently no public market
for the  Company's  equities  securities,  and it is unlikely that such a market
will develop in the future.

     (b)  Holders.  As of  December  31,  1995,  Lilly,  through its PCS Holding
Corporation  subsidiary,  was the sole owner of all of the Company's  15,660,200
issued and  outstanding  Common Stock and there were 74 holders of the Company's
5,622,323 outstanding shares of Series D non-voting redeemable preferred stock.

     (c)  Dividends.  The Company has not declared cash  dividends on its Common
Stock  since its  inception  and the  Company  does not  anticipate  paying  any
dividends on the Common Stock in the foreseeable  future. The Company's Series D
Stock is  preferred as to the payment of dividends  over the Common  Stock.  The
Series D Stock  accumulates cash dividends at an annual rate of $0.62 per share.
The dividends  accrue and cumulate,  regardless of whether such  dividends  have
been  declared by the Board of  Directors,  beginning on the date of issuance of
the shares and are payable  annually  when  declared in arrears each December 31
until and  unless  the  shares of Series D Stock are  redeemed  by the  Company.
Dividends are payable on the Common Stock only when,  as, and if declared by the
Board of Directors,  in accordance with Colorado law, and only after all accrued
dividends on Series D Stock have been paid.

ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

Overview

     The Company's networks,  generally referred to as IMS MEDACOM(R)  Networks,
enable  healthcare  entities   ("sponsors")  to  be  linked  with  participating
physician  offices and  physicians to be linked to each other to facilitate  the
exchange of clinical,  financial and administrative  information  related to the
delivery of healthcare services.

     Sponsors  pay  various  fees  to  utilize  an  IMS  MEDACOM(R)  Network  to
communicate with selected physicians or other network users in a given market on
a single  network (a "local  sponsor")  or on  several  networks  (a  "national"
sponsor).  Physicians are not charged fees to participate on a network for basic
network communication services and generally are designated for participation on
a network,  with the approval of the physician,  by a sponsor seeking to improve
communication with certain physicians. Generally, licenses to physicians for the
proprietary  IMS software  installed at the physician  practice sites on devices
owned by physicians are directly maintained with IMS.

     IMS markets its software and networks under three general arrangements.

     Large Markets

     In 27 of the  largest 50  metropolitan  markets in the United  States,  the
Company operates, directly or under a contract with a local network partner, IMS
MEDACOM(R)  Networks in which all healthcare  providers,  suppliers,  payors and
others in the market  have an  opportunity  to utilize  the  network for various
aspects of medical communication needs. The "open architecture"  networks may be
utilized by any sponsor which intends to  communicate  with  physicians or other
sponsors in the market area under a "network services agreement" ("NSA").  Under
an NSA, local sponsors contract with IMS or the network,  for  implementation of


                                     - 11 -

<PAGE>



an  individualized  automated  communications  plan utilizing the network for an
annual fee determined by either (a) the size of the sponsoring  institution  and
scope  of  the  network  design,  or  (b)  the  volume  and  characteristics  of
communications   with  designated   physician  sites  or  other  external  sites
(pharmacies,  clinic, ancillary treatment services, etc.). In addition to annual
sponsor  fees,  IMS may  receive  implementation  fees,  as well as  incremental
development and deployment  fees for custom  software  interfaces or workstation
applications  as requested  by the sponsor.  The typical term for an NSA is five
(5)  years,  though  shorter  participation   commitments  are  available  under
significantly  higher fee  structures.  Most NSAs include  general  renewal upon
expiration  at increased or  renegotiated  fees.  NSA revenue is  recognized  as
earned   monthly  by  prorating  the  fixed  annual  fee  while  certain  custom
development or implementation fees are recognized upon project completion.

     Smaller Market Networks

     In  selected  smaller  markets   (typically  those  with  less  than  1,500
practicing physicians), a local healthcare service provider or management entity
contracts  with IMS to receive a license of IMS  technology  and to  implement a
network under a network license  agreement  ("NLA").  Under an NLA, the licensee
generally  receives a nonexclusive  license to use the IMS proprietary  software
for a fixed period,  generally a five-year term with annual renewals thereafter.
The  licensee  can  operate a network  on its own or  retain  IMS to manage  the
network.  All physician  site licenses  under an NLA are with the Company so the
Company  retains  the right in most  cases to permit  other  local  sponsors  or
licensees or national  sponsors to communicate  with the NLA physicians.  At the
Company's option,  the NLA licensee  receives a negotiated  portion of local and
national sponsorship fees in the nonexclusive territory to implement the network
service.

     Typically, NLA licensees pay fees at approximately 50% of the corresponding
aggregate five-year fees under an NSA, and the NLA includes a defined obligation
for the NLA licensee to staff, operate, market and support the local network and
attain physician participation.

     The NLA license fee is  recognized  as revenue in the year in which the NLA
licensee  receives the  installation  of the network  software.  Any  technology
support  and  maintenance  fees  associated  with  the NLA are  recognized  on a
prorated monthly basis. In addition, the Company may receive implementation fees
that are  recognized  as earned.  Other NLA  revenue  sources  include  optional
monthly management services fees for services provided by the Company, generally
at the election of the NLA licensee, to provide network oversight and operation,
and custom development or new services  implementation  fees that are recognized
upon project completion.

     Certain National Sponsors

     National network sponsors enter into national sponsor  agreements  ("NSPA")
pursuant  to which  the  licensee  is  afforded  the right to  communicate  with
designated  physicians or other users in various networks.  Typically,  the NSPA
provides fees determined as an annual charge per physician or other recipient of
the  communication  or of the  sites to which  the  communication  is  directed,
usually  based  upon the  sponsor's  communication  application  and  annualized
communications  volumes,  with annual  minimum  fees.  As the number of national
sponsors increase,  the Company expects that incremental  recurring revenue will
increase as will profit margin as there is minimal  additional  expense incurred
and most of the  significant  operations/expenses  related to network  usage are
covered  by fees paid by local  sponsors.  The  Company  recognizes  the  annual
minimum fees prorated monthly until actual network communication fees exceed the
minimum.


                                     - 12 -

<PAGE>



Results of Operations

     The  following  discussion  of the  results  of  operations  and  financial
condition  of the  Company  should  be read in  conjunction  with the  Company's
Consolidated  Financial  Statements and Notes thereto included elsewhere in this
Annual Report.  The table below sets forth certain items of revenue and expenses
reflected in the Company's  income  statement (in thousands) and the percentages
of total revenue represented by the items.

<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                                   ---------------------------------------------
                                                           1995(1)                  1994
                                                   -----------------------  --------------------
<S>                                                <C>               <C>    <C>            <C>  

Net Sales and Fee Revenue:
  Network Service Agreement revenue ............   $ 11,937          58.5%  $  7,457       41.7%
  Network License Agreement revenue ............      6,596          32.3%    10,058       56.3%
  Network License Service revenue ..............      1,875           9.2%       366        2.0%
                                                   --------         -----    -------      -----
      Total revenue ............................     20,408         100.0%    17,881      100.0%
Costs and Expenses:
  Salaries, payroll taxes and benefits .........     19,331          94.7%    11,839       66.2%
  Facilities ...................................      4,965          24.3%     3,187       17.8%
  Selling, general and administrative ..........      9,044          44.3%     5,848       32.7%
  Amortization of goodwill and other
    intangibles ................................        471(2)        2.3%      --          --
  Costs of subsidiary litigation ...............        115            .6%       785        4.4%
  Reorganization costs .........................       --             --         479        2.7%
                                                   --------         -----    -------      -----
      Total expenses ...........................     33,926         166.2%    22,138      123.8%
LOSS FROM OPERATIONS ...........................    (13,518)        (66.2)%   (4,258)     (23.8)%
Other Income (Expense):
  Interest income ..............................        120           0.6%       343        1.9%
  Interest expenses ............................       (560)         (2.8)%     (119)       (.7)%
  Other, net ...................................       (228)         (1.1)%      (65)       (.3)%
                                                   --------         -----    --------      -----
      Total other income (expense) .............       (668)         (3.3)%      159         .9%
LOSS BEFORE MINORITY INTEREST IN OPERATIONS
OF SUBSIDIARIES ................................    (14,186)        (69.5)%   (4,098)     (22.9)%
MINORITY INTEREST IN INCOME FROM OPERA-
TIONS OF SUBSIDIARIES ..........................       (292)         (1.4%)     (153)       (.9)%
                                                   --------         -----    --------      -----
NET LOSS .......................................    (14,478)        (70.9)%   (4,252)     (23.8)%
                                                   ========         =====    ========     =====

</TABLE>
------------------------

(1)  The period from January 1, 1995 through  December 18, 1995,  the  effective
     date of the Merger ("pre-  Merger"),  and the period from December 18, 1995
     through December 31, 1995 ("post-Merger"),  have been combined for purposes
     of this presentation.  Because of purchase accounting adjustments resulting
     from the Merger,  the results of  operations  between pre- and  post-Merger
     periods  may  not  be  comparable.  See  Note 1 to  Consolidated  Financial
     Statements included under Item 7. However,  the post-Merger period does not
     materially  change  the  results  of  operations  for the full year and are
     included to provide a better comparison from year-to-year.

(2)  Represents  primarily  amortization  of  goodwill  during  the  post-Merger
     period. See Note 1 to Consolidated Financial Statements.


                                     - 13 -

<PAGE>



Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

     Net Sales and Fee  Revenue.  Total  revenue  increased  $2.53  million from
$17.88  million in 1994 to $20.41  million for the year ended December 31, 1995.
Sponsor  revenue under Network Service  Agreements  increased $4.48 million from
$7.46 million in 1994 to $11.94 million in 1995,  reflecting an increased number
of  operating  networks,  a greater  number  of  sponsors  participating  in the
networks  and a  substantial  increase  in the number of  physicians  with which
networks are connected.  Quarterly  sponsorship revenue under NSAs has continued
to  increase,  again  reflecting  the  growth of the  Company's  IMS  MEDACOM(R)
networks. The Company anticipates continued expansion of both the number of NSAs
and networks in operation and plans to emphasize  such growth in the next one to
two years.

     Revenue from Network License Agreements  declined $3.46 million from $10.06
million  in  1994 to  $6.60  million  in  1995.  The  first  half  of  1994  was
exceptionally  strong,  reflecting  recognition of substantial  revenue from the
sale of a network  license for Hawaii and several  other  smaller  licenses.  In
1995, the Company completed nine license sale  transactions,  including seven in
the last two quarters, which reflects the historical fluctuation in this revenue
as network  licenses  sold in smaller  markets are  unpredictable  in nature and
generally require 12 to 18 months from the time the licensee initially indicates
interest  in a  network  until the sale is  completed  and the  initial  network
installation is in place.  Although  management  anticipated  that revenue would
increase  significantly  in the third  quarter,  the Company  believes  that the
market  expectation  of the  merger  with  Lilly was in part  responsible  for a
postponement in the finalization of several pending contracts.

     Network  license  service  revenue  increased  from $.37 million in 1994 to
$1.88  million  in  1995,   reflecting   increased   management   service  fees,
implementation  fees and recognition of the portion of initial license fees sold
in previous  periods  allocated to service  revenue.  Service  revenue  tends to
reflect services provided to licensees and sponsors that became  participants on
networks in previous  periods and therefor should tend to increase as the number
of licenses for which IMS will provide network  management  increases and as the
number of sponsors and network size under NSAs increases.

     Salaries and Benefits.  Salaries and benefits increased approximately $7.49
million or 63% to $19.33 million in 1995 compared to $11.84 million in 1994, and
salaries  and  benefits  represented  95% of revenue in 1995  compared to 66% of
revenue in 1994. The substantial  increase reflects an increase in the number of
employees  from 146 at the  beginning  of 1994 to 321,  including  employees  of
network ventures, at December 31, 1995 due to increased activities and growth of
the Company's business.  Also, the Company charged an additional $2.3 million to
payroll  following the Merger in 1995 to reflect sales commissions paid in prior
periods but which were being amortized over the life of the contracts,  costs of
developing   the  Company's   ComCenter  NT  operating   system  and  previously
capitalized development costs.

     Facilities  and  Related  Expenses.  Facilities  and related  expenses  are
composed of rent, equipment, maintenance and depreciation, telephone, utilities,
insurance and taxes.  Facilities  expenses  increased  $1.8 million over 1994 to
$4.97 million for 1995, or 39%. The Company incurred increases due to opening of
additional  administrative  offices in Denver in January  1995 and opening  more
field  offices.  Rent and related  facilities  expenses  in 1995  related to the
Company's  San Diego  office  which  closed at the end of 1994 were  charged  to
reorganization  in 1994  and  are not  included  in  1995  facilities  expenses,
although such  expenses were paid in 1995.  Telephone  expenses  increased  $.87
million over the comparable period in 1994, reflecting  substantially  increased
network traffic.

     Selling,  General and Administrative.  Selling,  general and administrative
("SG&A")  expenses  include  travel  and  entertainment,  marketing,  sales  and
promotion  expenses and other  uncategorized  expenses.  SG&A expenses increased
approximately  $3.2 million or 55% in 1995 compared to 1994.  Travel and related
selling expenses  increased due to the Company's  transition to a national sales
force in late 1994 and  other SG&A expenses increased as the level of activities

                                     - 14 -

<PAGE>



rose due to the  Company's  growth.  Also,  the  Company  charged  to SG&A costs
incurred in early 1995 in connection with an abandoned  securities  offering and
approximately $1.1 million in Merger related fees and expenses.

     Amortization  of  Goodwill.  The  excess  of the  amounts  paid by Lilly in
connection  with the Merger over the estimated  fair market values of the assets
of the Company,  approximately $97 million,  was allocated to goodwill and other
intangibles  and will be amortized over 10 years.  The amount of amortization in
1995 primarily  reflects this  amortization for the period following the Merger.
In  future  years,   the  annual   amortization   charge  for  the  transaction,
approximately  $9.7 million,  will significantly and adversely affect results of
operations.

     Cost of  Subsidiary  Litigation.  Litigation  involving  the  Company,  two
subsidiaries and certain directors  commenced in 1992 was concluded in 1995 with
a judgment in favor of the  Company and the  directors  following  trials.  As a
result,  costs of subsidiary  litigation  decreased  $.67 million from 1994. The
Company is not currently involved in any major litigation.

     Reorganization  Costs. In 1994, the Company closed its San Diego office and
charged the costs to expenses for 1994.  Approximately  $100,000 of the $479,000
of  expenses  relate  to net  leasehold  expenses  which  will be paid  over the
remaining term of the lease and approximately  $280,000  represents expenses and
severance  compensation  paid in 1995 to the former  chairman and founder of the
Company who continued on as a director following the reorganization.

Financial Condition

     IMS had working  capital of $.6 million at December 31, 1994  compared to a
working  capital  deficit of  approximately  $11 million at December  31,  1995.
Treating the  obligations  due to Lilly in 1996 as long term debt would increase
the  Company's  working  capital to  approximately  $1.7 million at December 31,
1995. At December 31, 1995, IMS had $3.5 million in cash and cash equivalents on
hand  compared to $1.4 million at December  31,  1994.  The increase in cash was
primarily  attributable to borrowings from Lilly, which totaled $12.7 million at
year end,  due in 1996.  The Company  also had  increased  sales of  receivables
remaining  under NLAs during 1995 and  increased  fees paid under NSAs signed in
the fourth quarter of 1995.  Lilly has indicated that it does not intend to call
this debt for payment when due. IMS' contract  receivables  at December 31, 1994
were $6.8 million  compared to $6.2 million at December 31, 1995,  of which $.37
million were long term.  The modest  decrease  reflects an  increased  amount of
contracts receivable sold to third parties in 1995.

     Since  December 31,  1994,  in  accordance  with the Merger  Agreement  the
Company has funded operations  primarily through  approximately $12.7 million in
borrowings  from Lilly,  $6.9  million from the exercise by Lilly of warrants to
purchase  875,000  shares of Series C Preferred  Stock and $4.6 million from the
sale of receivables  under network  license and service  agreements to financial
institutions on a discounted cash flow basis. In addition, the Company utilized,
on an  interim  basis,  a portion  of a $1  million  line of credit  secured  by
guarantees  of certain  directors.  The  credit  line  expired  and there was no
balance outstanding as of December 31, 1995.

     The  Company  had  stockholders'  equity of $5.7  million  and  accumulated
deficit of  approximately  $23.4 million at December 31, 1994 and  stockholders'
equity and retained  earnings of  approximately  $48.3  million and $.5 million,
respectively  at  December  31,  1995.  This  very  significant  improvement  in
financial  condition is due primarily to the acquisition of the Company by Lilly
and the related purchase  accounting  adjustment required in connection with the
Merger. See Notes 1, 8 and 11 to Consolidated Financial Statements.

     The Company  has  incurred  and  expects to  continue to incur  significant
operating  and net losses and to continue to  generate  negative  cash flow from
operating activities while it emphasizes development and enhancement of networks
and until the Company  establishes  additional sponsor revenue for its networks.


                                     - 15 -

<PAGE>



In view of the anticipated  negative cash flow from operating activities and the
cash  required for the  continuing  development  of the  Company's  products and
services,   the  expansion  of  existing   networks  and  the  construction  and
acquisition  of new networks,  the Company will continue to require  substantial
amounts of capital for the foreseeable  future from outside  sources.  Lilly has
represented  that it is  committed to provide the  necessary  level of financial
support to the  Company to enable it to pay its debts as they become due for the
year ending December 31, 1996 and to provide funding for the Company to continue
its  development  and expansion until it is self  sufficient.  As a result,  the
Company anticipates that financing for rapid growth will be available.

New Accounting Pronouncement

     Statement of Financial  Accounting  Standards No. 121,  "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," issued
in March 1995 and effective for 1996,  establishes  accounting standards for the
impairment  of  long-lived  assets.  The Company will adopt this  standard as of
January 1, 1996 and does not expect that adoption will have a material impact on
the Company's financial position or results of operations.

ITEM 7.     FINANCIAL STATEMENTS

     The following  Consolidated Financial Statements that constitute Item 7 are
included at the end of this report beginning on page F-1.

     Report of  Independent  Public  Accountants
     (for the period  December  19, 1995 through December 31, 1995
     and as of December 31, 1995)........................................ F-1
     Report of Independent Public Accountants
     (for the period January 1, 1995 through December 18, 1995
     and for the year ended December 31, 1994)........................... F-2
     Consolidated Balance Sheet as of December 31, 1995.................. F-3
     Consolidated Statements of Operations............................... F-5
     Consolidated Statements of Stockholders' Equity..................... F-6
     Consolidated Statements of Cash Flows............................... F-8
     Notes to Consolidated Financial Statements.......................... F-11

ITEM 8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE

     There were no changes in accountants or  disagreements of the type required
to be  reported  under  this  item  between  the  Company  and  its  independent
accountants during the fiscal year ended December 31, 1995.

                                    PART III

ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     (a) Identification of Directors and Executive Officers

     All members of the Board of  Directors  hold  office  until the next annual
meeting  of  shareholders  or  until  their  successors  are  duly  elected  and
qualified. Executive officers serve at the discretion of the Board of Directors.
The following  table sets forth as of the date hereof certain  information  with
respect to the persons who serve as  executive  officers  and  directors  of the
Company.

                                     - 16 -

<PAGE>
<TABLE>
<CAPTION>

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

<S>                                      <C>  <C>
                                                 
Kevin E. Moley ....................      49   President, Chief Executive Officer and Director

Edward B. Daniels .................      45   Executive Vice President and Chief Operating Officer

Charles I. Brown ..................      64   Executive Vice President, Chief Financial Officer,
                                              Secretary and Director

George R. Beauchamp, M.D ..........      53   Senior Vice President - Physician Affairs

Joseph G. Ferguson, Sr ............      44   Senior Vice President - Technology

William B. Hein., Sr ..............      46   Senior Vice President - Sales and Marketing

Charles S. Iobe, Sr ...............      53   Senior Vice President - National Operations

Richard J. Smeltz .................      53   Vice President - Finance

Robert Ashworth ...................      53   Director

Michael S. Hunt, Ph.D .............      49   Director

Thomas Trainer ....................      48   Director

</TABLE>

     All members of the Board of  Directors  hold  office  until the next annual
meeting  of  shareholders  or  until  their  successors  are  duly  elected  and
qualified. Executive officers serve at the discretion of the Board of Directors.

     KEVIN E. MOLEY has served as President and Chief  Executive  Officer of the
Company  since  January  1996.  He also has been a  director  since 1994 and was
interim Chief Executive  Officer of the Company from July 1994 to December 1994.
Mr. Moley served as Senior Vice  President,  Health  Systems  Management  of PCS
Health Systems, Inc., a subsidiary of Lilly from, February 1993 to January 1996.
Mr. Moley served as Deputy Secretary of the U.S.  Department of Health and Human
Services  ("HHS")  from  February  1992 until  January  1993.  His career at HHS
included  tenures as Assistant  Secretary for Management  and Budget,  and Chief
Financial  Officer  from 1989 to 1992,  and  director  of the  office of Prepaid
Health Care from 1986 to 1988.  He served as Vice  Chairman  of the  President's
Council  on  Management  Improvement  from  1989  to  1992  and on the  steering
committee  of the  National  Health  Policy  Forum  from 1989 to 1993.  Prior to
serving at HHS, Mr. Moley held several  positions with CNA from 1969 to 1974 and
New England Life Insurance in marketing and underwriting management from 1974 to
1983. He attended  Georgetown  University  in  Washington,  D.C.,  served in the
United  States  Marines in Vietnam and was awarded the Navy  Commendation  medal
with Combat V and the Purple Heart.

     EDWARD  B.  DANIELS  has  served  as  Executive  Vice  President  and Chief
Operating  Officer  since  January 1996 and served as Senior Vice  President for
National  Network Services from 1994 to 1996. From 1993 to 1994, Mr. Daniels was
Vice President of Cornerstone Health  Management,  a geriatric services company,
in Dallas,  Texas.  From 1984 to 1993,  Mr. Daniels served as Vice President and
then President of GeriMed of America,  Inc., a geriatric  services  company.  In
1984, Mr. Daniels was Vice President of Envisioneering, a laboratory information
software development company.  From 1981 to 1984, Mr. Daniels served as Regional
Director of Health Care Systems at Arthur Young & Company,  an accounting  firm.
From 1976 to 1980, Mr.  Daniels held both technical and management  positions in
computer  services and  operations  analysis at Henry Ford  Hospital in Detroit,
Michigan.  Mr. Daniels obtained a bachelor's  degree in psychology from Southern
Illinois University in 1972 and a master's degree in industrial engineering from
the State University of New York at Buffalo in 1976.

     CHARLES I.  BROWN has  served as the  Executive  Vice  President  and Chief
Financial  Officer since March 1995 and as a director  since 1992.  From 1992 to

                                     - 17 -

<PAGE>


March  1995,  Mr.  Brown was a Senior  Vice  President  and the Chief  Financial
Officer.  From 1983 to 1992, Mr. Brown was active as a financial  consultant to,
and a director of, several banks and  corporations.  He was formerly Chairman of
the Board of American National Bank,  Laramie,  Wyoming,  from 1986 to 1992, the
Chairman of the Board of the Rawlins National Bank, Rawlins,  Wyoming, from 1983
to 1991, and the Chairman of the Board of Prudential  Bank of Denver,  Colorado,
from 1984 to 1986.  He has served as a director of The  Original  Sixteen to One
Mine, Inc., Allegheny,  California,  a publicly held gold mining company,  since
1986 and as a  director  of lzzo  Systems,  Inc.,  Denver,  Colorado,  a private
manufacturer of golf bags and related products since 1992. From 1974 to 1982, he
served as Senior Vice  President  and  Director of Energy Fuels  Corporation,  a
Denver based,  privately owned mining  company.  From 1959 to 1974, he served as
Vice  President/Finance  and Director of Western Nuclear Inc., a  publicly-owned
mining company listed on the American Stock Exchange prior to its acquisition by
Phelps Dodge  Corporation in 1970. Since 1978, he has served as a Trustee of the
Colorado State University Research Foundation,  Fort Collins, Colorado and since
1974, he has served as a Trustee of the Colorado Outward Bound School. Mr. Brown
received  a master of  business  administration  degree  with  distinction  from
Harvard  Graduate  School of Business  Administration  in 1959 and a bachelor of
arts degree from Williams College in 1954.

     GEORGE   R.    BEAUCHAMP,    M.D.   has   served   as   the   Senior   Vice
President--Physician  Affairs  since  January  1996 and was Vice  President  for
Strategic   Development   from   December   1994   until   1996   and  was  Vice
President--Medical  Affairs for the Company from 1991 to 1994.  From 1975 to the
present,  Dr. Beauchamp has practiced  medicine as a Pediatric  Ophthalmologist.
From 1987 to 1990,  Dr.  Beauchamp  served as Medical  Director of the Office of
Regional Health Affairs  Foundation and held numerous positions of authority and
responsibility  in  American  ophthalmology,  including  the  American  Board of
Ophthalmology  where he has  served as a  director  since  1990.  Dr.  Beauchamp
received   bachelor  of  arts  degree  in  physiology  from  the  University  of
California, Berkeley in 1965 and his doctor of medicine degree from Northwestern
University  in Chicago in 1968.  After  internship  and  residency  training  in
ophthalmology  at Walter  Reed Army  Medical  Center in  Washington,  D.C.,  and
completing his military service obligation,  Dr. Beauchamp undertook  additional
specialized training in corneal surgery and pediatric ophthalmology.

     JOSEPH   G.    FERGUSON,    SR.,    has   served   as   the   Senior   Vice
President--Technology  since  January  1996 and was Senior  Vice  President  for
Engineering  and  Development  from March 1995 until 1996.  Mr.  Ferguson has 20
years of  experience  in the  development  of  commercial  software  application
products  in  various  industries.  From  1990 to 1994,  Mr.  Ferguson  was Vice
President for Product  Engineering at Community  Health  Computing,  in Houston,
Texas, a hospital information systems company,  where he was responsible for the
development  of  Community   Health   Computing's  new  generation  of  clinical
application  products.  From 1982 to 1989,  Mr.  Ferguson was Vice President for
Engineering  and  co-founder  of  Covalent   Systems,   a  provider  of  turnkey
manufacturing  systems,  which provides  application  software  solutions to the
graphic arts industry.  From 1973 to 1982, Mr. Ferguson was with Hewlett-Packard
in  various   capacities   related  to  the   development   and   marketing   of
Hewlett-Packard's  internal and commercial  manufacturing  application products.
Mr.  Ferguson  received  a master of  business  administration  degree  from the
Wharton  School of Business in 1974 and a bachelor's  degree from the University
of California at Santa Cruz in 1972.

     WILLIAM B. HEIN has served as the Senior Vice President of Sales since 1994
and as Senior Vice  President  of Marketing  since  January  1996.  Mr. Hein was
previously the  President/Central  Region for the Company and was Vice President
of the Company from 1988 to 1993.  From 1979 to 1987,  Mr. Hein was with Control
Data Corporation, a computer systems and service company, where he managed field
sales and support  organizations and developed  strategic plans for domestic and
international  computer  sales  programs.  From 1972 to 1979,  Mr. Hein was Vice
President and a principal of Computing Associates,  Inc., a software development
and consulting  organization.  Mr. Hein received a bachelor of science degree in
engineering  from the  University  of Arizona  in 1973,  where he also took post
graduate courses in business administration.


                                     - 18 -

<PAGE>



     CHARLES S. IOBE,  SR.,  has served as the Senior  Vice  President--National
Operations  since January 1996 and was Senior Vice President of Field Operations
from 1994 until 1996.  From 1990 to 1993,  Mr. Iobe was Executive Vice President
of TME, Inc., a medical imaging  company.  From 1981 to 1983, Mr. Iobe was Chief
Operating Officer of Humana Inc.'s Health Services  Division.  Mr. Iobe received
his bachelor's degree in business administration from Texas Christian University
in  1964  and a  master  of  business  administration  degree  from  the  George
Washington University in 1967.

     RICHARD J. SMELTZ has served as the Vice  President of Finance  since 1991.
From 1988 to 1990, Mr. Smeltz was the Vice President/Chief Financial Officer for
Medical Warehouse, Inc., a membership warehouse specializing in medical supplies
for doctor's offices and home healthcare and pharmacies.  From 1982 to 1988, Mr.
Smeltz was Vice President and Treasurer of Pace  Membership  Warehouse,  Inc., a
membership    warehouse.    From   1974   to   1982,   Mr.   Smeltz   was   Vice
President/Controller  of Handyman  Home  Improvement  Centers,  which has retail
hardware  outlets.  Mr. Smeltz received a bachelor of science in accounting from
California  State  University  of Los Angeles in 1965 and a juris doctor  degree
from Loyola  University  School of Law in 1973.  Mr. Smeltz also has  instructed
college courses in accounting, business law and federal income tax.

     ROBERT ASHWORTH has served as a director of the Company since the Merger in
December  1995.  Mr.  Ashworth has served as Executive  Vice President and Chief
Information  Officer of PCS since 1989.  Prior to joining PCS, Mr.  Ashworth was
Vice  President and General  Manager,  Information  Technologies  Division,  for
McKesson  Corporation.  Mr.  Ashworth  completed  his  undergraduate  studies in
Mathematics at the University of Washington, Seattle, Washington in 1967, and is
a  graduate  of the  1984  summer  executive  program  at  Stanford  University,
Stanford, California.

     MICHAEL S. HUNT has served as a director of the Company  since 1994.  Since
1994, Dr. Hunt has been the Vice President,  North American Business Development
for  Lilly.   From  1993  to  1994,   Dr.  Hunt  served  as  Vice  President  of
Pharmaceutical  Strategic  Planning and Japan Business  Planning for Lilly.  Dr.
Hunt  joined  Lilly in 1974  and had  increasing  responsibilities  until he was
appointed  Vice President of Finance and Treasurer in 1985. Dr. Hunt is a member
of the  Board of  Directors  for  Circle  Income  Shares,  and the  Indianapolis
Symphony  Orchestra  Financing.  Dr. Hunt  received a bachelor of arts degree in
economics from Carlton  College in 1968 and a doctorate of philosophy  degree in
business and economics from Harvard University in 1972.

     THOMAS  TRAINER has served as a director of the Company since the Merger in
December 1995. Mr. Trainer serves as the Vice President, Information Technology,
and Chief  Information  Officer of Lilly.  Prior to joining Lilly,  he served as
Vice President and Chief Information Officer of Reebok International  Ltd.and as
Senior Vice President of Operations of A.C. Nielson Co. He attended  Strathclyde
University in Scotland, graduating in 1966 with a bachelor's degree in English.

     Other than as stated above, no director of the Company is a director of any
other entity that is required to file reports  under  Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act").

     (b) Identification of Significant Employees.

     Not applicable.
  
     (c) Family Relationships.

     There are no family relationships among directors,  executive officers,  or
persons nominated or chosen to become directors or executive officers.


                                     - 19 -

<PAGE>



     (d) Involvement in Certain Legal Proceedings.
         Directorship.

     During the last five  years,  no  director,  person  nominated  to become a
director,  executive officer, promoter or control person of the Company: (i) has
been  convicted  of, or is subject to, a pending  criminal  proceeding;  (ii) is
subject to any order, judgment or decree of any court of competent jurisdiction,
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business,  securities  or banking  activities;  and (iii) has been found by a
court of competent  jurisdiction  in a civil  action,  the  Securities  Exchange
Commission,  the  Commodities  Futures  Trading  Commission,  to have violated a
federal or state securities or commodities law. Further,  no bankruptcy petition
was filed by or against any  business of which any of such persons was a general
partner or executive  officer either at the time of the bankruptcy or within two
years prior to that time.

     Compliance with Section 16(a) of the Exchange Act.

     Not applicable.

ITEM 10.                EXECUTIVE COMPENSATION

     The  following  table  provides  certain  information   pertaining  to  the
compensation  paid by the Company and its subsidiaries for services  rendered by
the  persons  who served as Chief  Executive  Officer of the Company at any time
during the last fiscal year.

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE
                                                                                                   Long Term
                                                                                              Compensation Awards
                                                                                    Other     -------------------
                                                   Annual Compensation             Annual          Securities
                                                  -----------------------         Compensa-        Underlying
Name and Principal Position                Year   Salary($)       Bonus($)         tion(1)         Options(#)
---------------------------                ----  ---------      ----------        ---------   ------------------

<S>                                        <C>   <C>            <C>               <C>           <C>

Kevin E. Moley(1).......................   1995     - -            - -               - -               - -
  Director, Chief Executive Officer and    1994     - -            - -               - -               - -
  President                                1993     - -            - -               - -               - -

Kevin R. Green(1)........................  1995  168,950.00       30,593(3)        52,303(4)          76,250
  President, Chief Executive Officer       1994  124,999.92       25,000(5)          - -             100,000
                                           1993  123,333.16      168,750(6)          - -               - -

Charles I. Brown.........................  1995  130,833.00        - -              2,391            101,250
  Executive Vice President and             1994  124,999.92       25,000(5)          - -               - -
  Chief Financial Officer                  1993  108,333.39        - -               - -               - -

William B. Hein, Sr......................  1995  125,000.00        - -              2,604             35,000
  Senior Vice President -- Sales           1994  124,999.92       25,000(5)          - -             100,000
                                           1993  133,333.39      104,500(7)          - -               - -

Donald S. Chenoweth(8)...................  1995  125,000.00         - -             3,482              5,000
                                           1994  124,999.92       25,000(5)          - -             100,000
                                           1993  108,333.18         - -              - -               - -

James T. Murphy(8).......................  1995  150,000.00         - -             1,625             51,250
                                           1994  141,666.64       25,000(5)          - -             100,000
                                           1993  108,333.19         - -              - -               - -

John A. McChesney(9).....................  1995  197,500.00         - -              - -               1,250
                                           1994  199,999.02     166,478(10)          - -              79,302
                                           1993   99,999.84         - -              - -               - -

</TABLE>


                                     - 20 -

<PAGE>


-------------------------

(1)  Company cash contributions on behalf of named executives under 401(k) plan,
     unless otherwise indicated.

(2)  Mr.  Moley was the  Company's  Vice  Chairman and interim  Chief  Executive
     Officer from July 1994 to  December,  1994 and became the  Company's  Chief
     Executive  Officer in January  1996.  Kevin R. Green was the  President and
     Chief Executive Officer of the Company from March, 1995 to January 1996.

(3)  Represents  reimbursement  of  closing  costs and real  estate  commissions
     incurred in connection  with sale of residence  upon  relocation to Denver,
     Colorado to become Chief Executive Officer in 1995.

(4)  $50,000  represents  reimbursement  for  taxes  payable  on  the  value  of
     securities and cash awarded to Mr. Green in 1994 as  compensation  for 1993
     and earlier years. See Note 6 below.

(5)  Paid in 1995 for 1994 services.

(6)  Paid in 1994 for 1993 and prior  years  and  includes  $25,000  in cash and
     47,500 shares of Common Stock valued at $143,750.

(7)  Paid in 1994 and 1993 for 1993  and  includes  $17,000  in cash and  25,000
     shares of Common Stock valued at $87,500.

(8)  Mr.  Murphy  served as Executive  Vice  President of the Company from March
     1995 until January 1996. Mr.  Chenoweth served as Senior Vice President and
     Assistant Secretary of the Company from 1991 until January 1996.

(9)  Mr. McChesney was the Company's President and Chief Executive Officer until
     April 1994 and an executive officer through January 1995.

(10) Paid in 1994 for services in prior years.


                                     - 21 -

<PAGE>
                        OPTION GRANTS IN LAST FISCAL YEAR

     The following table provides information as to options and warrants granted
to the Named Executive  Officers during the fiscal year ended December 31, 1995.
No stock appreciation rights have ever been granted by the Company.

<TABLE>
<CAPTION>
                                                                  Option Grants in Last Fiscal Year
                                                                          Individual Grants
                                              ------------------------------------------------------------------
                                                    Number of
                                                   Securities          % of Total
                                                   Underlying        Options Granted     Exercise
                                                Options/Warrants     to Employees in      Price      Expiration
Name                                                Granted         Fiscal Year 1995    ($/SH)(1)      Date(2)
----                                           ------------------- -----------------   -----------   ----------

<S>                                              <C>                <C>                <C>           <C>

Kevin E. Moley...................................O     --                 --                 --           --
                                                 W     --                 --                 --           --
Kevin R. Green...................................O   75,000             22.36%               --           --
                                                 W    1,250              1.35%               --           --
Charles I. Brown.................................O     --                 --                 --           --
                                                 W    1,250              1.35%               --           --
William B. Hein, Sr..............................O   35,000             10.43%               --           --
                                                 W     --                 --                 --           --
Donald S. Chenoweth..............................O    5,000              1.49%               --           --
                                                 W     --                 --                 --           --
James T. Murphy..................................O   50,000             14.90%               --           --
                                                 W    1,250              1.35%               --           --
John A. McChesney................................O     --                 --                 --           --
                                                 W    1,250              1.35%               --           --
</TABLE>
-------------------------

(1)  The exercise price of all options and warrants was $6.50.

(2)  The term of each  warrant  was three  years  from the date of grant and the
     term of each  option was 10 years from the date of grant.  All  options and
     warrants were  exercised or exchanged in December  1995 in connection  with
     the Merger.


                                     - 22 -

<PAGE>



                           AGGREGATED OPTION EXERCISES
                       IN LAST FISCAL YEAR AND FISCAL YEAR
                                END OPTION VALUES

     The  following  table sets forth  information  as to options  and  warrants
exercised  during the fiscal year ended December 31, 1995 by the named Executive
Officers  and  options  held as of fiscal year end.  All of the named  Executive
Officers  exercised the options for cash in December 1995 in connection with the
Merger.

<TABLE>
<CAPTION>
                                                                                                           Value of Unexercised
                                                                                    Number of Unexercised      In-the-Money
                                                                                     Options/Warrants at    Options/Warrants at
                                                  Shares Acquired       Value         December 31, 1995      December 31, 1995
Name                                             on Exercise(#) (1)   Realized(1)       Exercisable(2)   Exercisable/Unexercisable
----                                             -----------------    ----------       ----------------  -------------------------
<S>                                              <C>                  <C>              <C>                <C>
Kevin E. Moley...............................O          --               --                  --                  --
                                             W          --               --                  --                  --
Kevin R. Green...............................O       226,800          $758,100               -0-                 -0-
                                             W         1,250             1,875               -0-                 -0-
Charles I. Brown.............................O       151,200          $617,900               -0-                 -0-
                                             W         1,250             1,875               -0-                 -0-
William B. Hein, Sr..........................O        15,000          $ 97,500             36,800             $163,100(3)
                                             W          --               --                  --                  --
Donald S. Chenoweth..........................O       155,900          $649,050               -0-                 -0-
                                             W          --               --                  -0-                 -0-
James T. Murphy..............................O       201,200          $501,815(4)            -0-                 -0-
                                             W         1,250          $  1,875               -0-                 -0-
John A. McChesney............................O       125,000          $687,500               -0-                 -0-
                                             W         1,250          $  1,875               -0-                 -0-
</TABLE>
-------------------------

(1)  Reflects  shares and value acquired on surrender of options and warrants in
     connection  with the Merger for cash equal to the  difference  between  the
     exercise  price and $8.00 per share a  specified  in the Merger  Agreement.
     Does  not  include  shares  and  value  for  other  warrants   acquired  in
     noncompensation transactions in earlier years and surrendered in connection
     with the Merger.

(2)  As a result of the Merger,  holders of options or  warrants  could elect to
     exchange  for vested  options or warrants  to  purchase  the same number of
     shares of Series D Preferred for the same exercise  price or options (as to
     Company employees) to purchase Lilly Common Stock with an equivalent value.

(3)  Pursuant to the Merger,  Mr.  Hein  elected to convert  options for 135,000
     shares of Common  Stock into  options to  purchase  shares of Lilly  Common
     Stock with a value of approximately $452,500 and options to purchase 36,800
     shares of Series D Stock (as described in the Merger Agreement).

(4)  Includes 127,389 shares received for options exercised in October 1995, for
     realized value of $314,111 at a value per share of $6.50.

     (f) Compensation of Directors.

     All directors are reimbursed for actual out-of-pocket  expenses incurred in
connection with attending  meetings.  In addition,  certain  directors  received
stock purchase warrants for personally  guaranteeing debt of the Company. In the
fiscal year ending  December 31, 1995, six directors  each received  warrants to
purchase  1,250  shares  of Common  Stock at $6.50  per  share for  guaranteeing
repayment of the Company's $1.0 million credit facility from a bank.

                                     - 23 -

<PAGE>




     Limitations on Liability of Officers and Directors

     The  Company's  Articles of  Incorporation,  as amended and restated in the
Articles of Merger, and By-Laws each contain a provision eliminating or limiting
director  liability  to the Company  and its  shareholders  or monetary  damages
arising  from acts or omissions in the  director's  capacity as a director.  The
provisions  do not,  however,  eliminate  or limit the  personal  liability of a
director (i) for any breach of such director's duty of loyalty to the Company or
its shareholders,  (ii) for acts or omissions not in good faith or which involve
intentional  misconduct or a knowing  violation of law, (iii) under the Colorado
statutory  provision  making  directors  personally  liable,  under a negligence
standard, for unlawful dividends or unlawful stock purchases or redemptions,  or
(iv) for any transaction  from which the director  derived an improper  personal
benefit.  This  provision  offers persons who serve on the Board of Directors of
the  Company  protection  against  awards of  monetary  damages  resulting  from
breaches of their duty of care (except as indicated above). As a result of these
provisions,  the ability of the Company or a shareholder thereof to successfully
prosecute  an  action  against  a  director  for a breach of his duty of care is
limited.  However,  the provisions do not affect the  availability  of equitable
remedies such as an injunction or rescission  based upon a director's  breach of
his duty of care. The  Commission  has taken the position that these  provisions
will have no effect on claims arising under the federal securities laws.

     (g)    Employment    Contracts   and    Termination   of   Employment   and
Change-In-Control Arrangements.

     In connection with the Merger, Lilly entered into severance agreements with
certain members of the Company's management, including Messrs. Brown, Chenoweth,
Hein, and Murphy,  pursuant to which Lilly,  through the Company,  agreed not to
reduce such  persons'  rates of  compensation  and  benefits or to relocate  the
employee during the one-year period  following the date of the Merger.  Pursuant
to the  agreements,  Lilly or the Company is required to pay an amount  equal to
one year's  base salary for a one-year  period if such  persons'  employment  is
terminated by the Company for any reason other than for cause,  or if the person
resigned because he is required to relocate to any office not within  reasonable
commuting distance of his residence.

     Kevin Green, the Company's  former  President and Chief Executive  Officer,
had an  employment  arrangement  approved by the  Company's  Board of Directors,
completed  in  connection  with his  relocation  to Denver in June  1995,  which
included the  obligation of the Company to pay him a severance  payment equal to
24 months  compensation  at the rate of  compensation  then paid to him,  in the
event,  upon a change of control of the Company (such as the Merger),  Mr. Green
reasonably  determined that due to circumstances  which have changed as a result
of the  change of  control he is unable to  perform  his  services  as the Chief
Executive  Officer  and  President  of the Company in the manner in which he was
expected to perform  such  services  prior to the change of control.  Mr.  Green
resigned  his  position  with the Company in January  1996.  In March 1996,  the
Company and Mr. Green  reached an  agreement  pursuant to which the Company will
pay an amount  equal to 12 months  compensation  to Mr.  Green  over the last 10
months of 1996,  in full  satisfaction  of the  Company's  obligation  under the
employment arrangement.

     The Company's  founder and former  Chairman,  President and Chief Executive
Officer,  John A.  McChesney,  was an employee and  maintained an office for the
Company near San Diego,  California  through 1994. In early 1995, Mr.  McChesney
resigned as an officer and employee of the Company,  but remained as a director.
In connection  with the change,  the Company agreed to continue Mr.  McChesney's
compensation  through 1995, to pay certain office  expenses  incurred in closing
the San Diego office and to pay office rent through June 1995. As a result,  the
Company charged $479,439 to expenses of  reorganization in the fourth quarter of
1994,  which included amounts to be paid to Mr. McChesney in 1995. In connection
with  the  resignation,   Mr.  McChesney  entered  into  a  noncompetition   and
confidentiality agreement with the Company which expired at the end of 1995.


                                     - 24 -

<PAGE>



ITEM 11.                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                        MANAGEMENT.

     (a)(b) Security Ownership of Certain Beneficial Owners and Management.

     The  following  table sets forth as of  December  31,  1995,  the number of
shares of the Company's outstanding Common Stock and Series D Stock beneficially
owned by each of the Company's  current  directors and officers,  sets forth the
number of shares of the Company's  Common Stock and Series D Stock  beneficially
owned by all of the Company's current directors and officers as a group and sets
forth the  number of shares of the  Company's  Common  Stock and  Series D Stock
owned by each person who owned of record, or was known to own beneficially, more
than 5% of the Company's  outstanding  shares of Common Stock and Series D Stock
respectively As of December 31, 1995, the following securities were outstanding;
15,660,200  shares of Common Stock,  no shares of Series B Stock,  and 5,263,995
shares of Series D Stock.

<TABLE>
<CAPTION>
                                              Amount and Nature
                                                of Beneficial
Name and Address of                              Ownership(2)
Beneficial Owner or                        -----------------------    Percent of
Officer or Director(1)                       Common      Series D        Class
----------------------                     ----------   ----------     ---------
<S>                                        <C>             <C>            <C> 

PCS Holding Corporation(3) ............... 15,660,200     -0-             100%
  Lilly Corporate Center,
  Indianapolis, Indiana 46285
Kevin E. Moley ...........................    -0-         -0-              --
Charles I. Brown .........................    -0-       300,000(4)        5.8%
George R. Beauchamp ......................    -0-         -0-              --
Joseph G. Ferguson, Sr ...................    -0-         -0-              --
William B. Hein, Sr ......................    -0-        36,800(5)         .5%
Edward B. Daniels ........................    -0-         -0-              --
Charles S. Iobe, Sr ......................    -0-         -0-              --
Richard J. Smeltz ........................    -0-         -0-              --
Robert Ashworth ..........................    -0-         -0-              --
Michael S. Hunt, Ph.D ....................    -0-         -0-              --
Thomas Trainer ...........................    -0-         -0-              --
All officers and directors as a group
(11 persons) .............................    -0-       336,800           6.4%
</TABLE>
------------------

(1)  The  address  of each  director  and  executive  officer  is in care of the
     Company  at the  Company's  address at 15000  West 6th  Avenue,  Suite 400,
     Golden, Colorado 80401.

(2)  Each  person  has the sole  voting  and  investment  power  over the shares
     indicated.

(3)  PCS Holding Corporation is owned by Eli Lilly and Company,  Lilly Corporate
     Center, Indianapolis, Indiana 46285.

(4)  Includes  200,000 shares of Series D Stock held by a family  partnership of
     which Mr. Brown is general partner.

(5)  Does not include options to acquire shares of Lilly common stock which were
     issued in  exchange  for an IMS option to  purchase  135,000  shares of IMS
     Common Stock pursuant to the Merger.

                                     - 25 -

<PAGE>


     (c) Changes in Control.

     Not applicable.

ITEM 12.                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 1994 and 1995,  the Company paid $125,000 and $1,600,  respectively,
to David R.  Holbrooke,  a director,  as  reimbursement  for costs and  expenses
incurred by him directly or indirectly in connection with certain  litigation or
claims  related to IMS-NET of Northern  California,  Inc., a  subsidiary  of the
Company,  and related  matters,  concluded  in early 1995,  in  accordance  with
obligations of the Company to provide indemnification for such expenses.

     The Company's  founder and former  Chairman,  President and Chief Executive
Officer,  John A.  McChesney,  was an employee and  maintained an office for the
Company near San Diego,  California  through 1994. In early 1995, Mr.  McChesney
resigned as an officer and employee of the Company,  but remained as a director.
In connection  with the change,  the Company agreed to continue Mr.  McChesney's
compensation  through 1995, to pay certain office  expenses  incurred in closing
the San Diego office and to pay office rent through June 1995. As a result,  the
Company charged $479,439 to expenses of  reorganization in the fourth quarter of
1994,  including amounts to be paid to Mr. McChesney in 1995. In connection with
the  resignation,   Mr.   McChesney  has  entered  into  a  noncompetition   and
confidentiality agreement with the Company.

     The Company  advanced Kevin Green, the Company's former President and Chief
Executive Officer,  approximately $90,000 in connection with his relocation from
Phoenix,  Arizona to Golden, Colorado in June 1995. Mr. Green repaid the Company
$60,000 of the advance and the balance was deemed by the Compensation  Committee
of the Board of Directors to be relocation  expense payable by the Company.  Mr.
Green also had an employment  arrangement  with the Company pursuant to which he
would be paid 24  months  compensation  as  severance  payment  upon a change of
control  of the  Company  if he  reasonably  determined  that as a result of the
change of control he would be unable to perform his services to the Company. See
"Item  10(g)  -  Employment   Contracts  and   Termination   of  Employment  and
Change-In-Control Arrangements" above.

     In 1994, the Company sold software and equipment valued at $177,500 to RMBA
Associates,  a company  owned by Robert M.  Brice,  a director of the Company at
that time. RMBA resold these assets and other services of RMBA to a client which
operates an IMS MEDACOM(R) Network to which the Company provides services.

     (c) Eli Lilly and  Company is the parent of the Company by virtue of its or
its  subsidiaries'  ownership  of  100%  of  the  Company's  outstanding  voting
securities,  the  Company's  no par  value  Common  Stock.  Lilly  acquired  the
Company's  Common Stock in connection with the Merger.  Holders of Class D Stock
may vote their shares only under  certain  limited  circumstances.  See "Item 1.
Business - Acquisition of the Company by Eli Lilly and Company."

     (d) Not applicable.

                                     PART IV

ITEM 13.                EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

Exhibit 2.1*  Agreement and Plan of Merger,  dated August 2, 1995,  among Lilly,
              Trans-IMS Corporation, and IMS.

                                     - 26 -

<PAGE>




Exhibit 2.2*  Form  of  Put/Call   Agreement  among  Lilly,   IMS  and  certain
              shareholders of IMS.

Exhibit 2.3*  Form of Support Agreement, dated August 2, 1995, between Lilly and
              certain shareholders of IMS.

Exhibit 4.1*  Articles of  Incorporation including  Articles of Merger of Trans-
              IMS Corporation with and into Integrated Medical Systems, Inc.

Exhibit 4.2*  By Laws of IMS

Exhibit 10.1* Stock Purchase  Agreement,  dated January 6, 1994, between IMS and
              McKesson Corporation.

Exhibit 10.2* Sponsorship and Participation Agreement,  dated November 17, 1993,
              between IMS and McKesson Corporation.

Exhibit 10.3* Stockholder's Rights Agreement, dated January 6, 1994, between IMS
              and McKesson Corporation.

Exhibit 10.4* Senior Subordinated Note from IMS (which includes the registration
              right for Charles Brown).

Exhibit 10.5* Indemnification  Agreement, dated August 14, 1992, between IMS and
              David Holbrooke.

Exhibit 10.6* IMS 1989 Restated Stock Option Plan.

Exhibit 10.7* IMS 1994 Employee Stock Option Plan.

Exhibit 10.8* Promissory Note, dated June 12, 1995, between Lilly and IMS.

Exhibit 10.9* Security Agreement, dated June 12, 1995, between Lilly and IMS.

Exhibit 10.10* Pledge Agreement, dated June 12, 1995, between Lilly and IMS.

Exhibit 10.11* Promissory Note, dated July 27, 1995, between Lilly and IMS.

Exhibit 10.12* Security Agreement, dated July 27, 1995, between Lilly and IMS.

Exhibit 10.13* Pledge Agreement, dated July 27, 1995, between Lilly and IMS.

Exhibit 10.14* Promissory Note, dated August 28, 1995, between Lilly and IMS.

Exhibit 10.15* Security Agreement, dated August 28, 1995, between Lilly and IMS.

Exhibit 10.16* Pledge Agreement, dated August 28, 1995, between Lilly and IMS.

Exhibit 10.17* Form of Registration  Agreement applicable to holders of Series B
               Preferred Stock.

Exhibit 10.18* Joint Venture Agreement, dated May 15, 1992, with HFN, Inc.

Exhibit 10.19* Shareholders'  Agreement,  dated  May 31,  1992,  with  Adventist
               Health System.


                                     - 27 -

<PAGE>


Exhibit 10.20* Joint Venture Limited Partnership Agreement, dated June 30, 1992,
               with Blue Cross and Blue Shield of Arizona, Inc.

Exhibit 10.21* Operating Agreement for Indiana Medical  Communications  Network,
               L.L.C., dated April 10, 1993.

Exhibit 10.22* Operating  Agreement for Minnesota Medical  Communications  dated
               November 7, 1993.

Exhibit 10.23* Stock Purchase and  Termination  Agreement,  dated  September 30,
               1995, with Unihealth America Ventures.

Exhibit 10.24* Promissory Note, dated September 25, 1995, between Lilly and IMS.

Exhibit 10.25* Promissory Note, dated October 17, 1995, between Lilly and IMS.

Exhibit 10.26* Promissory Note, dated October 25, 1995, between Lilly and IMS.

Exhibit 10.27* Form of Severance Agreement with certain employees of IMS.

Exhibit 21.1*  List of Subsidiaries of IMS.

Exhibit 27     Financial Data Schedule
-------------------

*    Incorporated  by  reference  to the same  exhibit  number  to  Registration
     Statement No. 33-62613/33-62613-01.

     (b) Current Reports on Form 8-K:

         None.

                                     - 28 -

<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:  March 28, 1996

                                       INTEGRATED MEDICAL SYSTEMS, INC.
                                       a Colorado corporation


                                       By /s/ Kevin E. Moley
                                          ----------------------------------
                                          Kevin E. Moley,
                                          President, Principal Executive Officer


                                       By /s/ Charles I. Brown
                                          ----------------------------------
                                          Charles I. Brown
                                          Executive Vice President and
                                          Chief Financial Officer


                                       By /s/ Richard J. Smeltz
                                          -----------------------------------
                                          Richard J. Smeltz
                                          Vice President Finance and
                                          Principal Accounting 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:


Date                      Name and Title       Signature
----                      --------------       ---------

March 28, 1996            Kevin E. Moley        /s/ Kevin E. Moley
                          Director              --------------------------------


March 28, 1996            Charles I. Brown      /s/ Charles I. Brown
                          Director              -------------------------------
                                 


March 28, 1996            Robert Ashworth       /s/ Robert Ashworth
                          Director              -------------------------------


March 28, 1996            Michael S. Hunt       /s/ Michael S. Hunt
                          Director              -------------------------------


March 28, 1992            Thomas Trainer        /s/ Thomas Trainer
                          Director              -------------------------------

                                     - 29 -

<PAGE>
                        INTEGRATED MEDICAL SYSTEMS, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 1995
                       TOGETHER WITH REPORT OF INDEPENDENT
                               PUBLIC ACCOUNTANTS




<PAGE>






                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Integrated Medical Systems, Inc.:


We have  audited  the  accompanying  consolidated  balance  sheet of  INTEGRATED
MEDICAL SYSTEMS, INC. (a Colorado corporation and wholly owned subsidiary of Eli
Lilly and Company)  and  subsidiaries  as of December 31, 1995,  and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
the period from the date of acquisition (December 19, 1995) to December 31, 1995
(see Notes 1 and 11). 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Integrated Medical
Systems, Inc. and subsidiaries as of December 31, 1995, and the results of their
operations  and their  cash flows for the  period  from the date of  acquisition
(December 19, 1995) to December 31, 1995, in conformity with generally  accepted
accounting principles.




ARTHUR ANDERSEN L.L.P.
Dnver, Colorado,
    January 23, 1996.

                                       F-1

<PAGE>







                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Integrated Medical Systems, Inc.:


We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity and cash flows of  INTEGRATED  MEDICAL  SYSTEMS,  INC.  (a
Colorado  corporation)  and  subsidiaries for the period from January 1, 1995 to
December 18, 1995 (see Notes 1 and 11) and for the year ended December 31, 1994.
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 consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
Integrated Medical Systems, Inc. and subsidiaries for the period from January 1,
1995 to  December  18,  1995  and for the  year  ended  December  31,  1994,  in
conformity with generally accepted accounting principles.





ARTHUR ANDERSEN L.L.P

Denver, Colorado,
    January 23, 1996.

                                       F-2

<PAGE>
<TABLE>
<CAPTION>



                                                                     Page 1 of 2

                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEET

                             AS OF DECEMBER 31, 1995
                                  (See Note 1)



                ASSETS
<S>                                                               <C>          

CURRENT ASSETS:
     Cash and cash equivalents ...............................    $   3,503,014

     Contracts receivable and other (Note 2) .................        5,851,368

     Prepaid expenses ........................................          387,329

     Deposits (Note 12) ......................................        1,900,000
                                                                  -------------
            Total current assets .............................       11,641,711
                                                                  -------------
CONTRACTS RECEIVABLE, long-term portion (Note 2) .............          374,432
                                                                  -------------

EQUIPMENT AND FURNITURE (Notes 2 and 5):

     Computer equipment ......................................        3,988,751

     Computer software .......................................          460,735

     Furniture and fixtures ..................................          888,824

     Leasehold improvements ..................................          327,089

     Equipment held under capital leases .....................          240,606
                                                                 --------------
                                                                      5,906,005

     Less-Accumulated depreciation and amortization ..........       (1,857,769)
                                                                 --------------
                                                                      4,048,236
                                                                 --------------
GOODWILL AND OTHER INTANGIBLES, net of
     accumulated amortization of $471,280 (Notes 1 and 2) ....       98,783,846
                                                                 --------------

OTHER ........................................................          802,074
                                                                 --------------
                                                                  $ 115,650,299
                                                                 ==============



          The accompanying notes to consolidated financial statements
                  are an integral part of this balance sheet.

                                       F-3

<PAGE>
<CAPTION>

                                                                     Page 2 of 2



                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                             AS OF DECEMBER 31, 1995
                                  (See Note 1)



            LIABILITIES AND STOCKHOLDER'S EQUITY
<S>                                                               <C>          

CURRENT LIABILITIES:
Accounts payable ..............................................     $    987,822
Accrued expenses ..............................................        1,824,055
Payables to predecessor stockholders (Note 11) ................        1,697,568
Payables to related parties (Note 3) ..........................          743,824
Deferred contract revenue (Note 2) ............................        4,622,330
Current maturities of long-term debt (Note 5) .................       12,776,928
                                                                    ------------
Total current liabilities .....................................       22,652,527
                                                                    ------------
LONG-TERM DEFERRED CONTRACT REVENUE (Note 2) ..................          412,500
                                                                    ------------
LONG-TERM DEBT (Note 5) .......................................           79,734
                                                                    ------------

COMMITMENTS AND CONTINGENCIES (Note 6)
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES ...............          399,494
                                                                     -----------
SERIES D PREFERRED STOCK SUBJECT TO MANDATORY
  REDEMPTION (Note 11), $.01 par value, 12,000,000 shares
  authorized, 5,263,995 shares issued and outstanding .........       43,761,843
                                                                    ------------

STOCKHOLDER'S EQUITY (Notes 8 and 11):
Common stock, no par value, 20,000,000 shares authorized,
  15,660,200 shares issued and outstanding ....................       47,825,545
Retained earnings .............................................          518,656
                                                                    ------------
Total stockholder's equity ....................................       48,344,201
                                                                    ------------
                                                                    $115,650,299
                                                                    ============
</TABLE>



           The accompanying notes to consolidated financial statements
                   are an integral part of this balance sheet.
                                      



                                       F-4

<PAGE>
<TABLE>
<CAPTION>
                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (See Note 1)
                                                (Post-           (Pre-
                                             acquisition)      acquisition)
                                               For the           For the
                                             Period from       Period From
                                             December 19,      January 1,      For the Year
                                               1995 to           1995 to          Ended           
                                             December 31,     December 18,     December 31, 
                                                 1995             1995             1994
                                             ------------    -------------     ------------
<S>                                         <C>             <C>              <C>         

REVENUES:
   Network service agreement revenue .....   $    797,637    $ 11,139,053    $  7,456,654
   Network license agreement revenue .....      2,038,000       4,557,956      10,057,983
   Network license service revenue .......          9,423       1,866,189         365,726
                                             ------------    ------------    ------------
                                                2,845,060      17,563,198      17,880,363
                                             ------------    ------------    ------------
COSTS AND EXPENSES:
   Salaries, payroll taxes and benefits ..      1,389,342      17,941,485      11,838,793
   Facilities ............................        206,922       4,757,684       3,187,007
   Selling, general and administrative ...        296,819       8,747,712       5,848,436
   Amortization of goodwill and other
     intangibles (Note 2) ................        403,261          68,019            --
   Costs of subsidiary litigation (Note 6)           --           115,021         784,787
   Reorganization costs ..................           --              --           479,439
                                             ------------    ------------    ------------
                                                2,296,344      31,629,921      22,138,462
                                             ------------    ------------    ------------
INCOME (LOSS) FROM OPERATIONS ............        548,716     (14,066,723)     (4,258,099)
                                             ------------    ------------    ------------
OTHER INCOME (EXPENSE):
   Interest income .......................            367         119,184         343,221
   Interest expense ......................        (35,038)       (524,607)       (118,850)
   Other, net ............................           --          (227,841)        (64,772)
                                             ------------    ------------    ------------
                                                  (34,671)       (633,264)        159,599
                                             ------------    ------------    ------------
INCOME (LOSS) BEFORE MINORITY ............        514,045     (14,699,987)     (4,098,500)
   INTEREST IN OPERATIONS OF
   SUBSIDIARIES
PROVISION FOR INCOME TAXES(Note 4) .......           --              --              --

MINORITY INTEREST IN LOSS ................          4,611        (296,546)       (153,281)
(INCOME) FROM OPERATIONS OF
SUBSIDIARIES
                                             ------------    ------------    ------------
NET INCOME (LOSS) ........................   $    518,656    $(14,996,533)   $ (4,251,781)
                                             ============    ============    ============
NET INCOME (LOSS) PER COMMON 
SHARE (Note 2) ...........................   $       0.03    $      (2.30)   $      (0.73)
                                             ============    ============    ============
WEIGHTED AVERAGE COMMON
 SHARES OUTSTANDING .......................    15,660,200       6,600,692       6,099,120
                                             ============    ============    ============
</TABLE>
           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.

                                       F-5

<PAGE>
<TABLE>
<CAPTION>
                                                                     Page 1 of 2
                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
         FOR THE PERIOD FROM DECEMBER 19, 1995 TO DECEMBER 31, 1995 AND
          FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 18, 1995 AND
                        THE YEAR ENDED DECEMBER 31, 1994
                                  (See Note 1)
 
                                        Series B                   Series C
                                     Preferred Stock             Preferred Stock               Common Stock
                                ------------------------    ------------------------     ------------------------
                                   Shares       Amount        Shares        Amount          Shares       Amount
                                   ------       ------        ------        ------          ------       ------
<S>                              <C>         <C>             <C>         <C>             <C>         <C>        
BALANCES,
December 31, 1993 ..........     2,000,000   $ 2,000,000     1,250,000   $ 5,000,000     5,970,868   $ 6,301,893
  Issuances of Series C
    preferred stock at
    $5.00 per share ........          --            --       1,000,000     5,000,000          --            --
  Exercises of Series C
    preferred stock purchase
    warrants at $5.00 per
    share ..................          --            --         375,000     1,875,000          --            --
  Exercise of common
    stock purchase
    warrants at
    $2.50 per share ........          --            --            --            --         122,000       305,000
  Issuance of common
    stock at $3.50 per .....          --            --            --            --          37,500       131,250
    share
  Issuance of common
    stock at $5.00 per .....          --            --            --            --         409,000     2,045,000
    share ..................          --
  Joint venturers'
    contributions receivable          --            --            --            --            --            --
  Exercise of common
    stock purchase
    warrants at ............          --            --            --            --          15,000        52,500
    $3.50 per share
  Exercise of employee
    common stock purchase
    options at $3.50
    per share ..............          --            --            --            --             236           826
  Exercise of employee
    common stock purchase
    options at $4.00
    per share ..............          --            --            --            --             126           504
  Joint venturers'
    contributions receivable
    subsequently collected .          --            --            --            --            --            --
  Net loss .................          --            --            --            --            --            --
                               -----------   -----------   -----------   -----------   -----------   -----------
BALANCES,
December 31, 1994 ..........     2,000,000     2,000,000     2,625,000    11,875,000     6,554,730     8,836,973
                               -----------   -----------   -----------   -----------   -----------   -----------

<PAGE>
<CAPTION>

                                                                  Stock
                                                               Subscriptions
                                                 Capital         and Joint
                                Retained       Contributions     Venturers'
                                Earnings        from Joint     Contributions
                                (Deficit)        Venturers       Receivable          Total
                               -----------      ------------   --------------      --------
<S>                            <C>             <C>            <C>             <C>         
BALANCES,
December 31, 1993 ..........   $(19,189,872)   $  6,358,230   $   (130,000)   $    340,251
  Issuances of Series C
    preferred stock at
    $5.00 per share ........           --              --             --         5,000,000
  Exercises of Series C
    preferred stock purchase
    warrants at $5.00 per
    share ..................           --              --             --         1,875,000
  Exercise of common
    stock purchase
    warrants at
    $2.50 per share ........           --              --             --           305,000
  Issuance of common
    stock at $3.50 per
    share ..................           --              --             --           131,250
  Issuance of common
    stock at $5.00 per
    share ..................           --              --             --         2,045,000
  Joint venturers'
    contributions ..........           --           150,000           --           150,000
  Exercise of common
    stock purchase
    warrants at
    $3.50 per share ........           --              --             --            52,500
  Exercise of employee
    common stock purchase
    options at $3.50
    per share ..............           --              --             --               826
  Exercise of employee
    common stock purchase
    options at $4.00
    per share ..............           --              --             --               504
  Joint venturers's
    contributions receivable
    subsequently collected .           --              --           50,000          50,000
  Net loss .................     (4,251,781)           --             --        (4,251,781)
                               ------------    ------------   ------------    ------------
BALANCES,
December 31, 1994 ..........    (23,441,653)      6,508,230        (80,000)      5,698,550
                               ------------    ------------   ------------    ------------


 The accompanying notes to consolidated financial statements are an integral part of these statements.
                                       
                                      F-6


<PAGE>
<CAPTION>
                                                                     Page 2 of 2

                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
         FOR THE PERIOD FROM DECEMBER 19, 1995 TO DECEMBER 31, 1995 AND
          FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 18, 1995 AND
                        THE YEAR ENDED DECEMBER 31, 1994
                                  (See Note 1)

                                          Series B                       Series C
                                       Preferred Stock                 Preferred Stock                  Common Stock
                                 --------------------------       -------------------------      -------------------------
                                   Shares          Amount          Shares         Amount           Shares         Amount
                                   ------          ------          ------         ------           ------         ------

<S>                               <C>          <C>                <C>          <C>                <C>         <C>         
BALANCES,
December 31, 1994 ..........      2,000,000    $  2,000,000       2,625,000    $ 11,875,000       6,554,730   $  8,836,973
  Issuances of Series C
    preferred stock at
    $5.00 per share ........           --              --           375,000       1,875,000            --             --
  Issuance of Series C
    preferred stock
    at $6.00 per
    share ..................           --              --           500,000       3,000,000            --             --
  Exercise of common
    stock purchase
    warrants at
    $3.50 per share ........           --              --              --              --             5,000         17,500
  Exercise of common
    stock purchase
    warrants at
    $5.00 per
    share ..................           --              --              --              --             1,000          5,000
  Exercise of employee
    common stock purchase
    options at $2.50
    per share ..............           --              --              --              --            25,000         62,500
  Exercise of employee
    common stock purchase
    options at $3.50
    per share ..............           --              --              --              --            27,612         96,642
  Exercise of employee
    common stock purchase
    options at $4.00
    per share ..............           --              --              --              --           119,810        479,240
  Exercise of employee
    common stock purchase
    options at $5.00
    per share ..............           --              --              --              --             1,551          7,755
  Exercise of employee
    common stock purchase
    options at $6.50 .......           --              --              --              --            11,806         76,739
    per share
Issuance of common stock
    to purchase minority
    interest in IMS-Net of
    Kansas City, Inc. at ...           --              --              --              --            20,000        100,000
    $5.00 per share
Joint venturers'
    contributions receivable           --              --              --              --              --             --
    subsequently collected
Net loss for the period ....           --              --              --              --              --             --
Purchase adjustments related
    to the acquisition of
    the Company by Lilly
    (Note 11) ..............     (2,000,000)     (2,000,000)     (3,500,000)    (16,750,000)      8,893,691     38,143,196
                               ------------    ------------    ------------    ------------    ------------   ------------
BALANCES,
  December 18, 1995 ........           --              --              --              --        15,660,200     47,825,545
  Net income for the period            --              --              --              --              --             --
                               ------------    ------------    ------------    ------------    ------------   ------------
BALANCES,
December 31, 1995 ..........           --      $       --              --      $       --        15,660,200   $ 47,825,545
                               ============    ============    ============    ============    ============   ============
<PAGE>
<CAPTION>
                                                                   Stock
                                                                Subscriptions
                                                   Capital        and Joint
                                  Retained      Contributions     Venturers'
                                  Earnings       from Joint     Contributions
                                 (Deficit)        Venturers       Receivable       Total
                                -----------     -------------   --------------   ---------

<S>                            <C>             <C>             <C>             <C>         
BALANCES,
December 31, 1994 ..........   $(23,441,653)   $  6,508,230    $    (80,000)   $  5,698,550
  Issuances of Series C
    preferred stock at
    $5.00 per share ........           --              --              --         1,875,000
  Issuance of Series C
    preferred stock
    at $6.00 per
    share ..................           --              --              --         3,000,000
  Exercise of common
    stock purchase
    warrants at
    $3.50 per share ........           --              --              --            17,500
  Exercise of common
    stock purchase
    warrants at
    $5.00 per
    share ..................           --              --              --             5,000
  Exercise of employee
    common stock purchase
    options at $2.50
    per share ..............           --              --              --            62,500
  Exercise of employee
    common stock purchase
    options at $3.50 .......           --              --              --            96,642
    per share
  Exercise of employee
    common stock purchase
    options at $4.00
    per share ..............           --              --              --           479,240
  Exercise of employee
    common stock purchase
    options at $5.00
    per share ..............           --              --              --             7,755
  Exercise of employee
    common stock purchase
    options at $6.50
    per share ..............           --              --              --            76,739
Issuance of common stock
    to purchase minority
    interest in IMS-Net of .           --              --              --           100,000
    Kansas City, Inc. at
    $5.00 per share
Joint venturers'
    contributions receivable           --              --            80,000          80,000
    subsequently collected
Net loss for the period ....    (14,996,533)           --              --       (14,996,533)
Purchase adjustments related
    to the acquisition of
    the Company by Lilly
    (Note 11) ..............     38,438,186      (6,508,230)           --        51,323,152
                               ------------    ------------    ------------    ------------
BALANCES,
  December 18, 1995 ........           --              --              --        47,825,545
  Net income for the period         518,656            --              --           518,656
                               ------------    ------------    ------------    ------------
BALANCES,
December 31, 1995 ..........   $    518,656    $       --      $       --      $ 48,344,201
                               ============    ============    ============    ============
</TABLE>


The accompanying notes to consolidated financial statements are an integral part
                              of these statements.
                                       F-7
<PAGE>
<TABLE>
<CAPTION>
                                                                     Page 1 of 3
                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (See Note 1)

                                                                    (Post-        (Pre-
                                                                 acquisition)  acquisition)
                                                                   For the       For the
                                                                 Period from   Period From
                                                                 December 19,   January 1,     For the Year
                                                                   1995 to        1995 to          Ended
                                                                 December 31,   December 18,    December 31,
                                                                    1995           1995            1994
                                                                 ------------   ------------   -------------

<S>                                                           <C>             <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) .......................................   $    518,656    $(14,996,533)   $ (4,251,781)
  Adjustments to reconcile net income (loss) to
     net cash provided by (used in) operating activities-
      Depreciation and amortization .......................        509,242       1,113,468         743,313
      Minority interest in (loss) income of subsidiaries ..         (4,611)        296,546         153,281
      Loss on write-off of computer equipment .............           --           720,400            --
      Loss on sales of contracts receivable ...............           --           222,093            --
      Changes in operating assets and liabilities-
        Contracts receivable and other ....................       (906,454)     (1,156,882)     (6,120,108)
        Prepaid expenses ..................................         20,144         (73,917)       (211,402)
        Other long-term assets ............................            128        (380,072)       (207,142)
        Accounts payable ..................................       (368,595)       (846,236)      1,151,965
        Accrued expenses ..................................        489,851        (627,574)      1,292,325
        Deferred contract revenue .........................        (90,549)        964,591         782,210
                                                              ------------    ------------    ------------
        Net cash provided by (used in) operating activities        167,812     (14,764,116)     (6,667,339)
                                                              ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of equipment and furniture ....................        (49,067)     (1,568,423)     (3,396,099)
  Purchase of remaining minority interest in Medical
    Communications Networks, Inc. .........................           --        (4,350,000)           --
                                                              ------------    ------------    ------------
        Net cash used in investing activities .............        (49,067)     (5,918,423)     (3,396,099)
                                                              ------------    ------------    ------------



           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.

                                       F-8
<PAGE>
<CAPTION>
                                                                    Page 2 of 3

                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (See Note 1)

                                                                      (Post-         (Pre-
                                                                   acquisition)    acquisition)
                                                                      For the        For the
                                                                      Period         Period
                                                                       from           From 
                                                                   December 19,     January 1,     For the Year
                                                                      1995 to         1995 to         Ended
                                                                     December        December        December
                                                                     31, 1995        18, 1995        31, 1994
                                                                   ------------    ------------     -------------

<S>                                                               <C>             <C>             <C>         
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock ......................   $       --      $    745,376    $    490,080
  Proceeds from issuance of Series C preferred stock ..........           --         4,875,000       5,875,000
  Proceeds from lines of credit ...............................           --         1,200,000            --
  Payments on lines of credit .................................           --        (1,200,000)           --
  Proceeds from issuance of long-term debt ....................      2,409,683      10,260,000         935,000
  Payments on long-term debt ..................................           --          (178,200)     (1,536,555)
  Related party borrowings, net ...............................       (175,764)       (189,035)        474,382
  Proceeds from the sales of contracts receivable .............           --         4,606,901            --
  Joint venturers' contributions ..............................           --              --           150,000
  Stock and joint venturers' subscriptions receivable collected           --           355,000       4,556,250
  Minority interest distributions .............................           --              --          (244,276)
                                                                  ------------    ------------    ------------
        Net cash provided by financing activities .............      2,233,919      20,475,042      10,699,881
                                                                  ------------    ------------    ------------
NET INCREASE (DECREASE) IN CASH AND ...........................      2,352,664        (207,497)        636,443
CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, beginning of period ................      1,150,350       1,357,847         721,404
                                                                  ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, end of period ......................   $  3,503,014    $  1,150,350    $  1,357,847
                                                                  ============    ============    ============



           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.

                                       F-9
<PAGE>
<CAPTION>
                                                                     Page 3 of 3

                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (See Note 1)


                                                                                       (Post-            (Pre-
                                                                                    acquisition)      acquisition)
                                                                                       For the           For the   
                                                                                     Period from       Period From
                                                                                      December           January      For the Year 
                                                                                     19, 1995 to       1, 1995 to        Ended
                                                                                      December          December        December
                                                                                      31, 1995          18, 1995        31, 1994
                                                                                     -----------     --------------   ------------ 

<S>                                                                                <C>               <C>             <C>         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest .......................................................   $           170   $    211,732    $     83,483
                                                                                   ===============   ============    ============

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
 AND FINANCING ACTIVITIES:
    Capital lease obligation incurred through lease for new equipment ..........   $          --     $       --      $    107,055
                                                                                   ===============   ============    ============
    Exchange of partners' investment in limited partnership
      for common stock (Note 7) ................................................   $          --     $       --      $  1,820,000
                                                                                   ===============   ============    ============
    Other deferred costs applied to issuance of Series C 
      preferred stock (Note 8) .................................................   $          --     $       --      $  1,000,000
                                                                                   ===============   ============    ============
    Subscription receivable for common stock ...................................   $          --     $       --      $    225,000
                                                                                   ===============   ============    ============
    Issuance of common stock to purchase remaining minority interest
      in IMS-Net of Kansas City, Inc. ..........................................   $          --     $    100,000    $       --
                                                                                   ===============   ============    ============
    Effective December 18,1995, Eli Lilly and Company acquired all of
      the  outstanding  common and preferred  stocks and warrants and options to
      purchase common stock of the Company (see Notes 1 and 11). The cost of the
      purchase by Eli Lilly and Company has been pushed down to the accompanying
      financial  statements and the following noncash items occurred as a result
      of the purchase-
          Conversion of Series B preferred stock ...............................   $          --     $ (2,000,000)   $       --
          Conversion of Series C preferred stock ...............................              --      (16,750,000)           --
          Conversion of capital contributions from joint venturers .............              --       (6,508,230)           --
          Conversion of predecessor common stock ...............................              --       (9,682,344)           --
          Elimination of accumulated deficit at December 18, 1995 ..............              --       38,438,186            --
          Issuance of common stock .............................................              --       47,825,545            --
          Issuance of Series D preferred stock .................................              --       43,761,843            --
          Increase in payables to predecessor stockholders .....................              --        1,697,568            --
                                                                                   ---------------   ------------    ------------
           Goodwill and other intangibles ......................................   $          --     $ 96,782,568    $       --
                                                                                   ===============   ============    ============

</TABLE>

           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.

                                      F-10

<PAGE>




                INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1995


(1)         ORGANIZATION, MERGER AND LIQUIDITY

            Organization

Integrated Medical Systems, Inc., ("IMS" or the "Company") develops, markets and
operates  computerized medical  communication  networks and related products and
services to hospitals,  managed care companies,  clinical laboratories and other
healthcare organizations throughout the United States.

            Merger

On December 18, 1995 (the  "Effective  Date"),  the  stockholders of the Company
approved  an  Agreement  and Plan of Merger  dated  August 2, 1995 (the  "Merger
Agreement")  providing for the Merger (the  "Merger") of Trans-IMS  Corporation,
which was a wholly owned subsidiary of Eli Lilly and Company ("Lilly"), with and
into the Company.  The purchase price was paid with cash and other consideration
(see Note 11).

The following presents pro forma results of operations for the Company as if the
Company had been acquired at the beginning of the respective fiscal year:
<TABLE>
<CAPTION>

                                     (Pre-acquisition)
                                           1995              1994
                                       --------------  ------------
          <S>                          <C>             <C>

           Revenues ................   $ 17,563,198    $ 17,880,363
           Net loss ................   $(24,471,400)   $(14,209,576)
           Net loss per common share   $      (1.56)   $      (0.91)

</TABLE>













                                      F-11


<PAGE>



The Merger was  accounted for by the purchase  method of accounting  whereby the
total  acquisition  cost was allocated to the acquired  identifiable  assets and
liabilities of the Company based on their relative  estimated fair market values
at the Effective Date, which approximated their historical carrying amounts. The
excess  of  the  purchase  price  over  the  tangible  net  assets  acquired  of
approximately $97 million was allocated to goodwill and other intangibles in the
accompanying consolidated balance sheet.

As a result of the Merger and the related purchase accounting  adjustments,  the
results  of  operations  and  the  financial  position  of the  Company  are not
comparable between pre- and post-acquisition periods.

            Liquidity

Since its inception, the Company has incurred significant losses from operations
and ongoing  significant  cash flow deficits.  Prior to entering into the Merger
Agreement with Lilly in August 1995, the Company relied on the sale of preferred
and common equity,  capital contributions from joint venturers,  borrowings from
existing  stockholders  and various banks,  collections  on network  license and
service  agreements,  and the sale of the rights to the  remaining  payments due
under  certain  network  license  agreements  to fund its losses and cash needs.
During  1995,  the Company  continued  to  experience  cash flow  deficits  from
expenditures  for expansion  into new markets  throughout  the United States and
continued  penetration  of existing  network  markets.  The Company's  cash flow
deficits  during the latter half of 1995 were funded by loans from Lilly.  As of
December 31, 1995, Lilly has loaned the Company approximately $12.7 million (see
Note 5) which is due and payable  July 1, 1996;  however,  the  Company's  plans
currently  contemplate  additional  loans from Lilly to fund 1996 operations and
network expansion.

Lilly has  represented  that it is committed to provide the  necessary  level of
financial  support  to IMS to enable it to pay its debts as they  become due for
the year  ending  December  31,  1996 and to provide  funding for the Company to
continue its development and expansion until it is self sufficient. In addition,
Lilly has represented to the Company that if the Company's  financial  resources
are not sufficient to satisfy loans from Lilly due in July 1996,  Lilly will not
demand payment and will extend the loans on similar terms to those  described in
Note 5.


















                                      F-12


<PAGE>



(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            Principles of Consolidation

The accompanying  consolidated  financial statements include the accounts of IMS
and the following subsidiaries:

<TABLE>
<CAPTION>
                                                  IMS Ownership
                                                    Interest
                                                as of December 31,
                                                ------------------
                  Subsidiary                     1994     1995(H)
                  ----------                     ----     -------
          <S>                                     <C>      <C> 
           IMS-Net of Alabama, Inc. ...........   100%     100%
               IMS-Net of Alabama Joint Venture    51(C)    51(C)(G)
           IMS-Net of Arizona, Inc. ...........   100      100
               IMS-Net of Arizona Joint
                 Venture, Ltd. ................    50(C)    50(C)
           IMS-Net of Arkansas, Inc. ..........    51       51
           IMS-Net of Central Florida, Inc. ...    51       51
           IMS-Net of Colorado, Inc. ..........   100      100
               IMS-Network of Colorado, Ltd. ..   (B)      (B)
           IMS-Net of Illinois, Inc. ..........   100      100
               Illinois Medical Information
                 Network, Inc. ................    68(C)    68(C)
           IMS-Net of Kansas City, Inc. .......    97      100(D)
           IMS-Net of Northern California, Inc.   100(F)   100(F)
               IMS-Net of Sacramento, Inc. ....   (A)      (A)
           Indiana Medical Communication
             Network, LLC .....................    51       51
           Medical Communication Networks, Inc.    49      100(E)
           Minnesota Medical Communication
             Network, LLC .....................    90       90
</TABLE>

          (A)  100% owned by IMS-Net of Northern California, Inc.
          (B)  IMS-Net of  Colorado,  Inc.  was the 1%  General  Partner of this
               partnership which was dissolved as of December 31, 1994 (see Note
               7).
          (C)  IMS's  indirect  ownership  interest  through  its  wholly  owned
               subsidiary.
          (D)  In May 1995,  IMS purchased the remaining 3% of IMS-Net of Kansas
               City, Inc. for 20,000 shares of common stock, to increase the IMS
               ownership to 100%.
          (E)  In October  1995,  IMS  purchased  the  remaining  51% of Medical
               Communication  Networks,  Inc. for $4,350,000  subject to certain
               contingencies (see Note 12).
          (F)  As of December  31, 1994,  the  outstanding  49%  minority  stock
               interest in IMS-Net of Northern  California,  Inc. ("Norcal") was
               retired by Norcal, thereby increasing the Company's interest from
               51% to 100% (see Note 6).
          (G)  Subsequent to yearend, IMS purchased the remaining 49% of IMS-Net
               of Alabama Joint Venture for $410,000.
          (H)  Several  of  the   entities   listed   above  are   governed   by
               stockholders'  or operating  agreements  which  contain  buy/sell
               provisions.  These  provisions  give the  Company  and the  joint
               owners of these entities the right to initiate buy/sell elections
               relating to the entities'  ownership.  The price of the exchanges
               are at  fair  market  value  or as  specifically  defined  in the
               agreements.

All  majority  owned  and  controlled  subsidiaries  are  consolidated  and  all
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.

                                      F-13


<PAGE>

            Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers
highly  liquid debt  instruments  purchased  with  original  maturities of three
months or less to be cash equivalents.

            Revenue Recognition

The Company follows the provisions of the American Institute of Certified Public
Accountants Statement of Position 91-1, "Software Revenue Recognition".

The Company  licenses  software  under  long-term  network  license  agreements.
License fee revenue is  recognized  when the  network is  operational,  customer
acceptance has occurred and all significant obligations have been satisfied.

Post-contract  support  ("Support")  activities,  including software updates and
maintenance,  are  provided  to  customers  either as part of a network  license
agreement or under a separate network license service agreement. When Support is
provided as part of a network license agreement, the Company allocates a portion
of the network license agreement fee to Support  activities.  The portion of the
fee allocated to Support  activities is based on the pricing of separate network
license service  agreements.  All Support revenue is recognized ratably over the
period such activities are provided.

The Company also generates revenue from network service agreements.  Under these
agreements,  customers are provided network access,  network  communication  and
installation.  Fees are typically  paid  quarterly in advance and  recognized as
revenue ratably over the service period.

Third-party  joint  venture  fees paid to the  Company  in  connection  with the
formation  of   consolidated   subsidiary   entities  are  recorded  as  capital
contributions  from  joint  venturers.  In 1994,  one  venturer  paid  $150,000,
relating to a joint venture commenced in 1993.

No single  customer  accounted for more than 10% of the Company's  total revenue
for the year ended December 31, 1995. One customer,  a hospital  system licensee
under a network  licensing  agreement,  accounted for  approximately  19% of the
Company's total revenue in fiscal 1994.

            Contracts Receivable and Deferred Contract Revenue

Contracts  receivable  are  comprised of amounts due the Company  under  network
services and network license  agreements for  implementation  and network access
fees.  Revenues associated with advance payments received under network services
agreements  are deferred  and  recognized  ratably over the period  services are
performed.

            Equipment and Furniture

Equipment and furniture are stated at cost.  Depreciation  and  amortization  is
provided using the  straight-line  method over the estimated useful lives of the
assets, ranging from 2 to 10 years.

            Goodwill and Other Intangibles

The excess of purchase price over the estimated fair market values of the assets
at the dates of  acquisitions  were allocated to goodwill and other  intangibles
and are being amortized over an estimated useful life of 10 years.


                                      F-14


<PAGE>



            Income Taxes

The Company  accounts  for income  taxes under the  provisions  of  Statement of
Financial  Accounting  Standards  No. 109 ("SFAS 109"),  "Accounting  for Income
Taxes". SFAS 109 utilizes the liability method and deferred taxes are determined
based on the estimated  future tax effects of differences  between the financial
statement  and tax  bases of  assets  and  liabilities  and net  operating  loss
carryforwards given the provisions of enacted tax laws (see Note 4).

            Net Income (Loss) Per Common Share

For the year ended December 31, 1994, and for the period from January 1, 1995 to
December  18, 1995,  net loss per common  share is computed  based upon net loss
increased to reflect  undeclared  preferred stock dividends at an annual rate of
$200,000 and the weighted average number of common and common  equivalent shares
outstanding  during the year.  All  outstanding  stock options and warrants were
excluded from the  computation  because their effect was  antidilutive.  For the
period from December 19, 1995 to December 31, 1995,  net income per common share
is computed based on the weighted  average  number of common shares  outstanding
during the period.

            Software Development Costs

Under the criteria set forth in Statement of Financial  Accounting Standards No.
86,  "Accounting  for the  Costs of  Computer  Software  to be Sold,  Leased  or
Otherwise  Marketed",  capitalization of software  development costs begins upon
the establishment of technological  feasibility of the product and ends when the
product  is ready  for  general  release.  The  establishment  of  technological
feasibility  and the ongoing  assessment  of the  recoverability  of these costs
require  considerable  judgment by management  with respect to certain  external
factors,  including,  but not  limited  to,  anticipated  future  gross  product
revenues,   estimated  economic  life  and  changes  in  software  and  hardware
technology.  Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and,  therefore,  no software
development costs have been capitalized by the Company to date.

            Use of Estimates in the Presentation of Financial Statements

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

            New Accounting Pronouncement

Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", issued
in March 1995 and effective for 1996,  establishes  accounting standards for the
impairment  of  long-lived  assets.  The Company will adopt this  standard as of
January 1, 1996 and does not expect that adoption will have a material impact on
the Company's financial position or results of operations.


                                      F-15


<PAGE>




(3)         RELATED PARTY TRANSACTIONS

In January  1995,  the  Company's  then-chairman  transitioned  from his role in
day-to-day  management to that of a board member only. The Company continued his
compensation through December 31, 1995. In connection with this transition,  the
former chairman entered into a noncompetition and confidentiality agreement with
the Company.

The Company issued  warrants to purchase  79,302 shares of common stock at $4.00
per share to its then-chairman in January of 1994.

During 1993, the Company's board of directors established a management committee
comprised  of five  senior  vice  presidents  in  charge of the  Company's  five
functional  areas. As part of their 1994  compensation,  the five members of the
management committee received options to purchase 500,000 shares of common stock
at $4.00 per share. As part of their 1995 compensation,  the five members of the
management  committee  and four other  officers  received  options  to  purchase
290,000 shares of common stock at $6.50 per share.

In the normal course of business,  the Company's networks incur costs payable to
the  Company's  joint  venture  partners.  At December 31, 1995,  such  payables
totaled approximately  $740,000, and are included in payables to related parties
in the accompanying consolidated balance sheet.

During  1995 and 1994 the  Company  reimbursed  a director  of the  Company  for
approximately $1,600 and $61,000,  respectively, of legal fees paid on behalf of
the Company under an indemnification agreement.

During 1994,  the Company sold  $177,500 of software and  equipment to a company
owned by a director of the Company,  who in turn sold these items to a hospital.
The Company recorded this revenue upon the network becoming  operational and all
significant obligations of the Company being fulfilled.

In  consideration  for certain loans and/or personal  guarantees  related to the
Company's  borrowings  from a bank and other  obligations,  the  Company  issued
warrants  to  purchase  10,000 and 28,000  shares of common  stock to  directors
during 1995 and 1994, respectively, at $5.00-$6.50 per share (see Note 8).

(4)         INCOME TAXES

The net deferred tax assets and liabilities as of December 31, 1995 and December
18, 1995, are comprised of the following:
<TABLE>
<CAPTION>

                                                      December 31,      December 18,
                                                          1995              1995
                                                      -------------     ------------
<S>                                                    <C>             <C>         
Current:
  Accrued vacation .................................   $    165,000    $    159,100
                                                       ------------    ------------
     Current deferred tax assets ...................        165,000         159,100
                                                       ------------    ------------
</TABLE>


                                      F-16


<PAGE>
<TABLE>
<CAPTION>

                                                    December 31,      December 18,
                                                        1995              1995
                                                    -------------     ------------
<S>                                                 <C>             <C>         

Noncurrent:
   Share in losses from joint
       ventures/partnerships ....................        205,500         203,400
 Reorganization costs ...........................           --            (6,300)
 Deferred revenue ...............................        152,600         147,200
 Depreciation ...................................       (191,100)       (187,500)
 Tax credits ....................................         67,600          67,600
 Net operating loss carryforwards ...............     12,284,400      12,091,200
                                                    ------------    ------------
        Noncurrent net deferred tax assets ......     12,519,000      12,315,600
                                                    ------------    ------------
        Total net deferred tax assets before
           valuation allowance ..................     12,684,000      12,474,700
Valuation allowance .............................    (12,684,000)    (12,474,700)
                                                    ------------    ------------
Net deferred tax assets .........................   $       --      $       --
                                                    ============    ============
</TABLE>


The Company has determined that  $12,474,700 and $12,684,000 of net deferred tax
assets as of December  18, 1995 and  December  31,  1995,  respectively,  do not
satisfy the  realization  criteria set forth in SFAS 109.  Recognition  of these
assets  requires  future taxable  income,  the attainment of which is uncertain.
Accordingly,  a valuation  allowance  has been recorded to offset the entire net
deferred tax assets.

At December  31,  1995,  the Company has tax credit  carryforwards  available to
offset future taxable income of approximately $68,000 which expire through 2006.
In addition,  the Company has net operating loss  carryforwards of approximately
$33,200,000 which expire through 2010.

As a  result  of the  Company's  acquisition  by  Lilly,  substantially  all the
Company's net operating  loss  carryforwards  are subject to  limitations  as to
future use in any given year.  Operating  loss and credit amounts are subject to
examination by the tax authorities.

At December 31, 1995,  the Company had no current  federal or state income taxes
payable.

The  difference  between  the year ended  December  31, 1994 and the period from
January 1, 1995 to December 18, 1995 losses reported for financial reporting and
the losses  reported for income tax purposes and the  difference  between income
for financial  reporting purposes and the losses for income tax purposes for the
period from December 19, 1995 to December 31, 1995 were  primarily the result of
accelerated  depreciation  for tax  purposes,  certain  accruals  not  currently
deductible  for tax  reporting  purposes,  amortization  of  goodwill  and other
intangibles and nonqualified option exercise compensation.






                                      F-17


<PAGE>

The  difference  between the  statutory  federal  income taxes and the Company's
effective income taxes is summarized as follows:
<TABLE>
<CAPTION>
                                            For the      For the
                                          Period from   Period From
                                            December     January       For the Year
                                          19, 1995 to   1, 1995 to        Ended
                                            December     December        December
                                            31, 1995     18, 1995        31, 1994
                                          -----------   -----------   -------------

<S>                                      <C>            <C>            <C>         
Federal income tax provision (benefit)
  computed at the statutory rate .....   $   176,300    $(5,098,800)   $(1,445,600)
State income tax provision (benefit),
  net of federal effect ..............        17,400       (668,600)      (142,400)
Goodwill and other intangibles
  amortization .......................         5,800        154,500           --
Nonqualified stock option
  exercise compensation ..............          --       (2,354,300)          --
Allocation of 1995 loss for tax
  return treatment ...................      (408,800)          --             --
Increase as a result of joint venture
  capital contributions treated as
  income for tax reporting purposes ..          --             --           51,000
Other ................................          --          (77,500)       179,500
Valuation allowance ..................       209,300      8,044,700      1,357,500
                                         -----------    -----------    -----------
Effective taxes ......................   $      --      $      --      $      --
                                         ===========    ===========    ===========
</TABLE>

(5)         LONG-TERM DEBT

                                                                     
Long-term debt is comprised of the following at December 31, 1995:
Notes payable to Lilly--secured by substantially all
   assets of IMS, subordinated to other
   indebtedness as discussed below, interest at 10%
   per annum, due on July 1, 1996 (see Note 1) .................   $ 12,669,683
Note payable to a corporation--secured by
   certain contracts, interest at 9.5%, monthly
   principal and interest payments of $8,008,
   due September 24, 1996 ......................................         69,301
Capital lease obligations--secured by
   equipment and letter of credit, interest
   ranging from 6% to 11.4%, due in varying
   monthly installments through 1999 ...........................        117,678
                                                                   ------------
            Total debt .........................................     12,856,662
Less-Current maturities ........................................    (12,776,928)
                                                                   ------------
            Long-term debt .....................................   $     79,734
                                                                   =============




                                      F-18

                                                      
<PAGE>

Long-term debt matures as follows:

                Year ended December 31-

                       1996 ................   $12,776,928
                       1997 ................        29,551
                       1998 ................        23,673
                       1999 ................        26,510
                                               -----------
                                               $12,856,662
                                               ===========

(6)         COMMITMENTS AND CONTINGENCIES

            Litigation

The Company was involved, beginning in January 1992, in a dispute with NewHealth
Group,  Inc.  ("NHG"),  the former 49% owner of IMS-Net of Northern  California,
Inc. ("Norcal") and the former manager of Norcal and IMS-Net of Sacramento, Inc.
("Sacto"), its 100% owned subsidiary.

During 1994 and early 1995, all of the litigation  surrounding  this dispute was
terminated in favor of the Company.  Additionally,  the Company won monetary and
punitive  judgments  against NHG and its officers and Norcal has  recovered  and
retired the outstanding 49% minority interest in Norcal,  formerly owned by NHG,
so that the Company owns 100% of Norcal as of December 31, 1994.  As the Company
is uncertain as to the ultimate  collectibility  of the judgments,  the monetary
and punitive judgments will be recognized for financial  reporting purposes when
and if the  judgments  are  collected.  No value was  recorded  for recovery and
retirement of the 49% minority interest.

During 1995 and 1994, the Company expensed  approximately $115,000 and $785,000,
respectively, in legal costs relating to this litigation.

            Conversion Obligation

Under a joint venture agreement with the Company,  Blue Cross and Blue Shield of
Arizona,  Inc. ("BCBSAZ"),  as limited  partner in  the  joint venture,  has the
right to elect to  exchange  all or  increments  of 20% of its rights to profits
allocations in the joint venture for shares of the Company's  common stock.  The
number of shares is to be  determined  by  dividing  $3.5  million by the market
price of IMS common stock at the time of  exchange.  Such option is available to
BCBSAZ at any time  until  three  years and 120 days after  commencement  of the
initial public offering of equity securities of the Company.

            Obligation to Fund Joint Ventures

The Company has agreed to fund operating cash shortfalls of three networks under
the terms of three joint venture agreements. At December 31, 1995, the aggregate
net amount of advances to the venture entities was  approximately  $253,000.  In
management's opinion, these potential future funding obligations will not have a
material adverse effect on the Company's financial position.




                                      F-19


<PAGE>


            Lease Obligations

The Company has entered into various  noncancelable  operating leases for office
space and  computer  equipment.  Total  rental  expense  related to these  lease
agreements  during the period from  December 19, 1995 to December 31, 1995,  the
period from January 1, 1995 to December 18, 1995 and for year ended December 31,
1994 was $18,302, $1,574,020 and $1,035,111, respectively.

Future minimum lease payments under noncancelable  operating lease agreements as
of December 31, 1995 are as follows:

            1996 ................        $1,369,872
            1997 ................         1,070,316
            1998 ................           428,995
            1999 ................           203,779
            2000 ................             6,034
                                         ----------
            Total ...............        $3,078,996
                                         ==========
            Letters of Credit

At December 31,  1995,  the Company had letters of credit  outstanding  totaling
approximately  $213,000   collateralizing   certain  capital  lease  and  tenant
finishings. The letters of credit expire at various dates through 1999.

            Other

Under terms of a Letter of Intent and Option  Agreement dated November 10, 1993,
an  unrelated  corporation  paid the  Company  $600,000.  The  option  agreement
provided this  corporation  with an option to make an equity  investment in IMS.
The option  agreement was  terminated in January 1995. The  corporation  did not
make such an  investment  and,  therefore,  the  $600,000  is being  applied  to
payments due under this corporation's Communications Services Agreement with the
Company. At December 31, 1995, $533,026 is included in deferred contract revenue
in the accompanying consolidated balance sheet.

(7)         PARTNERS' INVESTMENT IN LIMITED PARTNERSHIP

During  1992,  the  Company,  through  its wholly  owned  subsidiary  IMS-Net of
Colorado,  Inc.  ("IMS-Colorado"),  obtained a 1% general  partner  interest  in
IMS-Network  of  Colorado,   Ltd.  (the   "Partnership"),   a  Colorado  limited
partnership.  The Partnership  was formed for the purpose of obtaining  business
and  technology  licenses  from the  Company to operate a medical  communication
network  (the   "Network")  in  Colorado  and  to  sublicense   such  rights  to
IMS-Colorado.  IMS-Colorado  operates  the Network and paid  license fees to the
Partnership based on gross revenues received from the Network.

During  1994,  the  Partnership  distributed  $209,219 to the  limited  partners
representing 99% of the royalties earned by the Partnership.  As of December 31,
1994, the Partnership was dissolved as discussed below.

Due to the  Company's  various  obligations  to the  limited  partners,  amounts
received  from the  limited  partners  ($1,820,000  at December  31,  1993) were
excluded  from  stockholders'  equity in 1993.  Such amounts were  converted and
reclassified to common stock in 1994 as discussed below.


                                      F-20


<PAGE>


On December 9, 1994, the Company made an exchange  offering (the  "Exchange") to
each  limited  partner  of the  Partnership  and  each  holder  of  IMS-Colorado
preferred stock.

Pursuant to the Exchange,  each  Partnership  unit and each  preferred  share of
IMS-Colorado  was  surrendered  to the Company in exchange  for 4,000  shares of
common  stock of the  Company  and one  nontransferable  common  stock  purchase
warrant entitling the holder to purchase up to 2,000 and 4,000 additional shares
of common stock at $5 per share, respectively.

Each  limited  partner and  stockholder  accepted  the  Exchange and 324,000 and
40,000 shares of common stock and warrants to purchase 162,000 and 40,000 shares
of  common  stock  were  issued  to the  holders  of the  Partnership  units and
IMS-Colorado  preferred  stock,  respectively,  as  set  forth  above,  and  the
Partnership was dissolved as of December 31, 1994.

(8)         STOCKHOLDERS' EQUITY

As discussed  in Notes 1 and 11, the  stockholders  of the Company  approved the
Merger Agreement with Lilly effective  December 18, 1995. The discussions  below
describe the capital  structure of the Company through the Effective Date. For a
description  of the  effect of the  Merger  on the  Company's  previous  capital
structure and the Company's current capital structure see Note 11.

            Series B Preferred Stock

Each share of Series B voting  preferred stock ("Series B") was convertible at a
price per share of $1.50,  at the option of the holder  into common  stock.  The
Series B was entitled to receive quarterly cumulative dividends (equal to 10% of
the par value or $.10 per share per  annum).  Cumulative  undeclared  and unpaid
dividends were $1,300,000 at December 31, 1994.  Such cumulative  dividends were
not accrued as the Company had an accumulated deficit and, therefore, was unable
to declare or pay dividends.  The undeclared and unpaid dividends would increase
the net loss to the common stockholders by $193,000 and $200,000,  respectively,
for the period from  January 1, 1995 to December 18, 1995 and for the year ended
December 31, 1994.

            Series C Preferred Stock

Under terms of a  Subscription  Agreement  dated  December  30, 1993, a Series C
Preferred  Stock  Purchase  Agreement  dated  January  6,  1994,  and a  Network
Sponsorship  and  Participation  Agreement  dated  November 17,  1993,  McKesson
Corporation   ("McKesson")   purchased   1,250,000  shares  of  IMS's  Series  C
convertible  preferred  stock  ("Series  C") at $4 per  share  for a total of $5
million on January 6, 1994. On July 12, 1994,  McKesson  purchased an additional
1,000,000  shares of Series C at $5 per share by applying as partial payment the
$1 million in national network sponsorship and access fees paid in 1993.




                                      F-21


<PAGE>


The Company also issued  warrants to McKesson in connection  with its investment
in the Company's  Series C and in conjunction  with the Network  Sponsorship and
Participation  Agreement.  In conjunction  with the first and second tranches of
Series C as discussed above, the Company issued warrants to purchase 750,000 and
500,000 shares, respectively,  of Series C. In 1994, McKesson exercised warrants
to purchase 375,000 shares of Series C for $1,875,000.

During November 1994, McKesson was acquired by Lilly who succeeded to the rights
of  McKesson.  During  early  1995,  Lilly  exercised  warrants  to  purchase an
additional 375,000 shares of Series C for $1,875,000.

The additional  500,000 warrants were exercised at $6.00 per share  ($3,000,000)
by Lilly at the time of the Company's  acquisition of the remaining 51% interest
of Medical Communication Networks, Inc. (see Note 12).

            Stock Warrants

Stock  warrants  had been  issued to certain  investors.  Common  stock  warrant
activity during 1994 and 1995 is as follows:
<TABLE>
<CAPTION>

                                                                  Exercise Price
                                                    Shares           Per Share
                                                   --------       --------------
<S>                                                 <C>            <C> 
Balance, December 31, 1993 .................        503,800       $1.50 - 5.00
  Granted ..................................        309,303        4.00 - 5.00
  Exercised ................................       (137,000)          1.50
  Expired ..................................        (25,000)       2.50 - 3.50
                                                   --------        -------------
Balance, December 31, 1994 .................        651,103        1.50 - 5.00
  Granted ..................................         10,000           6.50
  Exercised ................................         (6,000)       3.50 - 5.00
                                                   --------        -------------
Balance, December 18, 1995 .................        655,103        1.50 - 6.50
  Converted in connection with
    Merger (see Note 11) ...................       (655,103)       1.50 - 6.50
                                                   --------        -------------
Balance, December 31, 1995 .................           --          $        --
                                                   ========        =============
</TABLE>


As discussed at Note 11, the stock  warrants were  converted in connection  with
the Merger. Therefore, no warrants are outstanding at December 31, 1995.

            Series C Warrants

In 1994, the Company also issued Series C warrants, as discussed above, of which
warrants to purchase 1,250,000 shares of Series C at prices ranging from $5.00 -
$7.00 were  granted  and 375,000  were  exercised  at $5.00 per share.  In 1995,
holders of such warrants  exercised the remaining  warrants to purchase  875,000
shares of Series C for $4,875,000.




                                      F-22


<PAGE>



Common Stock Option Plans

The Company had a 1989 Stock  Option Plan (the "1989  Plan")  providing  for the
grant of options to purchase a maximum of  1,600,000  shares of common  stock to
key employees.  Under the terms of the 1989 Plan, the option  exercise price was
to be no less than the fair  market  value of IMS's  stock on the date of grant.
Options were  exercisable  three months following the date of grant and up to 10
years from such date.

Stock option activity during 1994 and 1995 for the 1989 Plan is as follows:
<TABLE>
<CAPTION>

                                                                 Exercise Price
                                                   Shares           Per Share
                                                  --------       --------------
<S>                                              <C>               <C> 
Balance, December 31, 1993 ...............        1,547,422       $1.00 - 4.00
  Granted ................................           38,000           4.00
  Canceled ...............................          (19,273)       2.50 - 4.00
  Exercised ..............................             (362)       3.50 - 4.00
                                                 ----------        -------------
Balance, December 31, 1994 ...............        1,565,787        1.00 - 4.00
  Canceled ...............................          (13,786)       3.50 - 4.00
  Exercised ..............................          (91,311)       2.50 - 4.00
                                                 ----------        -------------
Balance, December 18, 1995 ...............        1,460,690        1.00 - 4.00
  Converted in connection with
    Merger (see Note 11) .................       (1,460,690)       1.00 - 4.00
                                                 ----------        -------------
Balance, December 31, 1995 ...............             --          $        --
                                                 ==========        =============
</TABLE>


Stock  options from the 1989 Plan became fully vested and  exercisable  upon the
Effective  Date of the Merger and were  converted in connection  with the Merger
(see Note 11); therefore, none are outstanding at December 31, 1995.

On April 22, 1994,  the  stockholders  of IMS approved the 1994  Employee  Stock
Option Plan (the "1994  Plan").  The 1994 Plan allowed  granting  incentive  and
nonqualified stock options;  however,  in 1994 and 1995, only nonqualified stock
options were granted.  Under the 1994 Plan,  the Company was authorized to grant
options  to  purchase  a  maximum  of  838,600  shares  of  common  stock to key
employees. Such options were exercisable six months following the date of grant.
All other terms were similar to the 1989 Plan.





                                      F-23


<PAGE>



Stock option activity during 1994 and 1995 for the 1994 Plan is as follows:
<TABLE>
<CAPTION>
                                                                 Exercise Price
                                                     Shares         Per Share
                                                    -------      --------------
<S>                                                 <C>            <C>       
Balance, December 31, 1993 ..................           --          $    --
  Granted ...................................        492,730        3.50 - 5.00
                                                    --------        ------------
Balance, December 31, 1994 ..................        492,730        3.50 - 5.00
  Granted ...................................        345,870        5.00 - 6.50
  Canceled ..................................        (27,128)           5.00
  Exercised .................................        (94,468)       4.00 - 6.50
                                                    --------        ------------

Balance, December 18, 1995 ..................        717,004        3.50 - 6.50
  Converted in connection with
    Merger (see Note 11) ....................       (717,004)       3.50 - 6.50
                                                    --------        ------------
Balance, December 31, 1995 ..................           --          $    --
                                                    ========        ============
</TABLE>


Stock  options from the 1994 Plan became fully vested and  exercisable  upon the
Effective  Date of the Merger and were  converted in connection  with the Merger
(see Note 11); therefore, none are outstanding at December 31, 1995.

            Subscriptions Receivable

Stock  subscriptions and joint venturers'  contributions  receivable  consist of
amounts to be received for sale of common stock and formation of joint ventures.

(9)401(k) PLAN

In 1993, the Company  adopted a 401(k) plan for its employees.  Under this plan,
the Company  may  contribute  to the plan at its  discretion.  The total  amount
contributed  by the Company to the plan during the period from December 19, 1995
to December 31,  1995,  the period from January 1, 1995 to December 18, 1995 and
for the  year  ended  December  31,  1994  was  $5,998,  $145,159  and  $79,353,
respectively.

(10)SALES OF CONTRACTS RECEIVABLE

During  1995,  the Company sold  without  recourse  its rights to the  remaining
payments due under certain network  license  agreements for a price equal to the
present value of the remaining noncancelable license fee payments. Proceeds from
the sales were  approximately  $4.6 million.  The Company  recognized  losses of
approximately $220,000 related to these sales.




                                      F-24


<PAGE>



(11)MERGER WITH LILLY

As  discussed  in Note 1, the  stockholders  of the Company  approved the Merger
Agreement  with Lilly  effective  December 18, 1995.  The  following  discussion
outlines  the  general  terms of the  Merger and the impact of the Merger on the
Company's capital structure.

Each existing holder of common stock obtained the right to receive $8.00 in cash
or one share of new Series D preferred  stock  subject to  mandatory  redemption
("Preferred  D") in exchange for each share of common stock held.  In connection
with the Merger,  holders of 2,308,147 shares of common stock elected to receive
$18,465,176  in cash and holders of 4,298,162  shares of common stock elected to
convert into 4,298,162 shares of Preferred D.

Each existing  holder of Series B preferred  stock obtained the right to receive
$5.33 in cash plus any accrued  unpaid  dividends  as of the  Effective  Date or
two-thirds  of a  Preferred  D share plus any accrued  unpaid  dividends  on the
Series B as of the Effective Date, or such Series B stockholders  could elect to
retain the Series B shares with the amended terms of conditions set forth in the
Merger Agreement and exhibits thereto. In connection with the Merger, holders of
551,250 shares of Series B elected to receive  $2,938,163 in cash and holders of
1,448,750 shares of Series B elected to convert into 965,833 shares of Preferred
D. No holder elected to retain Series B shares,  and no accrued unpaid dividends
were  payable at the  Effective  Date as the  $1,493,000  of accrued  but unpaid
dividends were paid as a condition of the Merger.

Each Series C preferred  share was  converted to one share of common stock for a
total of 3,500,000 shares.

The 12,000  shares of  Trans-IMS  Corporation  and the 160,200  shares of common
stock held by Lilly were converted into 12,000,000  shares and 160,200 shares of
common stock, respectively, after the Merger.

Holders of outstanding  Company options and warrants had the right either to (i)
receive  $8.00 in cash per share  into which  each such  option or  warrant  was
exercisable as of the Effective Date net of the exercise  price,  or (ii) retain
the right to  purchase  one share of  Preferred D stock for each share of common
stock into which such  option or warrant  was  exercisable  as of the  Effective
Date.  Option  holders had the further right to receive fully vested  options to
acquire shares of common stock of Lilly under the 1994 Lilly Stock Plan. Holders
of options to purchase  1,543,633,  146,762 and 487,300  shares of common  stock
elected to receive  $6,442,023 in cash,  options to purchase  146,762  shares of
Preferred D and options to purchase a certain  number of shares of Lilly  common
stock, as defined in the Merger Agreement, respectively.

Holders of  warrants to purchase  404,936  and  250,167  shares of common  stock
elected to receive  $1,617,560 in cash and options to purchase 250,167 shares of
Preferred D, respectively.

As of December 31, 1995, the Company had payables to predecessor stockholders of
$1,697,568  related  to  the  Merger  based  on  the  stockholders'   conversion
elections.  As a result of the Merger,  Lilly owns all of the 15,660,200  common
shares outstanding as of December 31, 1995.




                                      F-25


<PAGE>



Series D Preferred Stock Subject to Mandatory Redemption

Each share of Preferred D is entitled to cumulative  cash dividends at an annual
rate of $.62 per share,  payable in arrears  each  December  31 until and unless
redeemed by IMS.  Holders of Preferred D have no voting rights and have no right
to convert  their shares of Preferred D into any other class of capital stock of
IMS. Upon liquidation,  dissolution or winding-up of IMS, holders of Preferred D
are entitled to an amount in cash equal to $8.00 per share, plus an amount equal
to all accumulated and unpaid  dividends on such shares and have preference over
shares of IMS common stock.

Holders of 5,263,995  shares of Preferred D and holders of  options/warrants  to
purchase 199,762 shares of Preferred D elected to enter into Put/Call Agreements
with Lilly whereby each holder of Preferred D shares would have the right to put
their  shares to Lilly  during  two put  periods  beginning  one year  after the
Effective Date and 30 months after the Effective Date.  Pursuant to the Put/Call
Agreements,  Lilly  would have the right to call the  Preferred  D stock,  which
right could be exercised any time after three years from the Effective Date. The
put and call purchase price is $8.00 per share plus any unpaid dividends accrued
prior to the purchase date.

The Preferred D shares also carry mandatory redemption features.  For the period
of 30 days after the fifth  anniversary  of the Effective  Date, the holders may
demand  redemption  of their  shares  for $8.00 per share plus all  accrued  and
unpaid dividends. The Company has the option, beginning on the fifth anniversary
of the  Effective  Date,  to  redeem  any  or all  shares  of  Preferred  D at a
redemption price of $8.00 per share plus all accrued and unpaid  dividends.  All
such  shares  redeemed  will  be  canceled  and  will  not  be  issuable  by IMS
thereafter.

(12)PURCHASE OF MEDICAL COMMUNICATION NETWORKS, INC.

In October  1995,  the Company  acquired the  remaining  51% interest of Medical
Communication   Networks,   Inc.   ("MCN")  from  Unihealth   America   Ventures
("Unihealth").  The  purchase  price  was  $4,350,000  of  which  $1,900,000  is
contingent  upon MCN receiving  extensions to eight  existing  network  services
agreements with hospitals  owned by Unihealth.  Such extensions had not yet been
received as of January 23, 1996. Of the total purchase price, Unihealth received
$3,350,000 in cash at closing and $1,000,000 was placed in escrow at a bank. The
funding  for this  purchase  was  provided by Lilly  through  the  exercise of a
warrant to purchase 500,000 shares of the Company's Series C preferred stock for
$3,000,000 and a loan to the Company of $1,350,000.



                                      F-26

<PAGE>
                                  EXHIBIT INDEX

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

2.1   Agreement and Plan of Merger, dated August 2, 1995, among Lilly,    N/A
      Trans-IMS Corporation, and IMS.

2.2   Form  of  Put/Call   Agreement  among  Lilly,  IMS  and  certain    N/A
      shareholders of IMS.

2.3   Form of Support  Agreement,  dated August 2, 1995, between Lilly    N/A
      and certain share- holders of IMS.

4.1   Articles  of  Incorporation  including  Articles  of  Merger  of    N/A
      Trans-IMS  Corporation with and into Integrated Medical Systems,
      Inc.

4.2   By Laws of IMS                                                      N/A

10.1  Stock Purchase Agreement, dated January 6, 1994, between IMS and    N/A
      McKesson Corporation.

10.2  Sponsorship  and  Participation  Agreement,  dated  November 17,    N/A
      1993, between IMS and McKesson Corporation.

10.3  Stockholder's  Rights Agreement,  dated January 6, 1994, between    N/A
      IMS and McKess- on Corporation.

10.4  Senior   Subordinated   Note  from  IMS  (which   includes   the    N/A
      registration right for Charles Brown).

10.5  Indemnification  Agreement,  dated August 14, 1992,  between IMS    N/A
      and David Holbrooke.

10.6  IMS 1989 Restated Stock Option Plan.                                N/A

10.7  IMS 1994 Employee Stock Option Plan.                                N/A

10.8  Promissory Note, dated June 12, 1995, between Lilly and IMS.        N/A

10.9  Security Agreement, dated June 12, 1995, between Lilly and IMS.     N/A

10.10 Pledge Agreement, dated June 12, 1995, between Lilly and IMS.       N/A

10.11 Promissory Note, dated July 27, 1995, between Lilly and IMS.        N/A

10.12 Security Agreement, dated July 27, 1995, between Lilly and IMS.     N/A

10.13 Pledge Agreement, dated July 27, 1995, between Lilly and IMS.       N/A

10.14 Promissory Note, dated August 28, 1995, between Lilly and IMS.      N/A

10.15 Security  Agreement,  dated August 28, 1995,  between  Lilly and    N/A
      IMS.

10.16 Pledge Agreement, dated August 28, 1995, between Lilly and IMS.     N/A

10.17 Form of Registration  Agreement  applicable to holders of Series    N/A
      B Preferred Stock.

10.18 Joint Venture Agreement, dated May 15, 1992, with HFN, Inc.         N/A



<PAGE>


10.19 Shareholders'  Agreement,  dated May 31,  1992,  with  Adventist    N/A
      Health System.

10.20 Joint  Venture  Limited  Partnership  Agreement,  dated June 30,    N/A
      1992, with Blue Cross and Blue Shield of Arizona, Inc.

10.21 Operating Agreement for Indiana Medical Communications  Network,    N/A
      L.L.C., dated April 10, 1993.

10.22 Operating Agreement for Minnesota Medical  Communications  dated    N/A
      November 7, 1993.

10.23 Stock Purchase and  Termination  Agreement,  dated September 30,    N/A
      1995, with Unihealth America Ventures.

10.24 Promissory  Note,  dated  September 25, 1995,  between Lilly and    N/A
      IMS.

10.25 Promissory Note, dated October 17, 1995, between Lilly and IMS.     N/A

10.26 Promissory Note, dated October 25, 1995, between Lilly and IMS.     N/A

10.27 Form of Severance Agreement with certain employees of IMS.          N/A

21.1  List of Subsidiaries of IMS.                                        N/A

27    Financial Data Schedule