<PAGE>
 
================================================================================
                                                         

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                 ______________

                                   FORM 10-K

               (X)   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1996
                                      or
               (  )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number 0-26390

                         SUMMIT MEDICAL SYSTEMS, INC.
            (Exact name of registrant as specified in its charter)

         MINNESOTA                                               41-1545493
(State or other jurisdiction of                              (I.R.S. Employer 
incorporation or organization)                               Identification No.)

         10900 RED CIRCLE DRIVE
         MINNETONKA, MINNESOTA                                     55343
   (Address of principal executive offices)                     (Zip Code)

      Registrant's telephone number, including area code:  (612) 939-2200
                           _________________________

       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  NONE

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

                         COMMON STOCK, $.01 PAR VALUE
                               (Title of Class)

     Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding twelve 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   (  )

     The aggregate market value of the common stock held by non-affiliates of
the registrant at March 25, 1997 was $27,961,433.50 based on the last sale price
for the Common Stock as quoted on the Nasdaq National Market on that date.

     At March 25, 1997, 10,347,696 shares of the registrant's common stock were
outstanding.

     Documents Incorporated by Reference:  Pursuant to General Instruction G(3),
     -----------------------------------                                        
the responses to Items 10, 11, 12 and 13 of Part III of this report are
incorporated herein by reference from the Company's definitive proxy statement
for its 1997 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before April 30, 1997.

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

ITEM 1.  BUSINESS.
----------------- 

GENERAL
 
     Summit Medical Systems, Inc. (the "Company" or "Summit") is a leading
provider of clinical information systems and consulting services to the
healthcare industry. The Company's database software enables healthcare
providers to record, analyze and report detailed data on clinical, economic and
patient-reported outcomes of medical procedures, disease treatments and other
medical interventions. The Company also aggregates clinical data into national
databases that provide valuable benchmarks of national practice patterns and
clinical outcomes. The Company's customers include specialty physicians,
hospitals, physician and hospital networks, managed care organizations and other
healthcare payors, and pharmaceutical and medical device firms. These customers
use the outcomes data captured by the Company's software and services to profile
healthcare provider performance, demonstrate quality of care, identify cost-
effective clinical practices and monitor cost factors. Customers also use the
outcomes data for contracting with third party payors and managed care
organizations, establishing quality assurance programs and complying with the
informational demands of regulatory and accreditation agencies. The Company also
offers provider management consulting, regulatory consulting and clinical trial
management services.

     The Company currently offers database products primarily on two technology
platforms: Crescendo!(TM) and Vista(TM). The Crescendo! platform is a
Windows(TM)-based client/server, relational database application that
facilitates point-of-care collection and retrieval of clinical information. The
Crescendo! platform is designed for use in hospital cardiac catheterization and
cardiovascular surgery programs. The Company introduced, in the second half of
1996, a Crescendo! Forte product, a comprehensive information database for use
in high volume hospital cardiac catheterization and cardiovascular surgery
centers, including medical research centers. The Company also is developing a
standard Crescendo! product ("Crescendo! Basic") for medium and lower volume
cardiac catheterization and cardiovascular centers that desire to collect a core
set of outcomes measurements. To date, the Company has installed Crescendo!
Forte in four sites. The Company intends to establish the Crescendo! platform as
the Company's sole technology platform and to develop products using the
Crescendo! platform for additional medical specialties after the Crescendo!
platform has been fully developed for the cardiovascular market.

     The Vista platform is a Windows-based, flat file application, covering a
product line of over 40 database software modules that is primarily used in
five medical specialties: cardiac and thoracic surgery, cardiology,
ophthalmology, urology and orthopaedics. The Company also has certain products
on a DOS platform, which the Company intends to discontinue. Although the
Company intends to continue to support the Vista platform, the Company will seek
to migrate customers using Vista or DOS products to Crescendo! products as these
products become available in each medical specialty.

     The Company offers a range of support services for its database products.
Through its Continuous Quality Service ("CQS") package, the Company offers to
customers of its cardiovascular products a combined three year software license
and a program of implementation, training, data management and consulting
services that is designed to increase the value obtained by the customer from
the Company's database software. Company customers of products for other medical
specialties may purchase implementation, training, support and data management
services. The Company provides a range of consulting services through its
subsidiaries, The BSM Consulting Group ("BSM"), a national healthcare consulting
firm, and C. L. McIntosh & Associates, Inc. ("CLMA"), a provider of regulatory
affairs consulting and clinical trial management services. The Company's
consulting services are offered directly by these subsidiaries or in combination
with sales of the Company's database software products.

     In late 1996, the Company introduced registry services related to the use
of a particular medical device or therapeutic agent. These registries are
designed to collect and report clinical information through Crescendo! platform
software utilizing the world-wide web ("WWW"). Each registry will be sponsored
by one or more medical device or pharmaceutical companies with an interest in
the use of the particular device or drug.

                                   -1-     
<PAGE>
 
RECENT DEVELOPMENTS

     RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS. The financial
statements included in this Annual Report reflect restatements of previously
reported financial position and results of operations for the years 1994 and
1995 and the nine months ended September 30, 1996. The restatements are based on
an investigation by the Company's management, auditors and outside counsel of
the Company's accounting practices after concerns were brought to the attention
of senior management and the Company's Board of Directors by a new chief
financial officer on February 27, 1997. The restatements primarily involve
revenue recognition practices related to certain sales of software licenses and
related services including revenue recognized based on purchase commitments made
by certain corporate marketing partners but prior to actual shipment of product
("partner commitments"), and revenue recognized in advance of actual shipment of
product in other contexts ("pre-shipment recognition"). In addition, with
respect to products first introduced in the second half of 1996, revenue had
been recognized under CQS and Crescendo! contracts involving unfulfilled
obligations, including commitments for future delivery of additional product
features and performance of implementation and consulting services, and on a
database development program based on negotiations with a prospective customer
that were not finalized. Negotiations for this database development program were
subsequently discontinued without an order.

     Consequently, the Company's financial statements have been restated to
recognize revenue in the appropriate periods and defer revenue recognition on
certain contracts until the conditions for such recognition have been satisfied.
Corresponding adjustments to expenses associated with revenues have been made to
cost of sales and operating expenses (primarily sales commissions) in each
affected period as appropriate.

     These restatements had the net effect of reducing revenue for 1994, 1995
and the nine months ended September 30, 1996 by $1,052,000, $2,214,000 and 
$1,782,000, respectively.  See Note 2 in Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition 
and Results of Operations-Quarterly Results of Operations." On a full year basis
for 1996, using the Company's February 26, 1997 earnings announcement as a
baseline, revenues for 1996 were reduced by $2,372,000. Of the cumulative
revenue reductions of $5,638,000 through December 31, 1996, approximately $1.9
million related to partner commitments, $1.3 million to pre-shipment
recognition, $1.7 million to CQS and Crescendo! contracts, $500,000 to the
database development program and $200,000 to an increase in the reserve for
customer returns and allowances. As to the partner commitments, revenue will be
recognized in the future at time of shipment. The amount and timing of shipments
under these partner commitments is uncertain and depends, in part, on the market
demand for Vista products that are currently the only products covered by these
commitments, the effect on demand for Vista products of the Company's decision
to focus its development efforts on Crescendo! products, and the ability of the
Company to enter into satisfactory arrangements with its marketing partners
regarding the scope of database products and services to be sold under these
arrangements. See "Sales and Marketing." As to pre-shipment recognition, 
shipments representing approximately $300,000 of these cumulative adjustments
have occurred through March 31, 1997, and a significant portion of the remaining
balance of $1.0 million is likely not to be realized.

     The following table summarizes the restatement of revenues for the three
years ended December 31, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of 
Operations -- Restatement of Previously Issued Financial Statements" for further
information on the restatements by quarter.

 
                       SUMMARY OF RESTATEMENT OF REVENUE

<TABLE>
<CAPTION>
                          Year Ended          Three Months Ended,      Year Ended         Three Months Ended,        Year Ended   
                                       --------------------------------           ----------------------------------              
                              Dec 31,  March 31 June 30  Sep 30  Dec 31  Dec 31,  March 31 June 30  Sept 30  Dec 31     Dec 31,   
                               1994     1995     1995     1995    1995    1995     1996      1996     1996    1996       1996(1)  
                               ----     ----     ----     ----    ----    ----     ----      ----     ----    ----       ----
                                                                     (Dollars in thousands)          
<S>                          <C>      <C>      <C>      <C>     <C>     <C>      <C>      <C>      <C>      <C>        <C>
Revenue before restatement:  
 Software and service        $ 8,420  $ 2,158  $ 2,494 $ 3,373  $ 3,950  $11,976  $ 3,383  $ 4,575   $3,350   $2,133   $13,441
 Consulting                    3,905    1,407    1,467   1,325    1,521    5,720    1,547    1,457    1,531    1,568     6,103    
                              ------    -----    -----   -----    -----   ------    -----    -----    -----    -----    ------    
Total revenue before                                                                                                              
 restatement                 $12,325  $ 3,565  $ 3,961 $ 4,698  $ 5,471  $17,696  $ 4,930  $ 6,032   $4,881   $3,701   $19,543    
                              ======    =====    =====   =====    =====   ======    =====    =====    =====    =====    ======    
                                                                                                                                  
Revenue after restatement:                                                               
 Software and service        $ 7,368  $ 1,790  $ 2,473 $ 2,430  $ 3,069  $ 9,762  $ 3,142  $ 3,887   $2,497   $1,543   $11,069    
 Consulting                    3,905    1,407    1,467   1,325    1,521    5,720    1,547    1,457    1,531    1,568     6,103    
                              ------    -----    -----   -----    -----   ------    -----    -----    -----    -----    ------    
Total revenue after                                                                                                               
 restatement                 $11,273  $ 3,197  $ 3,940 $ 3,755  $ 4,590  $15,482  $ 4,689  $ 5,344   $4,028   $3,111   $17,172    
                              ======    =====    =====   =====    =====   ======    =====    =====    =====    =====    ======    
</TABLE> 

                                     -2- 
<PAGE>
 
<TABLE> 
<CAPTION>
                             Three Years Ended
                             December 31, 1996
                             ----------------- 
<S>                          <C>
Revenue before restatement:      
 Software and service            $33,837 
 Consulting                       15,728
                                  ------
Total revenue before             
 restatement                     $49,565
                                  ======
                                 
Revenue after restatement:       
 Software and service            $28,199
 Consulting                       15,727
                                  ------ 
                                 
Total revenue after              
restatement                      $43,926
                                  ======
</TABLE> 

(1)  Represents adjustments to revenue as reported in the Company's February
     26, 1997 earnings announcement.

          The Company's policies for recognizing revenue in the restated
     financial statements contained herein, and its policies for recognizing
     revenue in the future, are as follows:

          SOFTWARE LICENSES AND UPGRADES. The Company recognizes 
          revenue from sales of software licenses upon shipment, 
          provided that no significant vendor and post-contract 
          support obligations remain outstanding and that 
          collections of resulting receivables are probable. 

          SUPPORT AND SERVICE. Periodic agreements for customer
          support and service are recognized over the agreement 
          period using the straight-line method. All other service 
          revenue, including training, implementation and consulting 
          fees, are recognized upon performance of the applicable 
          services.

          SOFTWARE LICENSE WITH OTHER SIGNIFICANT VENDOR OBLIGATIONS.
          The Company will recognize revenue under agreements
          requiring significant vendor obligations such as
          installation, testing interface, and systems integration
          when all of the following obligations have been satisfied:
          (i) delivery has occurred; (ii) system installation,
          testing, integration and on-site consulting assistance has
          been completed; (iii) customer acceptance has been received;
          and (iv) collectibility is probable. If a significant
          portion of the revenue is due beyond twelve months of the
          date of the agreement, revenue will be recognized as each
          annual payment becomes due. In addition, certain contracts
          may require revenue recognition under contract accounting
          rules, whereby revenue is recognized on a percentage of
          completion basis, subject to probability of collection.

     The Company has retained outside counsel, with the assistance of
independent accounting advice, to investigate on behalf of the Company the facts
and circumstances surrounding the restatements. The investigation is continuing
under the direction of the Audit Committee of the Company's Board of Directors.
The Board of Directors has appointed W. Hudson Connery, Jr., as Interim Chairman
of the Board of Directors, with the responsibility for overseeing the
preparation and filing of this Annual Report and the preparation of the
restatements. In addition, the Company hired Richard Willemin as Interim Chief
Financial Officer on March 17, 1997. The Board of Directors has established that
Mr. Willemin reports directly to Mr. Connery with respect to filings with the
Securities and Exchange Commission (the "Commission") and financial statement
matters.

          The Company has been named as a defendant in three federal court
securities putative class actions captioned Jong E. Lee v. Summit Medical
                                            -----------------------------
Systems, Inc., Mathias Faue, George E. and Patricia E. Faue, Janice 
-------------  ----------------------------------------------------
Mc Quiston v. Summit Medical Systems, Inc., Edward F. Sweeney, Kevin R. Green,
-----------------------------------------------------------------------------
Anthony W. Rees, Kent J. Thiry, Dennis M. Powers, John M. Nehra, and Judith Anne
---------------------------------------------------------------      -----------
Jacobson v. Summit Medical Systems, Inc., each filed in United States District
---------------------------------------
Court of the District of Minnesota on March 10, 1997, March 26, 1997, and March
31, 1997, respectively. Each action alleges, in essence, that the Company made
misleading public disclosures relating to its financial statements. In each
action, the plaintiffs seek a declaration that the action be certified as a
class action and compensatory damages for losses incurred as a result of each
alleged misleading public disclosures. The Company believes these actions are 
without merit and intends to defend against them vigorously.

                                      -3-
<PAGE>
 
     The Company has been informed by the Division of Enforcement of the
Commission, through service of a subpoena on March 25, 1997, that the Commission
is conducting an investigation of the Company, relating to the Company's
restatement of certain financial statements. The Company is cooperating fully
with the Commission and its investigation.

     The Company expects to incur significant legal and accounting fees in
connection with the investigation of the Company's revenue recognition
practices, the Commission's investigation and the three shareholder class
actions filed on March 10, 1997, March 26, 1997, and March 31, 1997. These fees
will be included in operating expenses as incurred in the first quarter of 1997
and subsequent quarters.

     CQS PACKAGE. In September 1996, the Company began to offer its CQS package
primarily to customers of cardiovascular database software products. The CQS
package is intended to position the Company with the customer as an on-going
provider of clinical information services rather than focusing on a single
software sale to the customer. Under this program, the customer purchases a
three-year license for the Company's cardiovascular database software and a
series of related services that are designed to increase the value obtained by
the customer from the database software. These services include an initial six-
month regimen of on-site installation, operational training and system
integration support. Additional services provided under the CQS package include
semi-annual advanced training, data quality assurance reviews and data analysis
by the Company's healthcare consultants. The CQS package also provides software
updates during the term of the license as new technologies become available.

     ACQUISITION OF C. L. MCINTOSH & ASSOCIATES, INC.  On December 31, 1996, the
Company acquired CLMA in a stock-for-stock merger, accounted for as a pooling of
interests. CLMA is a provider of regulatory affairs consulting and clinical
trial management services, primarily focused on assisting healthcare companies
obtain and maintain Food and Drug Administration ("FDA") approval to market
medical devices and biological and pharmaceutical products. CLMA designs and
manages clinical trials for manufacturers, which includes providing statistical
analysis and reporting clinical study results. CLMA also assists clients to
develop appropriate regulatory strategies for product submissions and to prepare
these submissions. CLMA also assists clients to obtain and maintain necessary
manufacturing and quality certifications and to respond to adverse audit reports
from the FDA. In addition, CLMA provides customized quality and regulatory
training programs for clients' employees who are involved in meeting FDA
regulatory requirements. The acquisition of CLMA is intended to expand the
Company's capabilities as a provider of healthcare information services by
providing an entry into the clinical research organization market. The Company
also believes that its database technologies may enhance the development of
CLMA's clinical research business by offering more efficient means to collect,
aggregate and analyze clinical data. The success of the CLMA acquisition will
depend on a number of factors that are subject to uncertainties and risks. See
"Services-C. L. McIntosh & Associates, Inc."

     ACQUISITION OF JOINT VENTURE INTERESTS.  During the past two years, the
Company has invested approximately $13 million in cash, warrants, and stock
options in two transactions to acquire client/server database technology
developed at Duke University ("Duke Technology"). This technology has been the
basis for the Company's Crescendo! platform. On December 29, 1995 the Company
entered into a software license agreement for the Duke Technology and formed a
joint venture limited liability company, Cordillera L.L.C. ("Cordillera"), with
Duke University ("Duke") and three nationally recognized Duke cardiologists,
Drs. Donald Fortin, Robert Califf and Harry Phillips. On December 31, 1996, the
Company entered into a reorganization agreement (the "Reorganization Agreement")
pursuant to which the Company acquired the outstanding equity interests and
all options to acquire equity interests in Cordillera, which were not held by
the Company. Under Dr. Fortin's leadership, Cordillera has been engaged in the
development of the Crescendo! platform and WWW technologies to be employed in
the Company's registries. In conjunction with the Reorganization Agreement, Dr.
Fortin joined the Company as Vice President and Chief Scientific Officer and
Drs. Califf and Phillips continued as consultants to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments." The success of the Cordillera acquisition will
depend on a number of factors that are subject to uncertainties and risks. See
"Products."

                                      -4-
<PAGE>
 
     CONSOLIDATION OF TECHNOLOGY PLATFORM AND MIGRATION STRATEGY.  Upon the
appointment of Dr. Donald Fortin as Chief Scientific Officer of the Company, in
January 1997, the Company accelerated its review of its technology strategies.
This review was based, in part, on the Company's belief that customers in the
health information systems market increasingly demand client/server technologies
and that these technologies provide improved product performance. The review
also considered the costs associated with the Company's product development
projects in process at the end of the year and the length of time required to
complete these projects. Following this review, in February 1997, the Company
adopted a new technology strategy to focus its future development efforts and
business on client/server and WWW technologies developed by its Cordillera
subsidiary. As a consequence, the Company ended its project to develop Vista
Elite, a Vista-platform product with additional decision support modules, which
had incurred substantial development costs in 1996. The Company believes that
the consolidation of its products on a single technology platform will enable
the Company to control development costs and sales and support expenses
associated with the operation of multiple technology platforms to introduce new
products more quickly, and to focus the Company's products and services on
technologies that the Company believes more closely match market requirements.
The adoption of this technology strategy involves product development and market
risks that may cause the Company's actual results to differ significantly from
its current estimates. See "Products."

     The Company has introduced the Crescendo! platform in the cardiovascular
markets and intends to adapt this platform for other medical specialties. As the
Crescendo! platform products become available, the Company will seek to migrate
its Vista customers to these products. During this development period, the
Company intends to support its current Vista customers by continuing to provide
its existing Vista products and services and by releasing a new version of Vista
in 1997. In addition, as the Company discontinues its DOS products, it will seek
to migrate these customers to either the Crescendo! or Vista platforms, as
appropriate, during the next twelve months.

     COST REDUCTION PROGRAM AND SEVERANCE PAYMENTS. In March 1997, the Company
established a cost reduction program to reduce the number of employees
throughout the Company, except at BSM and CLMA, and closed the operations of
Medical Information Systems Company, Inc. ("MIS"), the Company's subsidiary
located near Boston. Twenty-nine positions were eliminated, reducing the number 
of employees from 208 at December 31, 1996 to 179 at March 25, 1997. This staff
reduction relates primarily to the Company's decision to end the Vista Elite
development program and to control development costs in general by focusing on a
single technology platform. The cost reduction program and the closing of MIS
will result in a charge in the first quarter of 1997 for severance and other
related expenses.

     REGISTRY AGREEMENT.  On February 3, 1997, the Company entered into an
agreement with Eli Lilly and Company ("Eli Lilly") to participate in a pilot
program for a registry to collect, analyze and report on the use of a platelet
aggregation inhibitor (the "Inhibitor") during coronary interventions, which is
marketed by Eli Lilly. Under the pilot program, the Company will collect from
ten participating cardiac catheterization laboratories data on the use of the
Inhibitor including patient selection criteria and protocols, clinical outcomes,
costs and resource utilization and patient-reported outcomes (satisfaction with
treatment as well as restoration of quality of life). The registry will provide
longitudinal data by collecting data at the time of the initial intervention and
at follow-up patient encounters. Data will be entered by the participants on-
site at the cardiac catheterization laboratories primarily through an on-line
system using WWW pages. The on-line system will use digital signatures and file
encryption to insure safe transmission of information to the database
repository. Participating laboratories will receive aggregated information from
the registry on a monthly basis, including cost, utilization and outcomes
analyses regarding Inhibitor treatments and benchmark data with respect to
Inhibitor use at other laboratories. The registry is a pilot program subject to
significant product development and market acceptance risks. See "Products-
Registries."

                                      -5-
<PAGE>
 
     AAOS VENDOR AGREEMENT.  In March 1997, the Company entered into an
agreement with the American Academy of Orthopaedic Surgeons ("AAOS") to be a
certified vendor of AAOS' MODEMS(TM) (Musculoskeletal Outcomes Data Evaluation
Management System) Program. The MODEMS Program is designed to compile data on
clinical outcomes related to specific orthopaedic medical procedures and
interventions that will be aggregated into a national database. The MODEMS
Program measures patient functionality and quality of life factors through
patient questionnaires in four categories: lower limb, upper extremity,
pediatrics and spine. The Company is or will be one of approximately six vendors
certified by AAOS to market the MODEMS Program. Under the agreement, the Company
will pay AAOS an initial fee of $27,500, and an annual fee equal to 10% of sales
that exceed $200,000 in the applicable year. The agreement does not and will not
restrict the Company's activities regarding its orthopaedic clinical outcomes
programs.

     LINK MEDICAL LETTER OF UNDERSTANDING. Under a Letter of Understanding
("LOU") dated February 6, 1997, between the Company and Link Medical, Inc.
("Link"), the Company has agreed to use Link's LINKTools(TM) integration
software and related programming services to interface the Company's various
software products with medical devices and computer systems of its customers.
The LOU requires the Company to use LINKTools for all interfaces for the
Company's Vista software product, unless LINKTools is not reasonably adequate
with respect to a particular installation. The Company may, at its option, use
LINKTools with other Company products, such as Crescendo!, under the terms set
forth in the LOU. Under the arrangement contemplated by the LOU, the Company
will pay a royalty only on each copy of LINKTools activated, with activation
occurring when an interface is actually activated at a customer's location. The
LOU has a term of three years and the parties are required to renegotiate a new
agreement six months prior to its scheduled termination. The Company and Link
anticipate that a formal agreement incorporating the terms of, and replacing,
the LOU will be executed within 60 days after the execution of the LOU.

PRODUCTS

     INTRODUCTION.  The Company offers Crescendo! Forte, a comprehensive
information database application for use in high volume hospital cardiac
catheterization and cardiovascular surgery centers, including medical research
centers. The Company is also developing Crescendo! Basic for medium and lower
volume cardiac catheterization and cardiovascular centers that desire to collect
a core set of outcomes measurements. These Crescendo! products are marketed and
sold by the Company's direct sales force and telesales staff. The Company also
offers its Vista product line of over 40 database software modules that is
primarily used in five medical specialties: cardiac and thoracic surgery,
cardiology, ophthalmology, urology and orthopaedics. The Vista products are
marketed and sold by the Company's telesales staff and national vendors of
healthcare products under joint marketing arrangements. See "Sales and
Marketing."

     GENERAL.  The Company's software is designed to capture and organize the
clinical data that healthcare providers require to compete effectively in
today's healthcare market. The software includes analytical tools for reviewing
the data of healthcare providers, enabling them to improve their clinical
efficiency and quality of medical care. Company customers can use the data
reports to profile healthcare provider performance, demonstrate quality of care,
identify cost-effective clinical practices and monitor cost factors. Using the
report generating functions of the software, customers can communicate their
analysis of outcomes data to patients, managed care organizations and regulatory
and accreditation agencies, as well as internal peer review and quality
assurance committees and organizations. The Company also aggregates, manages and
reports the data generated by its customers into national databases for certain
medical specialties to provide national benchmarks of national practice patterns
and clinical outcomes for comparison with the data generated by individual
customers.

     The software includes analytical tools that organize the information
collected in the healthcare provider's database and provide meaningful
measurements of such provider's clinical outcomes data.  The software affords
convenient access to the information in the database, allowing 

                                      -6-
<PAGE>
 
patient records to be searched by data field, and includes functions for
generating patient listings, frequency tables, cross tabulations and statistical
analyses from the healthcare provider's database.

     The Company's software features enable efficient and accurate data
collection.  Data from a healthcare provider's other information system or
certain diagnostic equipment can be accessed by the software.  The software's
automatic data entry function enables the healthcare provider to enter data
efficiently by calling up only the screens required for further data entry. In
addition, the software can calculate the entry of certain data fields that can
be derived from data already entered in the database. The software provides for
automatic validity checks for certain data fields that prompt a review of an
entry if it falls outside certain parameters or is inconsistent with another
entry. The software's data collection features include an on-screen help system
that provides guidance on the use of the software, as well as data entry menus
and field definitions that give assistance in making the correct data entries.
The edit feature of the software allows healthcare providers to customize their
software to add data fields that they consider relevant or that payors or other
organizations require them to collect. To protect the confidentiality of patient
data, the software contains an extensive security system that, among other
features, allows physicians in a group practice or hospital to access only the
records of each individual physician's patients.

     The software enables healthcare providers to communicate their clinical
outcomes effectively and efficiently.  Specifically, the software includes a
graphics package for charting and graphically displaying clinical outcomes using
bar charts, pie charts and three-dimensional charts.  The graphics package also
allows healthcare providers to record digitized images from diagnostic tests,
such as an angioplasty report, in their databases.  In addition, the document
processing functions can streamline the production of referring physician
letters, operative notes and discharge summaries.

     Company customers who choose to participate in a national database can
receive reports from such national databases that contain information on trends
in procedure utilization and outcomes (including, but not limited to, mortality
and morbidity), as well as information on statistical analyses of the
relationship between medical risk factors and outcomes.  The information
provided by the national databases can be used with the information contained in
the healthcare provider's database to compare the healthcare provider's practice
patterns and clinical outcomes to national benchmarks. These comparisons can be
used by healthcare providers to compete for contracts based on outcomes and to
establish or enhance clinical or operational practices.

     CRESCENDO!  The Crescendo! platform is a Windows-based client/server,
relational database application that facilitates point-of-care collection and
retrieval of clinical information. The platform is intended to be scaleable to
function in a range of configurations depending on the customer's requirements.
The Company intends to establish the Crescendo! platform as the Company's sole
technology platform and to develop products using the Crescendo! platform for
additional medical specialties after this platform has been fully developed for
the cardiovascular market. The Crescendo! platform is designed to allow multiple
users access to accurate clinical, economic and patient-reported information and
to reduce the overall cost of data acquisition. The platform uses a point-of-
care design, in which data entry follows the care process to allow concurrent
data collection and analysis. To reduce redundant data entry and increase the
accuracy of data, the Crescendo! platform interfaces with hemodynamic equipment
and other clinical equipment and communicates with the healthcare provider's
hospital information systems utilizing industry standard protocols. This
platform provides longitudinal tracking of outcomes data. The Crescendo!
platform employs a standard word processing program, Microsoft Word for Windows
7.0(TM), to generate detailed, chart ready reports. In addition, the Crescendo!
platform runs a number of predefined reports, including outcomes reports,
population reports, profiling reports and productivity reports, as well as ad-
hoc queries to further assist in a healthcare provider's analysis of outcomes
data.

                                      -7-
<PAGE>
 
     The client application of the Crescendo! platform conforms to Windows
95(TM) standards and incorporates many of the features common in the Windows
operating environment. The Crescendo! platform provides database and interface
utilities that permit the customer to customize the database selections and user
interface. The platform uses Microsoft SQL Server for Windows NT(TM) as the
relational database engine for distributed client/server computing.

     The Crescendo! platform is presently designed for use in hospital cardiac
catheterization and cardiovascular surgery programs. In the second half of 1996,
the Company introduced a comprehensive information database product, called
Crescendo! Forte, for use in high-volume, hospital cardiac catheterization and
cardiovascular surgery centers, including medical research centers. The
Crescendo! Forte product includes clinical modules on cardiac catheterization
(diagnostic and interventional), adult cardiac surgery, in-hospital quality
assurance, patient history and physical examinations. In addition, the Company
is developing electrophysiology, echocardiography, stress testing and nuclear
testing modules. The Company anticipates offering these additional modules to
customers in late 1997. Moreover, the Company is developing Crescendo! Basic, a
database system for medium and lower volume cardiac catheterization and
cardiovascular centers that desire to collect a core set of outcome
measurements.

     The Company has limited operating experience with the Crescendo! products.
There can be no assurance that these products will achieve market acceptance or
that the failure to do so will not have a material adverse effect on the 
Company's business, financial condition and results of operations. These
products, when first released by the Company, may also contain undetected
difficulties or defects that, despite testing by the Company, are discovered
only after they have been installed by customers. There can be no assurance that
such difficulties of defects will not be discovered in the future, causing
significant customer relations issues, delays in product introduction and
shipments, or requiring design modifications that could adversely affect the
Company's competitive position, business, financial condition and results of
operations. 

     VISTA. The Company offers its Vista-platform database software for use
primarily in five medical specialties: cardiac and thoracic surgery, cardiology,
ophthalmology, urology, and orthopaedics. The Vista products includes over 40
database software modules in these medical specialty markets. On the Vista-
platform, the Company also offers additional database software modules for
selected medical specialties that measure cost, health status and patient
satisfaction and inventory control.

     The Vista database modules may be bundled within a certain medical
specialty to form an integrated software solution that compiles data on clinical
outcomes for certain medical procedures, as well as data on costs and patient
health status and satisfaction. The cost containment module is designed to
provide cardiac catheterization laboratories and cardiac surgery centers with
the ability to analyze costs and reimbursements by margins, patient, physician
or diagnostic related group. This module combines both clinical and financial
information for comparison of resource utilization trends among patients with
similar medical profiles. Healthcare providers can analyze practice patterns,
including choice of technology, device and drug costs and labor usage, to
improve operational efficiency. In addition, the hospital, group practice or
physician can use the cost containment module to project cost outcomes by
modeling different clinical pathways. The health status and patient satisfaction
module bundles two patient-derived outcomes measurement tools: (i) a quality of
life application, incorporating the SF-36 health status survey, and (ii) one of
three patient satisfaction surveys measuring the patient's satisfaction with the
medical care received from the healthcare provider. The SF-36 health status
surveys can be completed by patients both prior to, and at selected intervals
following, a course of treatment. The application identifies changes in a
patient's general health and functional status due to either a diagnostic
treatment, particular procedure or therapeutic treatment. The patient
satisfaction surveys may be administered to patients on a routine basis to
identify levels of, and changes in, patient satisfaction. The inventory control
module is designed to be used in conjunction with the Company's cardiology
modules in hospitals. This module allows tracking of inventory using bar coding
technology along with a database which shares information with the Company's
cost containments and procedure modules.

     The Vista platform is a Windows-based, flat file application, that operates
on IBM or IBM-compatible personal computers. The platform format also includes
an automatic document processor, multi-tasking features, user-defined
customization, embedded medical images and a security system. The Vista platform
is capable of operating on a network, thereby allowing concurrent access to a
database from several locations. The Company has developed interfaces between
its Vista platform and the hemodynamic equipment of leading manufacturers and a
majority of the information systems of major vendors for healthcare facilities.
These interfaces enable the Company's Vista modules to import data directly from
a hospital's or practice group's existing information systems. Although the
Company intends to continue to support the Vista platform, the Company will seek
to migrate its customers using the Vista platform to products on the Crescendo!
platform as they become available in each medical specialty. The Company's
operating results may be adversely affected by a continued deterioration of
Vista product sales and by a failure of the Company to implement successfully
its strategy to migrate its Vista product customers to Crescendo! products.

     DOS. Prior to 1994, all of the Company's modules operated in a DOS
environment, and a significant number of the Company's installed base is
comprised of DOS modules. Since the Company currently offers all of its
procedure modules in its Windows format, the Company is offering software
upgrades to its DOS customers to migrate to the Windows-based Vista or
Crescendo! products for a separate fee. During this migration period, the
Company intends to continue to provide support for its DOS modules.

     WELLCAST R.O.I.  Wellcast R.O.I. is a decision-support product line in a
Windows-based environment. Wellcast R.O.I. models the financial return on
investment in health promotion. Specifically, Wellcast R.O.I. calculates both
the future medical costs of specific diseases and the economic impact of
temporary or permanent loss of employment due to such disease. Wellcast R.O.I.
modules allow the customer to forecast the results of prevention programs prior
to incurring costs
                  
                                      -8-

<PAGE>
 
associated with preventative activities. Wellcast R.O.I. customers include
hospitals, wellness centers, managed care organizations, pharmaceutical 
manufacturers and payors.

     REGISTRIES.  In late 1996, the Company introduced registries that employ
the Crescendo! technology and on-line systems using WWW technologies to collect
and report clinical information related to the use of a particular medical
device or a specific therapeutic agent at a specific site. A registry may be
sponsored by one or more medical device manufacturer or pharmaceutical companies
who would pay for the development and ongoing maintenance of the registry. A
registry may focus on capturing a limited set of data elements necessary to
review the clinical efficacy and economic implications of a device or drug and
to identify the clinical practices associated with such device or drug. Factors
tracked by a registry may include: patient demographics, patient risk profiles,
healthcare provider demographics, clinical protocols, complications and outcomes
of interventions, costs and economic indicators and long-term patient follow-up.
The collection technologies and minimum data sets intended for the registries
will be designed to provide the sponsors, healthcare providers and payors with
insights into efficient clinical practices while minimizing the data collection
burden on the healthcare provider. The data compiled through specific on-site
reporting can be aggregated into a national database to be used by other
healthcare providers.

     On February 3, 1997, the Company entered into an agreement with Eli Lilly 
to participate in a pilot program for a registry to collect, analyze and report 
on the use of a platelet aggregation inhibitor marketed by Eli Lilly during 
coronary interventions. See "Recent Developments-Registry Agreement." The 
Company's program with Eli Lilly for registry services is in the development
stage and, in general, the Company has limited operating experience with
registry products. There can be no assurance that the Company's registry
products will achieve market acceptance.


SERVICES

                                      -9-
<PAGE>
 
     CQS PACKAGE. The Company offers its CQS package to customers of its
cardiovascular database software products, which consists of an array of
arrangements and services intended to position the Company with the customer as
an on-going provider of clinical information services rather than focusing on a
single software sale to the customer. Under the CQS package, the customer
purchases a three-year license for the Company's cardiovascular database and a
series of related services that are designed to increase the value obtained by
the customer from the database software. These services include an initial six
month regimen of on-site installation of, and operational training in the use
of, the software as well as system integration support. Additional services
provided under the CQS package include initial and subsequent semi-annual
advanced training, data quality assurance reviews and data analysis by the
Company's healthcare consultants. During the term of the license, the CQS
package also includes software updates as such become available.

     The Company provides to customers a comprehensive implementation and
training process under the CQS package. This process includes pre-installation
profiling of the customers' requirements, system configuration and development
of an implementation plan. The Company provides on-site implementation and
training services in which the software is installed and tested by the Company,
comprehensive system training, including data capture, data entry and basic
reporting, and workflow assessment services. During the applicable installation
period, the Company conducts monthly status calls with the customer to review
progress on the implementation plan and address any customer issues. After
software installation, the Company provides an on-site assessment, including a
data quality assurance check and advanced training in reporting and use of data.
As part of the CQS package, the Company contracts with the customer to conduct
standardized analysis and interpretation of the customer's outcomes data,
including analyses of practice patterns, referral patterns, payor profiles,
resource utilization and procedure profitability. The Company also provides
consulting services in payor contracting, such as contract analysis and
capitation strategies, RFP responses and accreditation and certification
processes.

     CUSTOMER SERVICES. Although the Company offers the CQS package to its 
cardiovascular customers, the Company also offers to other customers a range of
other support and services, including the following support and services.

     Implementation Services.  The Company offers implementation services at the
time of a software purchase, for which the Company charges an additional fee.
These services include a survey of the customer's existing information systems
and an analysis of the hardware, interface, networking, data conversion and
personnel needs of the customers. The implementation services also include
advanced training for the customer's personnel.

     Customer Training. All of the Company's customers are encouraged to attend
the Summit Training Institute, or schedule on-site training for those
individuals managing a Company-provided database, for which the Company charges
a fee. Instruction is provided on a continuous schedule at the Company's
headquarters or as specified by the customer for on-site training. The Company
also offers advanced training for existing customers.

     Customer Service and Support. The Company usually provides basic customer
services and support for six months after installation of the software and
thereafter, the Company charges an annual fee for these customer services and
support. Included in the basic customer services are: access to a toll-free hot
line to answer questions ranging from installing the software to creating
customized reports; technical assistance on software and hardware; and format
designs and migration of data from the healthcare provider's information systems
into the Company's database.

     Data Management Services.  In addition to its standard customer service,
the Company provides assistance to users requiring data management services,
including assistance in gathering and analyzing data from their files and the
national databases.  These additional data analyses and more in-depth analyses
are provided on a fee-for-service basis.  The Company intends to expand its data

                                      -10-
<PAGE>
 
analyses services to assist healthcare providers in specialized analysis for
presentations or negotiations with managed healthcare organizations, other third
party payors and accreditation and regulatory agencies.

     CONSULTING SERVICES.   The Company provides a range of consulting services
through its subsidiaries, BSM, a national healthcare consulting firm, and CLMA,
a provider of regulatory consulting and clinical trial management services.

     The BSM Consulting Group.   BSM is a national healthcare consulting firm,
providing consulting services to healthcare providers, pharmaceutical and
medical device firms. BSM offers a range of advisory services to its clients for
effectively competing in health care environments, including strategic planning,
data analysis and presentation for marketing to payors and negotiation skills
training. BSM also assists healthcare providers in forming integrated healthcare
provider networks and mergers and acquisitions. The Company intends to develop
products which integrate the use of its clinical outcomes software and BSM's
related consulting services. After the Company's software has been installed at
a healthcare provider site, opportunities exist to consult with a healthcare
provider on the uses of the data from the database, the packaging of the data
for external reporting and the management of the data for internal quality
assurance. The Company believes that creating this ongoing relationship also
enhances the opportunities for the sale of additional and new products and
services in a healthcare organization. The above discussion includes forward
looking statements designed to provide investors with an overview of the
Company's strategy to integrate and leverage BSM's business. There can be no
assurance that the Company will be able to integrate successfully BSM's business
with the Company's software business or obtain the expected benefits of BSM.

     C. L. McIntosh & Associates, Inc.  CLMA is a provider of regulatory affairs
consulting and clinical trial management services, primarily focused on
assisting medical companies obtain and maintain Food and Drug Administration
("FDA") approval to market medical devices, and biological and pharmaceutical
products. CLMA also designs and manages clinical trials for manufacturers,
including statistical analysis and reporting of clinical study results. CLMA
assists clients to develop appropriate regulatory strategies for product
submissions and to prepare regulatory submissions. CLMA also assists clients to
obtain and maintain necessary manufacturing and quality certifications and to
respond to adverse audit reports from the FDA. In addition, CLMA provides
customized quality and regulatory training programs for clients' employees who
are involved in meeting FDA regulatory requirements. The Company's success will
depend, in part, on its ability to integrate CLMA into the Company's operations.
There can be no assurance that the anticipated benefits from the acquisition of
CLMA will be realized or that the Company will be able to effectively market the
services of CLMA.

NATIONAL DATABASES

     The Company maintains and manages national databases for two national
medical associations, the Society of Thoracic Surgeons ("STS"), and the American
Society of Cataract and Refractive Surgery ("ASCRS"), for cardiac and thoracic
surgery and ophthalmology, respectively. In addition, the Company has an
agreement with the American College of Cardiology ("ACC") to become a certified
software vendor to participants in the ACC National Database. These databases
provide valuable benchmarks of national practice patterns and clinical outcomes
against which individual healthcare providers can compare their own performance.
The affiliations with STS, ASCRS and ACC are also valuable marketing
relationships that provide the Company with access to the membership of these
associations. The Company pays royalties or fees to each of these medical
association, and has the right to use of the name and logo of these
associations.

     STS National Database.  The procedure modules for cardiac and thoracic
surgery have been developed under a contract with STS.  STS is a leading medical
specialty society representing cardiac and thoracic surgeons, with approximately
3,000 members in the United States and Canada, including an estimated 70% of
cardiac and thoracic surgeons in the United States.  The Company uses STS's name
and logo in promoting the STS-sponsored procedure modules, while STS promotes
the Company's software and national databases in publications of STS and by
other means.  The information collected from these programs is included in STS-
sponsored national databases, which currently include patient 

                                      -11-
<PAGE>
 
records for approximately 700,000 procedures in cardiac and thoracic surgery.
The Company produces and distributes an annual report on the national database,
as well as up to three special analyses per quarter for each participant.

     The Company's agreement with STS was originally executed in April 1990 and
is effective through December 31, 1998.  The Company is the copyright owner of
the software, documentation and other materials created pursuant to the
agreement, while STS is the copyright owner of the remaining data in the
associated national database, the information format design used in the software
and all reports and information derived by either the Company or STS from the
national database.  As a result of STS's ownership and certain other rights, the
Company may not use any data submitted to the national database to develop
commercial applications other than for the Company's cardiac and thoracic
surgery procedure modules, without the consent, licensing or similar agreement
of STS.  The STS database is open to allow participants to enter data in the
national database using the software of other vendors provided the data conforms
to the standard definitions and format of the national database created by the
Company and STS.  In the event the Company's agreement with STS is terminated by
the Company or by STS due to the Company's material breach of the agreement or
inability to fulfill the agreement, the Company must assign its rights in the
software, documentation and materials, including source code, that are created
pursuant to the agreement, and must deliver copies of this source code, to STS.
Upon termination of the Company's agreement with STS under any other
circumstance or if STS chooses not to extend the agreement, the Company will
retain all ownership rights to the software associated with STS-sponsored
procedure modules, and STS would be required independently to develop, either
directly or through a substitute vendor, the software necessary to continue the
national database.

     ASCRS National Database.  The ophthalmology modules have been developed
under a contract with ASCRS.  ASCRS is a subspecialty medical association
representing ophthalmology subspecialists. The Company uses ASCRS's name and
logo in promoting ASCRS-sponsored module, while ASCRS promotes the software and
national database in publications of ASCRS and by other means. The information
collected from these modules is included in the ASCRS-sponsored national
database, which currently contains patient records for approximately 40,000
ophthalmology procedures.

     The Company's agreement with ASCRS was originally executed in February 1994
and is effective until February 18, 1999, and will automatically renew for
another five year period unless either party provides notice 180 days prior to
February 18, 1999.  The Company is the copyright owner of the software,
documentation and other materials created pursuant to the agreement, and the
Company and ASCRS are the co-owners of the copyright for the data in the
associated national database and all reports based thereon.  Upon termination of
the agreement, ASCRS has the right to purchase the Company's interest in the
ASCRS national database; however, in the event of an offer by ASCRS, the Company
first has a right to purchase the interest of ASCRS in the national database on
the same terms as the ASCRS offer.

     ACC National Database.   The Company executed an agreement with ACC in
March 1997, which replaces the parties' February 1991 agreement for the ACC
National Database. Under the March 1997 agreement, ACC will maintain the
database containing the ACC National Database, by collecting, analyzing and
reporting on the data provided to it by participants. The Company has the 
non-exclusive right to develop and implement software to enable participants to
enter data into the ACC National Database in the format, and using the
transmission specifications, required by ACC. The Company has six months from
the effective date of the agreement to demonstrate to ACC that the Company's
software meets such requirements, and thereafter, on an annual basis, ACC will
review such software to ensure that it complies with the then-current ACC
National Database format and ACC specifications. Upon ACC's approval of the
Company's software, the Company will be deemed a certified vendor of

                                      -12-
<PAGE>
 
ACC entitled, among other things, to use the ACC trademark and the "ACC-
certified" designation in its promotion of the software. If the Company updates
its software, during the time that the Company's software is under review by
ACC, the Company may only indicate that ACC approval of such version is pending.

     At such time as the software is certified by ACC, the Company intends to
offer its Crescendo! products for use by its customers who desire to participate
in the ACC National Database. The Company's Vista customers, who elect to
continue to participate in the ACC National Database will be required to migrate
to the Crescendo! products to provide data to ACC National Database. The
participation agreements currently in effect between the Company, ACC and
participants in the ACC National Database will continue to be honored during
their term, and the Company will not be required to perform any obligations
under the agreement that conflict with the terms and conditions of such
participation agreements.

     ACC is the owner of all rights in the ACC National Database including the
national database, its data formats, definitions, file specifications, file
transfer protocols, procedural guides, and all publications and reports it
develops in support of the operations of the ACC National Database. The Company
is the owner of all rights in the software and related documentation and
training materials it develops pursuant to the agreement. The Company is
expressly permitted to develop cardiovascular data repositories that are
independent of ACC for the collection and aggregation of cardiovascular clinical
data, so long as ACC is provided with 45 days prior notice of the commercial
release of such repositories. Thus, the Company may use the data submitted by
participants to the ACC National Database in any data repositories it creates
that are independent of ACC. However, if the Company uses materials owned by ACC
in its independent data repositories, it is required to pay royalties to ACC for
such use. In addition, the Company may offer to its customers who are
participants services similar to the ACC National Database so long as
participants are not required to purchase such services in order to participate
in the ACC National Database.

     The term of the agreement ends on January 4, 1999, and it may only be
terminated earlier by ACC if the Company fails to initially deliver acceptable
software, or fails an annual software review thereafter.  In addition, either
party may terminate the agreement if the other party fails to cure a material
breach within 60 days after receipt of notice of such breach.  At the request of
ACC, the parties are required to conduct good faith negotiations, beginning no
later than July 1, 1998, to enter into a new agreement to become effective upon
the expiration of the March 1997 agreement.  Upon any termination of the
agreement, the parties shall retain their respective ownership of materials, and
the Company will no longer be deemed an ACC-certified vendor.  The agreement is
not assignable by either party.

     Data Collection and Integrity.  Healthcare providers are requested to
complete entries of their patient records to the Company in order to receive
reports on the national databases or software upgrades for risk stratification
tools based on a national database. Hospitals and physicians typically provide
their data to the Company electronically or on disks using the Company's
software, although members of the medical associations may submit manual data
forms for a fee-per-form. The national databases contain measures to protect
patient and healthcare provider confidentiality. To date, no information which
could identify the patient or physician is included in the data submitted to the
Company. The Company uses several methods to test the validity of the data
included in the national databases. Before a submission of data is entered into
a database, the Company samples the file for missing data. The Company also
samples the data for clinical consistency and appropriateness to determine
whether an entry in one part of the patient record is consistent with entries in
other parts of the record. The Company returns data to a healthcare provider if
it finds an unacceptable level of missing data fields or clinical
inconsistencies.

                                      -13-
<PAGE>
 
SALES AND MARKETING
 
     DIRECT SALES.  The Company's direct sales force primarily focuses on sales
of Crescendo! products to hospitals, other healthcare providers and wellness
centers. In conjunction with its direct sales of Crescendo! products, the
Company also sells its CQS package directly to cardiovascular customers. The
Company does not focus its direct sales force on sales of Vista products but
rather sells Vista products primarily through telesales and corporate joint
marketing arrangements. See "Corporate Joint Marketing."

     The Company's direct sales force in the United States currently consists of
seven area managers and three national sales managers who are responsible for
pursuing direct sale prospects. The area managers are located in Minneapolis and
other key cities in the United States (Chicago, Philadelphia, San Francisco, San
Diego and Tampa) and are responsible for targeted sales activities within a
geographic region. The Company has one National Sales Manager dedicated
exclusively in the United States to Crescendo! Forte, to focus and coordinate
sales to academic medical centers and hospitals.

     The Company began an in-house telesales and marketing program in late 1996.
The program now consists of seven telesales representatives and one managing
director, who is also responsible for the Company's telephone based customer
service call center. The telesales unit works in concert with the field sales
force and is primarily responsible for sales of the Company's Vista products to 
non-hospital office-based providers. 

     The Company's area managers also coordinate sales activities with the
Company's corporate marketing partners and work with the sales representatives
of the corporate marketing partners to identify potential customers for its
Vista products. Once a sales representative of a corporate marketing partner has
identified an opportunity, the area manager provides the sales representative
with appropriate technical information and product specifications. The area
managers work with the sales representative of the Corporate Marketing Partners
(defined herein) to complete the sale to a customer.

     Direct sales leads are generated via telemarketing, focused mailing
campaigns, trade show displays, advertising and customer referral
recommendations. Mailings are targeted to members of the various medical
associations and identify the growing need for the physician to maintain a
quality database. Sales representatives are responsible for completing sales to
targeted direct sales prospects.

     The Company markets and sells its products in European markets through its 
subsidiary, Summit Medical Europe S.A.R.L.

     CORPORATE JOINT MARKETING. The Company seeks to leverage its
distribution through joint marketing relationships with national vendors of
healthcare products ("Corporate Marketing Partners"). The Company currently
markets Vista products through these joint marketing arrangements.

     The Company has established a joint marketing arrangement with SciMed Life
Systems, Inc. ("SciMed"), a subsidiary of Boston Scientific Corporation ("Boston
Scientific"), a worldwide developer, manufacturer and marketer of medical
devices and four Boston Scientific divisions: Microvasive Urology, Microvasive
Endoscopy, Mansfield EP and Meadox Medicals (collectively, the "Boston
Scientific Divisions"), The Company also has marketing arrangements with
Allergan, Inc. ("Allergan"), a global provider of eye care and other specialty
therapeutic products, and Smith & Nephew Richards Inc. ("Smith & Nephew
Richards"), a global provider of medical orthopaedic devices, which 
relationships have been in transition during 1996.


     Under its joint marketing arrangement with SciMed, SciMed markets adapted
versions of the Company's Vista angioplasty, cardiac catheterization laboratory,
cost and patient satisfaction modules. Microvasive Urology markets adapted
versions of the Company's Vista BPH

                                     -14-

<PAGE>
 
management and prostate cancer procedure modules, and will market additional
urology procedure modules as such modules are developed. Microvasive Endoscopy
will market adapted versions of the Company's Vista colonoscopy, endoscopic
retrograde cholangiopancreatography ("ERCP") and esophagastric duodenoscopy
("EGD") modules, and will market additional Vista pulmonary and alimentary
endoscopy procedure modules as such modules are developed. Mansfield EP will
market adapted versions of the Company's Vista electrophysiology studies module,
and will market additional electrophysiology modules as such modules are
developed. Meadox Medicals will market adapted versions of the Company's current
Vista vascular surgery module and will market additional vascular surgery
modules as such modules are developed. SciMed and the Boston Scientific
Divisions purchase Vista modules from the Company for resale either as an
independent product or as part of a package of goods and services that SciMed or
the Boston Scientific Divisions provide to the customer. In connection with
these joint marketing arrangements, the Company will manage national databases
comprised of data to be collected from customers of SciMed or the Boston
Scientific Divisions. During the term of these joint marketing agreements, the
Company may not provide Vista software for distribution by a competitor of
SciMed or the Boston Scientific Divisions, as long as SciMed or the Boston
Scientific Divisions meet applicable minimum purchase requirements. SciMed is
the owner of the Vista programs developed for SciMed and the database containing
information about users of the Company's software purchased through SciMed. The
Boston Scientific Divisions are the owners of the programs and additional
features developed for the Boston Scientific Divisions and the databases
collected on their behalf. At the same time, the Company will own and manage
national databases comprised of data (excluding the fields developed for the
Boston Scientific Divisions) collected from the Boston Scientific Division's
customers and from customers that purchase procedure modules directly from the
Company. If the Company terminates any of the agreements or is unable to serve
SciMed or the Boston Scientific Divisions or purchasers of Company modules from
SciMed and the Boston Scientific Divisions under the terms of the applicable
agreement, or if SciMed or the Boston Scientific Divisions terminate an
agreement due to a material breach by the Company, the voluntary or involuntary
filing for bankruptcy of the Company or the sale of substantially all of the
assets or capital stock of the Company, SciMed or the Boston Scientific
Divisions will have continued access to and the right to use the source code to
the Vista software programs subject to the agreement.

     The Company has also established a joint marketing arrangement with
Allergan, Inc. ("Allergan"), a global provider of eye care and other specialty
therapeutic products, to market adapted versions of the Company's ophthalmology,
cost and patient satisfaction modules. Allergan purchases modules from the
Company for resale either as an independent product or as part of a package of
goods and services that Allergan provides to ophthalmologists. In connection
with this joint marketing arrangement, the Company will manage a national
database comprised of data to be collected from Allergan's customers. The
Company's agreement with Allergan is effective until August 14, 1997; however,
either party may terminate the agreement without cause after giving 60 days
prior notice. Allergan has a right of first refusal to obtain co-exclusive
rights and licenses to distribute certain software and related materials in
every country of the world in the medical disciplines of vision care,
ophthalmology, orthopaedics, neurology, pediatrics and dermatology. Allergan is
the owner of the software developed for it and the database containing
information about users of the Company's software purchased through Allergan. If
Allergan terminates the agreement due to the voluntary or involuntary filing of
bankruptcy of the Company, Allergan will have continued access to and right to
use the source code to the software programs subject to the agreement. During
the term of the agreement, Allergan has agreed not to distribute any other
national database clinical outcomes software. To maintain its rights under the
agreement, Allergan must meet minimum purchase requirements. In 1996, Allergan
did not meet these minimum purchase requirements. Consequently, on October 3,
1996, the Company notified Allergan that, due to Allergan's failure to comply
with its minimum purchase requirements as stated in the agreement, the Company
no longer was required to sell software programs for distribution exclusively to
Allergan pursuant to the terms of the agreement. The Company continues to market
Vista ophthalmology products through Allergan on a non-exclusive basis.

     In November 1995, the Company established a joint marketing arrangement in
the United States with Smith & Nephew Richards to market versions of the
Company's Vista hip replacement, knee replacement and sports medicine knee and
shoulder clinical outcomes modules, as well as additional orthopaedic procedure
modules as such modules are developed. Smith & Nephew Richards purchases Vista
modules from the Company for resale either as an independent product or as part
of a package of goods and services that Smith & Nephew Richards provides to
hospitals, orthopaedic surgeons and other physicians. In connection with this
joint marketing arrangement, the Company will, on behalf of Smith & Nephew
Richards, maintain and manage a database comprised of data collected from Smith
& Nephew Richards' customers. The Company's agreement with Smith & Nephew
Richards is effective until January 31, 2001, and will automatically renew for
additional one-year periods unless either party provides 180 days prior notice
of termination. The Company and Smith & Nephew

                                      -15-
<PAGE>
 
Richards each have a right of first refusal to establish a joint marketing
arrangement with the other if either the Company or Smith & Nephew Richards
intends to market orthopaedic procedure modules outside the United States or
introduces modules in the fields of orthopaedic rehabilitation, wound care and
otolaryngology (excluding laryngology). During the term of the Smith & Nephew
Richards agreement, the Company may not provide Vista orthopaedic software for
distribution by a competitor of Smith & Nephew Richards, as long as Smith &
Nephew Richards meets minimum purchase requirements. The agreement provides that
Smith & Nephew Richards is the owner of the programs and additional features
developed for Smith & Nephew Richards under the agreement and the related
database collected on its behalf. At the same time, the Company will own and
manage a national orthopaedic database comprised of data collected from Smith &
Nephew Richards' customers and from customers that purchase orthopaedic
procedure modules directly from the Company. Upon termination of the agreement,
the Company must provide Smith & Nephew Richards with full and complete copies
of the data from the programs and separate database the Company developed for
Smith & Nephew Richards under the agreement and delete all such records from the
Company's files.

     The Company is in discussions with Smith & Nephew Richards regarding
disputes under their marketing arrangement, including allegations of material
breaches under their agreement and requests for certain payments. 

CUSTOMERS

     The Company's customers include specialty physicians, hospitals, physician
networks, managed care organizations, other healthcare payors, pharmaceutical
and medical device firms located in the United States, Europe, South America and
Asia. The Company is the sole vendor of cardiac surgery and cardiology outcomes
database software to Columbia Healthcare Association network. 

     The Company's cardiology products are primarily designed for and sold to
hospitals, with cardiology group practices a secondary market. The Company
primarily markets its cardiac and thoracic surgery modules to hospitals and
cardiac and thoracic group practices. The primary target market for the
Company's ophthalmologic products are physician group practices. The Company's
urology products are sold to office-based practices and to hospital urological
units. The primary market for the Company's orthopaedic products is the single
and multi-specialty orthopaedic practices and networks.

     BSM's customers include healthcare providers and pharmaceutical and medical
device firms located in the United States. CLMA's customers include
pharmaceutical firms located primarily in the United States.

COMPETITION

     The market for healthcare information systems and services is highly
competitive. The Company believes that the principal competitive factors for
outcomes software are the quality and depth of the underlying clinical outcomes
database, the usefulness of the data and reports generated by the software,
customer service and support, ease-of-use, compatibility of the system,
potential for product enhancement and vendor reputation. The Company believes
its principal competitive advantages are the clinical focus of its databases,
the depth of patient records in its databases, its installed base of programs,
its customer service and its affiliation with the medical associations.

     The Company's competitors include other providers of clinical outcomes
software, healthcare consulting firms, providers of medical information derived
from databases based on claims data and clinical research organizations. As the
market for outcomes software develops, additional competitors may enter the
market and competition may intensify. BSM's and CLMA's competitors include 
healthcare consulting firms and clinical research organizations. Many of the 
Company's, BSM's and CLMA's competitors and

                                      -16-
<PAGE>
 
potential competitors have greater financial, development, technical, marketing
and selling resources than the Company, and have substantial installed customer
bases in the healthcare industry. The Company also faces significant competition
from internal information services at hospitals, many of which have developed
their own outcomes databases.

PROPRIETARY RIGHTS AND LICENSES

     The Company depends upon a combination of trade secret, copyright and
trademark laws, license agreements, nondisclosure and other contractual
provisions, and technical measures to protect its proprietary rights in its
products. The Company distributes its products under software license agreements
which grant customers a nonexclusive, nontransferable license to the Company's
products and contain terms and conditions prohibiting the unauthorized
reproduction or transfer of the Company's products. The Company attempts to
protect its trade secrets and other proprietary information through agreements
with employees and consultants. The Company also seeks to protect the source
code of its products as a trade secret and as an unpublished copyright work.
There can be no assurance that these protections will be adequate or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. The Company
believes that, due to the rapid pace of innovation within the software industry,
factors such as the technological and creative skills of its personnel, and
ongoing reliable product maintenance and support, are more important in
establishing and maintaining a leadership position within the industry than are
the various legal protections of its technology. Although the Company believes
that its products, trademarks and other proprietary rights do not infringe upon
the proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future.

GOVERNMENT REGULATION

     The confidentiality of patient records and the circumstances under which
such records may be released to the national databases is subject to substantial
regulation by state governments. These state laws and regulations govern both
the disclosure and use of confidential patient medical record information.
Minnesota, for instance, prohibits "release" of "health records" unless the
patient has consented or a statutory exception has been met.  One such exception
is a release for scientific medical research.  Although the Minnesota statute
does not define either "health records" or "release" the statute appears to
apply only to records that are patient identifiable.

     Although compliance with the laws and regulations of the various states is
principally the responsibility of the hospital, physician or other healthcare
provider supplying the data to the Company, the national databases have been
designed to enable healthcare providers to comply with the confidentiality
requirements of state law. To protect patient confidentiality, data entries to
the national databases delete any patient identifiers, including name, address,
hospital and physician. The Company believes that its procedures comply with the
laws and regulations regarding the collection of patient data in substantially
all jurisdictions, but regulations governing patient confidentiality rights are
evolving rapidly.

     Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. In general,
this legislation may require holders of such information to implement security
measures that may be of substantial cost to the Company. One bill currently
pending in Congress would protect and regulate the confidentiality of medical
record information. The bill would prohibit the disclosure of individually
identifiable health information, except with the patient's consent. Without the
patient's consent, medical information could be disclosed only for other limited
purposes, including disclosures to permit the creation of nonidentifiable health
information and to facilitate medical research. The bill would preempt most
state laws regarding access to, and the use and disclosure of, medical record
information. The Company collects, 

                                      -17-
<PAGE>
 
compiles and discloses health care information which it believes is not
individually identifiable and therefore would not be protected healthcare
information under the bill. If the bill is enacted, it may simplify the
Company's regulatory compliance efforts by superseding the various, and
sometimes inconsistent, state laws governing the collection, use and disclosure
of health care information. The Company cannot accurately assess the likelihood
that the bill or any other proposal will become law, or the final scope of any
law.

     The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare facilities. During the past several years, the healthcare industry
has been subject to an increase in governmental regulation of, among other
things, reimbursement rates and certain capital expenditures. Many lawmakers
have proposed programs to reform the United States healthcare system. These
programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates and otherwise change the operating
environment for the Company's customers. Healthcare providers may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investment, including those for the Company's products and related
services. Cost containment measures instituted by healthcare providers as a
result of regulatory reform or otherwise could result in greater selectivity in
the allocation of capital funds. Such selectivity could have an adverse effect
on the Company's ability to sell its products and related services. The Company
cannot predict with any certainty what impact, if any, such proposals or
healthcare reforms might have on its business, financial condition and results
of operations.

EMPLOYEES

     As of March 25, 1997, the Company employed a total of 179 full-time
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are excellent.

EXECUTIVE OFFICERS

     Set forth below are the names, ages and positions of the executive officers
of the Company:

<TABLE> 
<CAPTION> 
NAME                                 AGE  POSITION
----                                 ---  --------
<S>                                  <C>  <C> 
Kevin R. Green....................   42   President, Chief Executive Officer and Director
David R. Teckman..................   40   Vice President, Sales
Richard J. Willemin...............   46   Interim Vice President, Finance and Chief Financial Officer
Lisa K. Olson, Ph.D...............   39   Vice President, Corporate Marketing and Planning
Bruce S. Maller...................   42   Vice President and President of BSM
Donald F. Fortin, M.D.............   39   Vice President and Chief Scientific Officer    
Charles L. McIntosh, M.D., Ph.D...   59   Vice President and President of CLMA  
</TABLE>                                  

          Mr. Green has served as the President and Chief Executive Officer
since joining the Company in January 1996.  From September 1991 to December
1995, Mr. Green was employed by Integrated Medical Systems, Inc., a provider of
electronic communication networks to the healthcare industry, where, during part
of this period, he served as President and Chief Executive Officer.

                                      -18-
<PAGE>
 
          Mr. Teckman has served as Vice President, Sales since September 1996.
From 1989 to 1996, he served as Senior Vice President, Sales for PCS Health
Systems, Inc., a provider of information-driven healthcare solutions. 

          Mr. Willemin has served as Interim Vice President, Finance and Chief
Financial Officer since March 1997. Prior to his joining the Company, he served
as Chief Financial Officer at Datalogix International, Inc. from September 1996
to January 1997. From June 1994 to August 1996, Mr. Willemin served as Vice
President and Chief Financial Officer of NEIC, a transaction processing company
in the health care industry. From March 1992 to June 1994, he served as interim
Chief Financial Officer during periods of transition for several companies,
including Saratoga Springs Water Company, a beverage manufacturer and
distributor; Canyon Ranch Spa Cuisine, a mail order health food company; and
Cosmetics Plus, a health and beauty aid retailer.

          Dr. Olson has served as Vice President, Corporate Marketing and
Planning since joining the Company in April 1995. From November 1994 to April
1995, Dr. Olson was an independent consultant providing marketing and management
advice to healthcare organizations. From 1987 to August 1994, Dr. Olson was an
Associate Executive Vice President for the American College of Cardiology, a
22,000 member nonprofit professional society. Since December 1993, Dr. Olson has
also been an Adjunct Professor at Georgetown University in its healthcare
business certificate program.

          Mr. Maller has served as Vice President since October 1995, and
President and Chief Executive Officer of BSM since the merger of a wholly owned
subsidiary of the Company and BSM in October 1995. From 1979 until September
1995, Mr. Maller served in the same capacity with BSM.

          Dr. Fortin has served as Vice President and Chief Scientific Officer
since January 1997. From July 1995 to December 1996, Dr. Fortin was Director of
the Health Information Center and, from July 1993 to December 1996, Assistant
Professor of Medicine for the Division of Cardiology at Duke University Medical
Center.

          Dr. McIntosh has served as Vice President since December 1996. Since
1990, Dr. McIntosh has also served as President of CLMA. Prior to 1990, Dr.
McIntosh served on the Commissioned Corps of the U.S. Public Health Services as
a cardiac surgeon and researcher at the National Heart, Lung and Blood Institute
of the National Institute of Health.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

          This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in the forward-
looking statements. Factors that might cause such differences include, but are
not limited to, failure of the Company's joint marketing partners to market
successfully the Company's Vista products; termination of any of the Company's
joint marketing arrangements; failure of the Company's new products, including
the Crescendo! products and registries, to achieve market acceptance or
significant delays in the introduction of these new products or the discovery of
material defects in these products after introduction; termination of one or
more of the Company's agreements with national medical associations; lack of
continued market acceptance of the Company's clinical outcomes database
software; failure of the Company to maintain the integrity of its national
databases;

                                      -19-
<PAGE>
 
failure of the Company to integrate the business of CLMA into the Company's
operations; changes in government regulation; loss of key management personnel;
increased competition; and inability of the Company to obtain adequate
protection for the Company's proprietary technology. The forward-looking
statements herein are qualified in their entirety by the cautions and risk
factors set forth under "Cautionary Statement" filed as Exhibit 99 to this
Annual Report on Form 10-K.

          The Company is a corporation organized under the laws of the State of 
Minnesota. Its headquarters are located at 10900 Red Circle Drive, Minnetonka, 
Minnesota, 55343.

ITEM 2.  PROPERTIES.
------------------- 

          The Company occupies approximately 54,451 square feet of space at its
headquarters near Minneapolis, Minnesota, under a lease expiring in 2005.   The
Company leases space in Nice, France for Summit Medical Europe, S.A.R.L., its
European subsidiary. The Company also leases space in Nevada for BSM, space in
Massachusetts for MIS, space in North Carolina for Cordillera and space in
Maryland for CLMA.

ITEM 3.  LEGAL PROCEEDINGS.
-------------------------- 

          The Company has been named as a defendant in three federal court
securities putative class actions captioned Jong E. Lee v. Summit Medical
                                            -----------------------------
Systems, Inc., Mathias Faue, George E. and Patricia E. Faue, Janice 
-------------  ----------------------------------------------------
Mc Quiston v. Summit Medical Systems, Inc., Edward F. Sweeney, Kevin R. Green,
------------------------------------------------------------------------------
Anthony W. Rees, Kent J. Thiry, Dennis M. Powers, John M. Nehra, and Judith Anne
---------------------------------------------------------------      -----------
Jacobson v. Summit Medical Systems, Inc., each filed in United States
-----------------------------------------
District Court of the District of Minnesota on March 10, 1997, March 26, 1997
and March 31, 1997, respectively. Each action alleges, in essence, that the
Company made misleading public disclosures relating to its financial statements.
In each action, the plaintiffs seek a declaration that the action be certified
as a class action and compensatory damages for losses incurred as a result of
each alleged misleading public disclosures. The Company believes each of these
actions are without merit and intends to defend against them vigorously.

          The Company has been informed by the Division of Enforcement of the
Securities and Exchange Commission (the "Commission"), through service of a
subpoena on March 25, 1997, that the Commission is conducting an investigation
of the Company, relating to the Company's restatement of certain financial
statements. The Company is cooperating fully with the Commission and its
investigation.

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

          None.

                                    PART II

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

          The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "SUMT."  The following table sets forth the high and low prices
of the Company's Common Stock for the periods indicated as reported on the
Nasdaq National Market since the Company's initial public offering of Common
Stock on August 4, 1995.

<TABLE>
<CAPTION>
                          PERIOD                             HIGH       LOW
                          ------                            -------   ------- 
     <S>                                                    <C>       <C>
     1995
          Third quarter (commencing August 4, 1995)..       $17-1/8   $11-3/8
          Fourth quarter.............................       $25-1/2   $14-1/2
                                                                            
     1996                                                                   
          First quarter..............................       $22-3/4   $    16
          Second quarter.............................       $24-1/2   $    19
          Third quarter..............................       $    21   $11-1/2
          Fourth quarter.............................       $13-1/4   $     6
</TABLE>

                                      -20-
<PAGE>
 
     On March 24, 1997 the last reported sales price for the Company's Common
Stock on the Nasdaq National Market was $3-3/8 per share.  At March 24, 1997
there were approximately 206 record holders of the Company's Common Stock.

     The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future.  The Company currently intends to retain all available funds and any
future earnings for use in the operation of its business.

                                      -21-
<PAGE>
 

ITEM 6.  SELECTED FINANCIAL DATA.
-------------------------------- 

     The consolidated statements of operations data set forth below for each of
the three years ended December 31, 1994, 1995 and 1996 and the consolidated
balance sheet data at December 31, 1995 and 1996 are derived from, and are
qualified by reference to, the audited consolidated financial statements
included elsewhere in this Annual Report. The consolidated statements of
operations data for the years ended December 31, 1992 and 1993 and the
consolidated balance sheet data at December 31, 1992, 1993 and 1994 are derived
from audited consolidated financial statements of the Company not included
herein. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's consolidated financial statements and related notes,
and other financial information included elsewhere herein.

<TABLE>
<CAPTION>
                                                              Year Ended December 31,                 
                                             -------------------------------------------------------  
                                                1992       1993        1994(1)     1995(1)   1996     
                                             ---------  ---------  ----------  ----------  ---------  
                                                                   (Restated)  (Restated)             
<S>                                          <C>        <C>         <C>         <C>        <C>       
                                                     (In thousands, except per share amounts)
Revenue:                                                                                             
     Software licenses                       $  1,977   $  3,713    $  5,212    $  6,077   $  6,094    
     Support and service                          382        793       2,157       3,685      4,975    
     Consulting fees                            1,789      2,689       3,904       5,720      6,103    
                                             ---------  ---------  ----------  ----------  ---------    
          Total revenue                         4,148      7,195      11,273      15,482     17,172    
                                                                                                     
Cost of sales:                                                                                       
     Software licenses                            224        444         545         831        961
     Support and service                          495      1,129       1,421       1,797      2,590    
     Consulting fees                            1,005      1,345       2,919       3,316      4,130    
                                             ---------  ---------  ----------  ----------  ---------    
          Total cost of sales                   1,724      2,918       4,885       5,944      7,681    
                                             ---------  ---------  ----------  ----------  ---------    
                                                                                                     
Gross profit                                    2,424      4,277       6,388       9,538      9,491    
                                                                                                     
Operating expenses:                                                                                  
     Selling and marketing                        955      2,035       4,667       6,277      8,825    
     Research and development                     263        569         817       1,230      3,932    
     Purchase of in-process                     
       research and development                     -          -           -       7,435      4,746    
     General and administrative                 1,180      1,465       2,142       4,195      6,693    
                                             ---------  ---------  ----------  ----------  ---------    
          Total operating expenses              2,398      4,069       7,626      19,137     24,196
                                             ---------  ---------  ----------  ----------  ---------    
                                                                                                     
Income (loss) from operations                      26        208      (1,238)     (9,599)   (14,705)   
Interest income, net                                2          4          81         575      1,888    
                                             ---------  ---------  ----------  ----------  ---------    
Income (loss) before income taxes                  28        213      (1,157)     (9,024)   (12,817)   
Income tax expense                                  -          -          16           -         19    
                                             ---------  ---------  ----------  ----------  ---------    
Net income (loss)                            $     28   $    213    $ (1,173)   $ (9,024)  $(12,836)   
                                             =========  =========  ==========  ==========  =========     
                                                                                                      
Net income (loss) per share (2)              $   0.01   $   0.05    $  (0.24)   $ (1.37 )  $  (1.37)   
                                             =========  =========  ==========  ==========  =========     
                                                                                                     
Weighted average shares outstanding(2)          3,674      4,247       4,930       6,581      9,399     
                                             =========  =========  ==========  ==========  =========  
</TABLE> 

<TABLE> 
<CAPTION> 
                                                              Year Ended December 31,                
                                             ------------------------------------------------------- 
                                                1992       1993        1994        1995      1996    
                                             ---------  ---------  ----------  ----------  --------- 
                                                                   (Restated)  (Restated)            
<S>                                          <C>        <C>         <C>         <C>        <C>        
                                                                 (In thousands)
Cash, cash equivalents on short-term                   
  investments                                  $  754    $  657      $ 3,148    $ 22,921   $ 44,630     
Working capital                                   797       535        2,819      24,276     41,707     
Total assets                                    1,546     2,574        6,447      29,551     53,487     
Long -term debt, excluding current portion         53        91          153          29         27     
Total shareholders' equity                        834     1,133        3,891      25,834     46,083      
</TABLE>

(1) Restated as described in Note 2 to the Consolidated Financial
    Statements.
(2) Computed on a fully diluted basis as described in Note 3 to the
    Consolidated Financial Statements.


                                     -22-
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS.
------------- 

OVERVIEW

     The Company is a leading provider of clinical information systems and 
consulting services to the healthcare industry.  The Company currently offers 
database products primarily on two technology platforms: Crescendo! and Vista.  
The Crescendo! platform is designed for use in hospital cardiac catheterization 
and cardiovascular surgery programs.  The Company introduced, in the second half
of 1996, a Crescendo! Forte product, a comprehensive information database for 
use in high volume hospital cardiac catheterization and cardiovascular surgery 
centers, including medical research centers.  The Company is also developing a 
standard Crescendo! product for medium and lower volume cardiac catheterization 
and cardiovascular centers that desire to collect a core set of outcomes
measurements. The Vista platform is a Windows based, flat file application,
covering a product line of over 40 database software modules that is primarily
used in five medical specialties: cardiac and thoracic surgery, cardiology,
ophthalmology, urology and orthopaedics. Through its CQS package, the Company
offers to customers of its cardiovascular products a combined three year
software license and a program of implementation, training, data management and
consulting services that is designed to increase the value obtained by the
customer from the Company's database software. The Company also provides a range
of consulting services through its subsidiaries, BSM and CLMA. The Company
introduced, in late 1996, registry services related to the use of a particular
medical device or therapeutic agent, which are designed to collect and report
clinical information through Crescendo! platform software utilizing the WWW.

     A number of factors contributed to the Company's performance in 1996,
including:

          (i) Customer demand for Vista products in 1996 was adversely affected
     by a market trend away from flat file, PC-based systems, toward
     client/server, relational database architectures. A decision was made in
     1996 to address this trend on an interim basis, by developing an enhanced
     version of the Vista product ("Vista Elite") featuring additional reporting
     and decision support capabilities. This development effort was discontinued
     in February 1997, after a decision was made to accelerate, and focus on,
     the development of the Company's Crescendo! client/server, relational
     database platform and on-line technologies. While the Company believes that
     the Crescendo! product line will address the emerging needs of the
     marketplace, the adoption of this technology involves product development
     and market risks that may cause results to differ materially from this
     belief.

          (ii)   During 1996, sales of Vista products were adversely affected by
     a decision to have the Company's sales force focus primarily on management
     and support of indirect sales through the corporate marketing partners
     rather than direct sales activity. In the fourth quarter of 1996, the
     Company adopted a direct sales focus for sales of the Company's Crescendo!
     products and CQS package, and it began hiring additional sales personnel.
     The Company also implemented an inbound telesales initiative to support
     sales of Vista products. See "Sales and Marketing--Corporate Joint
     Marketing."

          (iii)  The Company's performance in 1996 was also affected by the 
     introduction of Crescendo! products and CQS packages during the second half
     of 1996. Although the Company signed agreements for four Crescendo!
     products and 15 CQS packages in 1996, these agreements did not result in
     revenue due to unfulfilled obligations. In addition, the Crescendo!
     products and CQS package will not significantly contribute to revenue until
     such time, if any, as these products and package are more widely accepted
     in the marketplace. The contribution of the Crescendo! products and CQS
     package to revenue is also affected by a longer sales cycle for these
     products and packages due to the greater complexity and higher purchase
     prices associated with these sales.

     
                                      -23-
<PAGE>
 
     Several factors also contributed to an increase in operating expenses in
1996 including:

          (i)    The acquisition of CLMA in December 1996, which was accounted
     for as a pooling of interest, involved acquisition related costs of
     $523,000. Under pooling rules such costs are expensed. See "Recent
     Developments."

          (ii)   The acquisition during December 1996 of the equity interest in
     Cordillera not owned by the Company resulted in costs totaling $4.7 million
     for purchase of in-process research and development. See "Recent
     Developments" below.

          (iii)  The dual development of the Crescendo! products and Vista Elite
     product resulted in greater research and development expense, including
     personnel, consulting and software sublicense costs associated with the
     Vista Elite development, totaling approximately $1 million in the second
     half of 1996. 
     
          (iv)   In preparation for the transition to offering a more service
     intensive CQS package, the Company hired additional implementation,
     consulting and support personnel in the second half of 1996 in advance of
     introducing the CQS package.

          (v)    The Company also increased the number of the direct sales
     personnel in anticipation of product introduction.

          (vi)   The Company incurred additional personnel and marketing costs
     in an attempt to expand into additional medical specialty markets (e.g.
     urology, endoscopy and critical care) to fulfill obligations entered into
     with certain of the Company's joint marketing partners in 1995.

     The Company anticipates that it will continue to experience operating 
losses during 1997.

RECENT DEVELOPMENTS

     On December 31, 1996, the Company acquired CLMA, pursuant to a merger in
which CLMA became a wholly-owned subsidiary of the Company and the Company
issued 976,453 shares of Common Stock in exchange for the outstanding stock of
CLMA.  The merger is accounted for as a pooling of interests and is
reflected retroactively in the financial statements of the Company on that 
basis.

     On December 31, 1996, the Company entered into a reorganization agreement
(the "Reorganization Agreement") pursuant to which the Company acquired the
outstanding equity interest and all options to acquire equity interests in
Cordillera L.L.C. ("Cordillera") not held by the Company. The total purchase
price of the acquisition was $5,898,000, consisting of cash ($2,000,000), the
value of options and warrants to purchase 675,000 shares of Company Common Stock
for a ten year period at $7.50 per share ($3,792,000) and acquisition related
expenses ($106,000), and was allocated to research and development in process
($4,746,000) and developed technology ($1,552,000). Purchased research and
development in process was expensed as of December 31, 1996, the acquisition
date, and developed technology will be amortized straight-line over a three year
period. During 1996, Cordillera has been engaged in the development of a
client/server, relational database application and the on-line system and WWW
technologies to be employed in the Company's registries. In conjunction with the
Reorganization Agreement, Dr. Fortin joined the Company as Vice President and
Chief Scientific Officer and Drs. Califf and Phillips continued as consultants
to the Company.

     In March, 1997, the Company established a cost reduction program to reduce
the workforce throughout the Company, except at BSM and CLMA, and to close the
operations of MIS, its subsidiary near Boston. Twenty-nine positions were
eliminated as a result, reducing the number of employees from 208 at December
31, 1996 to 179 at March 25, 1997. The Company also has incurred severance
expenses in the first quarter of 1997 related to executive officers of the
Company. Included in these charges are severance payments to former Chief
Financial Officer, Donald Haas.

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

     The financial statements included in this Annual Report contain
restatements of previously reported financial positions and results of
operations for the years 1994 and 1995 and the nine months ended September 30,
1996. The restatements are based on an investigation by the Company's
management, auditors, and outside counsel of the Company's accounting practices
after concerns were brought to the attention of senior management and the
Company's Board of Directors by a new chief financial officer on February 27,
1997. The restatements primarily involve revenue recognition practices related
to certain sales of software licenses and related services including

                                      -24-
<PAGE>
 
revenue recognized based on purchase commitments made by certain corporate
marketing partners but prior to actual shipment of products ("partner
commitments"), and revenue recognized in advance of actual shipment in other
contexts ("preshipment recognition"). In addition, with respect to products
first introduced in the second half of 1996, revenue had been incorrectly
recognized under CQS and Crescendo! contracts involving unfulfilled obligations,
including commitments for future delivery of additional product features and
performance of implementation and consulting services, and on a database
development program based on negotiations with a prospective customer that were
not finalized. Negotiations for this database development program were
subsequently discontinued without an order.

     Consequently, the Company's financial statements have been restated to
recognize revenue in the appropriate periods and defer revenue recognition on
certain contracts until the conditions for such recognition have been satisfied.
Corresponding adjustments to expenses associated with revenues have been made to
cost of sales and operating expenses (primarily sales commissions) in each
affected period as appropriate.

     These restatements had the net effect of reducing revenue for 1994, 1995
and the nine months ended September 30, 1996 by $1,052,000, $2,214,000 and
$1,782,000, respectively. See Note 2 in Notes to Consolidated Financial
Statements and "Summary of Restatement of Revenues." On a full year basis for
1996, using the Company's February 26, 1997 earnings announcement as a baseline,
revenues for 1996 were reduced by $2,372,000. Of the cumulative revenue
reductions of $5,638,000 through December 31, 1996, approximately $1.9 million
related to partner commitments, $1.3 million to pre-shipment recognition, $1.7
million to CQS and Crescendo! contracts, $500,000 to the database development
program and $200,000 to an increase in the reserve for customer returns and
allowances. As to partner commitments, revenue will be recognized in the future
at the time of shipment. The amount and timing of shipments under these partner
commitments depends, in part, on the market demand for Vista products, which are
currently the only products covered by these commitments, the effect on demand
for Vista products or the Company's decision to focus its product development
efforts on Crescendo! products, and the ability of the Company to enter into
satisfactory arrangements with its marketing partners regarding the scope of
database products and services to be sold under these arrangements. See "Sales
and Marketing." As to pre-shipment recognition, shipments representing
approximately $300,000 of these cumulative adjustments have occurred through
March 31, 1997, and a significant portion of the remaining balance of $1.0
million is likely not to be realized.

     The Company expects to incur significant legal and accounting fees in
connection with the investigation of the Company's revenue recognition practices
and the three shareholder class action suits filed on March 10, 1997, March 26,
1997 and March 31, 1997. These fees will be included in operating expenses as
incurred 1997. The Company also incurred $200,000 of executive officer severance
expense in the first quarter of 1997.

Results of Operations

     The following table sets forth certain financial data expressed as a 
percentage of net sales for the periods indicated.

<TABLE>
<CAPTION>
                                                         Year Ended December 31,                                            
                                             ----------------------------------------------                                 
                                                                                                                            
                                               1992     1993      1994     1995      1996                                   
                                             -------  --------  --------  -------  --------                                 
<S>                                          <C>      <C>       <C>       <C>      <C>      
Revenue:                                                                                                                    
        Software licenses                      47.7%    51.6%     46.2%     39.3%    35.5%                                  
        Support and service                     9.2     11.0      19.1      23.8     29.0                                   
        Consulting Fees                        43.1     37.4      34.7      36.9     35.5                                   
                                             -------  --------  --------  -------  --------        
          Total Revenue                       100.0    100.0     100.0     100.0    100.0                                   
                                             
Cost of sales:                                                                                                              
        Software licenses                       5.4      6.2       4.8       5.4      5.6                                   
        Support and service                    11.9     15.7      12.6      11.6     15.1                                   
        Consulting Fees                        24.2     18.7      25.9      21.4     24.1                                   
                                             -------  --------  --------  -------  --------          
          Total cost of sales                  41.5     40.6      43.3      38.4     44.8                                   
                                                                                                                            
Gross profit                                   58.5     59.4      56.7      61.6     55.2                                   
                                                                                                                            
Operating expenses:                                                                                                         
        Selling and marketing                  23.0     28.3      41.4      40.5     51.4                                   
        Research and development                6.3      7.9       7.2       7.9     22.9                                   
        Purchase of in-process                                                    
        research and development                0.0      0.0       0.0      48.0     27.6 
        General and administrative             28.4     20.4      19.0      27.1     39.0                                   
                                             -------  --------  --------  -------  --------        
          Total operating expenses             57.8     56.6      67.6     123.5    140.9                                   
                                             -------  --------  --------  -------  --------              
                                                                                                                            
Income (loss) from operations                   0.8      2.8     -10.9     -61.9    -85.7                                   
Interest income, net                            0.0      0.1       0.7       3.7     11.0                                   
                                             -------  --------  --------  -------  --------         
Income (loss) before income taxes               0.8      2.9     -10.2     -58.2    -74.7                                   
Income tax expense                              0.0      0.0     - 0.1       0.0     -0.1                                   
                                             -------  --------  --------  -------  --------   
Net Income (loss)                               0.8%     2.9%    -10.3%    -58.2%   -74.8%                                  
                                             =======  ========  ========  =======  ========         
</TABLE>


Years Ended December 31, 1996, 1995 and 1994     

     TOTAL REVENUE.  Summit's revenue for 1996 was derived primarily from
software sales, support and services related to its Vista products and
consulting services provided by its BSM and CLMA subsidiaries. Revenue for 1996
of $17.2 million represented a 11% increase from 1995 resulting from an increase
in support service, consulting and software revenues. Revenue from sales to
marketing partners comprised 27% of total software, support and service revenue
(excluding consulting) in 1996. Revenue for 1995 was

                                     -25-







<PAGE>
 
$15.5 million, an increase of $ 4.2 million or 37% over 1994 attributable mainly
to growth in the Vista customer base.

     SOFTWARE LICENSE REVENUE.  The Company's software license revenue in 1996
related primarily to shipments of Vista software to end users and corporate
marketing partners. Sales of software licenses for 1996 were $6.1 million,
essentially unchanged from 1995. Revenues were flat due to various factors that
adversely affected revenues as discussed more fully in the Overview section,
including (i) a shift in market demand away from a flat file, PC based solution
and towards client/server, relational database based solutions; (ii) an
unsuccessful attempt to rely more heavily on corporate marketing partners to
sell the product; and (iii) a longer sales cycle with the CQS package reflecting
the greater complexity and price of CQS versus Vista and lack of a referenceable
customer base.

     Sales of software licenses for 1995 were $6.1 million, an increase of
$865,000 million or 17% over 1994. This increase is attributable to increased
sales of cardiology, cardiac surgery, and ophthalmology modules as well as
higher prices for procedure modules.

     SUPPORT AND SERVICE REVENUE.  Support and service revenue primarily
includes an annual service fee, training fees, and, in the future, will include
fees for the service components of the Company's new CQS package. Annual service
fees are recognized ratably over the period in which support services are
provided. All other services are recognized upon performance of the applicable
services. Support and service revenue in 1996 was $5.0 million, an increase of
$1.3 million or 35% over 1995, due to an increase in the installed customer
base. Support and service revenue in 1995 was $3.7 million, an increase of $1.5
million or 71% over 1994, reflecting a larger customer base and additional
development fees from joint marketing partners related to urology and endoscopy
modules.

     CONSULTING REVENUE.  Consulting revenue consists of fees received by BSM
for providing strategic development, financial analysis and systems planning
services to health care providers and vendors and fees received by CLMA for
regulatory affairs services provided primarily to manufacturers of new medical
device and biologic products in order to secure FDA approval. CLMA services
include regulatory strategy for FDA submissions, clinical trials and statistical
analysis. Revenue is recognized when services are performed. Consulting revenue
in 1996 was $6.1 million, an increase of $382,000 or 7% over 1995 attributed to
new customers and additional services provided to existing customers. Consulting
revenue in 1995 was $5.7 million, an increase of $1.8 million or 46% over 1994.
Both increases were attributable to an increase in the customer base.

     COST OF TOTAL REVENUE.  Cost of sales as a percentage of total revenue was
45% in 1996, compared to 38% in 1995, primarily due to the Company's focus on
building the support and implementation staffing needed to support the CQS sales
model, an increase in lower margin interfacing services and lower margins on 
consulting activities at BSM and CLMA. Cost of sales in 1995 was 38% of total 
revenue compared to 43% in 1994 reflecting an increase in higher margin software
sales.
                                   
     COST OF SOFTWARE LICENSE REVENUE.  Cost of software license revenue
consists of expenses directly related to sales of software licenses, including
royalties, freight, user guides, diskettes, amortization of capitalized software
and an allocation of costs incurred by the customer service department for
various software related activities.  Amortization of capitalized software
amounted to $38,000 in 1996.  At December 31, 1996, the balance in capitalized
software was $1.2 million primarily representing software purchased in
connection with the Cordillera acquisition.

                                      -26-
<PAGE>
 
     The following table sets forth, for the periods indicated, the relationship
of cost of license fees and license fee revenues:

<TABLE>
<CAPTION>
                                                    1996      1995      1994
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
License fee revenue.........................      $  6,094  $  6,077  $  5,212
Cost of license fees........................           961       831       545
Cost of license fees as a percentage
of license fee revenues.....................            16%       14%       10%
</TABLE>

     Cost of license fees increased as a percent of license fee revenues during
1996 due to an increase in lower margin system interfacing services provided in
connection with the Windows-based Vista products which represented a higher
percentage of new installations versus the DOS product in 1996 than in 1995. The
DOS software did not provide such interfacing capability. The increase in cost
of license fees in 1995 compared with 1994 is also due to an increase in system
interfacing services.

     COST OF SUPPORT AND SERVICE REVENUE.  Cost of support and service revenue
consists of expenses directly related to sales of support and service, including
royalties, customer service personnel costs, and expenses for training and
clinical data services.  The following table sets forth, for the periods
indicated, the relationship of cost of support and services and support and
service revenues:

<TABLE>
<CAPTION>
                                                    1996      1995      1994
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Support and service revenue..................     $  4,975  $  3,685   $  2,157
Cost of support and service..................        2,590     1,797      1,421
Cost of support and service as a percentage
of support and service revenues..............           52%       49%        66%
</TABLE>

     Cost of support and service increased as a percentage of revenues in 1996
as the Company hired additional implementation consulting and support personnel
in the second half of 1996 to support the new CQS package. The decline in cost
of support and services as a percent of related revenues in 1995 over 1994 was
attributable to more efficient utilization of personnel as the number of
customers increased.

     COST OF CONSULTING REVENUE. Cost of consulting revenue consists of
personnel costs and related expenses associated with the BSM and CLMA
subsidiaries. The following table sets forth, for the periods indicated, the
relationship of the cost of consulting and consulting revenue:

<TABLE>
<CAPTION>
                                                    1996      1995      1994
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Consulting revenue..........................      $  6,103  $  5,720  $  3,904
Cost of consulting..........................         4,130     3,316     2,919
Cost of consulting as a percentage of
 consulting revenues........................            68%       58%       75%
</TABLE>

     Cost of consulting increased to 68% of consulting revenue in 1996 compared
to 58% in 1995 as a shortfall in new Vista installations adversely impacted
follow-on consulting opportunities at BSM. Cost also increased with the addition
of a BSM branch in Atlanta. The percentage dropped to 58% in 1995 from 75% in
1994 reflecting more efficient utilization of personnel at CLMA following a 47%
increase in consulting fees.

     SELLING AND MARKETING EXPENSES.  Selling and marketing expenses include
primarily salaries, benefits and commissions associated with the Company's
direct sales force; product marketing; advertising and product literature.
Selling and marketing expenses were $8.8 million in 1996, an increase of $2.5
million or 41% over 1995 reflecting costs associated with the development 

                                      -27-
<PAGE>
 
of the CQS package and Vista Elite and Crescendo! product line and including
additional staffing in the sales and marketing areas, development and production
of marketing materials and product literature related to CQS and Crescendo!, and
increased travel to medical conventions. In addition, the Company incurred
significant personnel and marketing costs in an attempt to expand into
additional medical specialty markets (e.g., urology, endoscopy and critical
care), and to fulfill obligations extended with certain marketing partners in
1995. These initiatives generated very little increased revenues, and the
Company has reduced its focus on them. The Company also upgraded its sales force
and implemented a telesales operation in the second half of 1996.

     Selling and marketing expenses were $6.3 million in 1995, an increase of
$1.6 million or 34% over 1994, due to expenses relating to the expansion of the
direct sales force in the U.S., increased salaries for marketing personnel and
expenses related to hiring additional personnel related to new specialty
procedure modules.

     RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses
primarily include the salaries and benefits associated with technical services
personnel and outside consultants involved in developing new software products.
Research and development costs have been expensed as incurred. Research and
development expenses were $3.9 million in 1996, an increase of $2.7 million over
1995 reflecting additional staffing and associated costs in connection with
migrating the Company's software products to a client/server, relational
database (a) technology platform (i.e. Crescendo!), (b) personnel, consulting
and software sublicense costs incurred in connection with Vista Elite and
various other software products involving new medical specialties, and (c)
supporting multiple product platforms and operating systems. The Company has
developed a strategy to focus its future development efforts on a client/server
relational database platform and on-line technologies.

Research and development expenses were $1.2 million in 1995, an increase of 
$413,000 or 51% over 1994, due primarily to the addition of technical and
programming personnel by the Company and MIS.

     PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT. In fourth quarter 1996,
the Company incurred a $4.7 million charge for in-process research and
development purchased in connection with the acquisition of 100% of the
Cordillera equity interest. In fourth quarter 1995, an in-process R&D charge of
$7.4 million was recorded on the formation of the Cordillera joint venture with
Duke University.

     GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
primarily include the salaries and benefits associated with general management,
finance and human resources, as well as the cost of legal and professional
services. General and administrative expenses were $6.7 in 1996, an increase of
$2.5 million over 1995 attributable to (a) transaction costs incurred on the
CLMA acquisition, (b) recruiting and relocation expenses incurred with
additional hiring and (c) an increase in reserves for bad debt.

     General and administrative expenses were $4.2 million in 1995, an increase
of $2.1 million compared to 1994, due primarily to increased personnel and
higher salaries for accounting, human resources and business development
personnel, increased administrative expenses at the Company's European
subsidiary, Summit Medical Europe S.A.R.L., and higher legal and transaction
cost incurred in the BSM and MIS acquisitions.

     INTEREST INCOME, NET.  Interest income, net, increased to $1.9 million in
1996 from $575,000 in 1995 as proceeds from the Company's public offerings in
1995 and 1996 were invested in short term securities. Interest income, net, in
1995 was $575,000 compared to $81,000 in 1994, due to interest income recorded
on proceeds received from the Company's August 1995 initial public offering.

     INCOME TAXES.  To date, the Company has not incurred any substantial income
tax liability because of its historical operating losses.  The deferred tax
asset related to additional operating loss carry forwards generated in 1996 was
fully offset by an increase in the valuation reserve.  See Note 16 of Notes to
Consolidated Financial Statements.

                                      -28-
<PAGE>
 
QUARTERLY RESULTS OF OPERATIONS

     The following table sets forth certain unaudited quarterly financial data
for 1994, 1995 and 1996, in dollars and percentage of revenue. All amounts and
percentages in the following tables have been restated to reflect poolings of
interests and revenue recognition as disclosed elsewhere in this Annual Report.
In the opinion of the Company's management, this unaudited information has been
prepared on the same basis as the audited information included elsewhere in this
Annual Report and includes all adjustment necessary to present fairly the
information set forth therein. The operating results for any quarter are not
necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
                                                Three Months Ended, (1)                        Three Months Ended, (1)
                                        ----------------------------------------     -----------------------------------------
                                        March 31, June 30,   Sept. 30   Dec. 31,     March 31,  June 30,  Sept. 30,   Dec. 31,  
                                          1994      1994       1994       1994         1994       1994      1994        1994    
                                        --------- --------   --------   --------     ---------  --------  ---------   --------
<S>                                     <C>       <C>        <C>        <C>          <C>        <C>       <C>         <C>       
Revenue:                                                                                                                        
     Software licenses                  $1,063    $ 1,181    $ 1,230    $  1,738     41.2%      49.5%     43.8%       49.7%  
     Support and service                   326        449        632         750     12.6%      18.8%     22.5%       21.4%     
     Consulting fees                     1,192        755        946       1,011     46.2%      31.7%     33.7%       28.9%     
                                        ----------------------------------------    ---------------------------------------
          Total revenue                  2,581      2,385      2,808       3,499    100.0%     100.0%   100.0%       100.0%   
                                                                                                                              
Cost of Sales:                                                                                                                
     Software licenses                     109        123        123         190      4.2%       5.2%     4.4%         5.4%
     Support and services                  290        325        383         423     11.2%      13.6%    13.6%        12.1%
     Consulting fees                     1,146        254        733         786     44.4%      10.7%    26.1%        22.4%     
                                        ----------------------------------------    --------------------------------------- 
              Total cost of sales        1,545        702      1,239       1,399     59.8%      29.5%    44.1%        39.9% 
Gross profit                             1,036      1,683      1,569       2,100     40.2%      70.5%    55.9%        60.1%

Operating expenses                       1,555      1,683      2,056       2,332     60.2%      70.6%    73.2%        66.6%   
                                        ----------------------------------------    ---------------------------------------

Income (loss) from operations             (519)        (0)      (487)       (232)   -20.0%      -0.1%   -17.3%        -6.5%    
                                                                               
Net income (loss)                       $ (519)   $    11    $  (460)   $   (205)   -20.0%       0.4%   -16.4%        -5.7%      
                                        ========================================    ======================================= 
</TABLE> 

<TABLE> 
<CAPTION> 
                                                Three Months Ended, (1)                        Three Months Ended, (1)
                                        ----------------------------------------     ----------------------------------------- 
                                        March 31, June 30,   Sept. 30   Dec. 31,     March 31,  June 30,  Sept. 30,   Dec. 31,
                                           1995      1995       1995      1995         1995       1995      1995        1995  
                                        --------- --------   ---------  --------     ---------  --------  ---------   --------
<S>                                     <C>       <C>        <C>        <C>          <C>        <C>       <C>         <C> 
Revenue:                                                                                                                     
     Software licenses                  $1,097    $ 1,706    $ 1,415    $  1,859     34.3%      43.3%    37.7%        40.5%  
     Support and service                   693        767      1,015       1,210     21.7%      19.5%    27.0%        26.4%     
     Consulting fees                     1,407      1,467      1,325       1,521     44.0%      37.2%    35.3%        33.1%
                                        ----------------------------------------    ---------------------------------------  
           Total revenue                 3,197      3,940      3,755       4,590    100.0%     100.0%   100.0%       100.0%   
Cost of Sales:                                                                                                                
     Software licenses                     113        249        306         163      3.5%       6.3%     8.1%         3.6%     
     Support and service                   377        417        531         472     11.8%      10.6%    14.1%        10.3%     
     Consulting fees                       835        875        757         849     26.1%      22.2%    20.2%        18.5%     
                                        ----------------------------------------    ---------------------------------------
           Total cost of sales           1,325      1,541      1,594       1,484     41.4%      39.1%    42.4%        32.4% 
Gross profit                             1,872      2,399      2,161       3,106     58.6%      60.9%    57.6%        67.6%

Operating expenses                       2,365      3,038      3,039      10,695(2)  74.0%      77.1%    80.9%       233.0% 
                                        ----------------------------------------    ----------------------------------------
Income (loss) from                                                                  
 operations                               (493)      (639)      (878)     (7,589)   -15.4%     -16.2%   -23.3%      -165.4%    
                                                                                                                                
Net income (loss)                       $ (461)   $  (614)   $  (680)   $ (7,269)   -14.4%     -15.6%   -18.1%      -158.5% 
                                        ========================================    ========================================
</TABLE> 

                                      -29-
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                 Three Months Ended, (1)                        Three Months Ended, (1)     
                                        ----------------------------------------     -----------------------------------------
                                        March 31, June 30,   Sept. 30   Dec. 31,     March 31,  June 30,  Sept. 30,   Dec. 31,  
                                          1996      1996       1996       1996         1996       1996      1996        1996       
                                        --------- --------   --------   --------     ---------  --------  ---------   --------
<S>                                     <C>       <C>        <C>        <C>          <C>        <C>       <C>         <C> 
Revenue:                                                                                                                         
     Software licenses                  $1,710    $ 2,298    $ 1,508    $    578       36.5%       43.0%      37.4%    18.6%    
     Support and service                 1,432      1,589        989         965       30.5%       29.7%      24.6%    31.0%   
     Consulting fees                     1,547      1,457      1,531       1,568       33.0%       27.3%      38.0%    50.4%     
                                        ----------------------------------------     ---------------------------------------- 
               Total revenue             4,688      5,344      4,028       3,111      100.0%      100.0%     100.0%    100.0%   
Cost of Sales:                                                                                                                  
     Software licenses                     349        180        186         246        7.4%       3.4%        4.6%      7.9%    
     Support and service                   581        638        588         783       12.4%      11.9%       14.6%     25.2%    
     Consulting fees                       810        985      1,138       1,197       17.3%      18.4%       28.2%     38.5%    
                                        ----------------------------------------     ----------------------------------------
               Total Cost of sales       1,740      1,803      1,912       2,226       37.1%      33.7%       47.4%     71.6%    
Gross profit                             2,948      3,541      2,116         885       62.9%      66.3%       52.6%     28.4%

Operating expenses                       3,482      4,103      4,457      12,154(2)    74.3%      76.8%      110.7%    390.5%   
                                        ----------------------------------------     ----------------------------------------
Income (loss) from                                                    
 operations                               (533)      (562)    (2,341)    (11,269)     -11.4%     -10.5%      -58.1%   -362.1%    
                                                                                                                                 
Net income (loss)                       $ (250)   $  (222)   $(1,713)   $(10,651)      -5.4%      -4.1%      -42.5%   -342.2% 
                                        ========================================     ========================================
</TABLE>

_______________________
(1)  Restated as described in Note 2 to the Consolidated Financial Statements.
(2)  Includes expenses of $7.4 and $4.7 million in 1995 and 1996, respectively,
     for the purchase of in-process research and development in connection with
     the formation of the Joint Venture and buyout in 1995 and 1996
     respectively.

Restatement of Previously Issued Financial Statements

The following is a summary of selected unaudited quarterly information, as
presented to reflect the effect of the restatements for the three years ended 
December 31, 1996:

<TABLE>
<CAPTION>
                                                                       Net income                  Net income 
                                                          Gross       (loss) from     Net income   (loss) per
                                          Revenues        Profit       operations       (loss)       share
                                        ------------  -------------  -------------  -------------  ----------
<S>                                     <C>           <C>            <C>            <C>            <C>
1996 (1)
 
Three months ended March 31:
  As previously reported                $ 3,913,281    $ 2,678,767      ($544,325)     ($280,808)  ($0.03)
  Effect of McIntosh pooling              1,016,851        483,383        225,949        224,148     0.03
  Effect of restatement                    (241,800)      (214,120)      (215,749)      (194,744)   (0.02)
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $ 4,688,332    $ 2,948,030      ($534,125)     ($251,404)  ($0.03)
 
Three months ended June 30:
  As previously reported                $ 5,116,161    $ 3,698,189       ($93,705)      $247,469    $0.03 
  Effect of McIntosh pooling                915,724        457,081         94,743         93,328     0.01
  Effect of restatement                    (688,563)      (614,707)      (563,007)      (563,007)   (0.06)
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $ 5,343,322    $ 3,540,563      ($561,969)     ($222,210)  ($0.02)
 
Three months ended September 30:
  As previously reported                $ 4,098,474    $ 2,671,073    ($1,466,685)     ($837,177)  ($0.08)
  Effect of McIntosh pooling                781,358        259,237        (86,662)       (88,084)   (0.01)
  Effect of restatement                    (852,471)      (814,724)      (788,301)      (788,301)   (0.08)
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $ 4,027,361    $ 2,115,586    ($2,341,648)   ($1,713,562)  ($0.17)
 
Three months ended December 31: (2) (3)
  As previously reported                $ 2,744,040    $ 1,061,597   ($10,241,021)   ($9,688,928)  ($0.94)
  Effect of McIntosh pooling                957,200        371,485        (37,082)       (37,934)    0.00
  Effect of restatement                    (588,821)      (546,683)      (989,589)      (922,094)   (0.09)
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $ 3,112,419    $   886,399   ($11,267,692)  ($10,648,956)  ($1.03)
 
 
1996 Total:  (2) (3)
  As previously reported                $15,871,956    $10,109,626   ($12,345,736)  ($10,559,444)  ($1.12)
  Effect of McIntosh pooling              3,671,133      1,571,186        196,948        191,458     0.02
  Effect of restatement                  (2,371,655)    (2,190,234)    (2,556,646)    (2,468,146)   (0.26)
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $17,171,434    $ 9,490,578   ($14,705,434)  ($12,836,132)  ($1.37)
</TABLE>


<TABLE>
<CAPTION>                                                                                                      
                                                                       Net income                  Net income 
                                                          Gross       (loss) from     Net income   (loss) per
                                          Revenues        Profit       operations       (loss)       share
                                        ------------  -------------  -------------  -------------  ----------
<S>                                     <C>           <C>            <C>           <C>           <C>
1995 (1)
 
Three months ended March 31:
  As previously reported                $ 2,624,448     $1,748,947     ($341,313)    ($300,437)     ($0.06) 
  Effect of McIntosh pooling                941,026        455,564       149,798       146,487        0.03  
  Effect of restatement                    (368,510)      (331,659)     (300,222)     (305,863)      (0.06) 
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $ 3,196,964     $1,872,852     ($491,737)    ($459,813)     ($0.08) 
                                                                                                            
Three months ended June 30:                                                                                 
  As previously reported                $ 2,929,122     $1,961,767     ($707,369)    ($686,789)     ($0.13) 
  Effect of McIntosh pooling              1,031,922        455,049        92,738        89,493        0.02  
  Effect of restatement                     (20,985)       (18,886)      (25,299)      (17,418)      (0.00) 
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $ 3,940,059     $2,397,930     ($639,930)    ($614,714)     ($0.11) 
                                                                                                            
Three months ended September 30:                                                                            
  As previously reported                $ 3,776,776     $2,580,241     ($204,351)      ($6,124)     ($0.00) 
  Effect of McIntosh pooling                921,452        444,507       137,331       134,371        0.02  
  Effect of restatement                    (943,000)      (863,700)     (810,540)     (808,190)      (0.11) 
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $ 3,755,228     $2,161,048     ($877,560)    ($679,943)     ($0.09) 
                                                                                                            
Three months ended December 31: (3)                                                                     
  As previously reported                $ 4,470,338     $3,434,709   ($7,013,328)  ($6,664,430)     ($0.81) 
  Effect of McIntosh pooling              1,001,134        463,411       126,764       124,233        0.02  
  Effect of restatement                    (881,612)      (791,951)     (702,657)     (729,188)      (0.09) 
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $ 4,589,860     $3,106,169   ($7,589,221)  ($7,269,385)     ($0.88) 
                                                                                                            
                                                                                                            
1995 Total:  (3)                                                                                 
  As previously reported                $13,800,684     $9,725,664   ($8,266,361)  ($7,657,780)     ($1.16) 
  Effect of McIntosh pooling              3,895,534      1,818,531       506,631       494,584        0.08  
  Effect of restatement                  (2,214,107)    (2,006,196)   (1,838,718)   (1,860,659)      (0.28) 
                                        ------------  -------------  -------------  -------------  ----------
  As restated                           $15,482,111     $9,537,999   ($9,598,448)  ($9,023,855)     ($1.37)  
</TABLE>

<TABLE>
<CAPTION>                                                                                                     
                                                                      Net income                   Net income           
                                                         Gross        (loss) from    Net income    (loss) per      
                                          Revenues       Profit       operations       (loss)         share           
                                        ------------  -------------  -------------   ------------  -------------       
<S>                                     <C>           <C>            <C>             <C>           <C>           
1994 (1)
 
Three months ended March 31:
  As previously reported                $ 1,750,430     $1,079,492      ($181,825)     ($181,089)      ($0.04)  
  Effect of McIntosh pooling                830,515        (44,275)      (337,894)      (338,866)       (0.08)  
  Effect of restatement                           0              0              0              0            0   
                                        ------------  -------------  -------------   ------------  -------------       
  As restated                           $ 2,580,945     $1,035,217      ($519,719)     ($519,955)      ($0.12)  
                                                                                                         
Three months ended June 30:                                                                              
  As previously reported                $ 1,970,814     $1,268,554      ($414,758)     ($403,892)      ($0.09)  
  Effect of McIntosh pooling                414,697        414,697        414,697        414,697         0.09   
  Effect of restatement                           0              0              0              0            0   
                                        ------------  -------------  -------------   ------------  -------------       
  As restated                           $ 2,385,511     $1,683,251           ($61)  $     10,805      $  0.00   
                                                                                                         
Three months ended September 30:                                                                         
  As previously reported                $ 2,499,661     $1,784,322       ($86,084)      ($83,852)      ($0.02)  
  Effect of McIntosh pooling                721,813        155,943        (33,989)       (34,273)       (0.01)  
  Effect of restatement                    (414,000)      (372,600)      (367,954)      (343,620)       (0.06)  
                                        ------------  -------------  -------------   ------------  -------------       
  As restated                           $ 2,807,474     $1,567,665      ($488,027)     ($461,745)      ($0.09)  
                                                                                                         
Three months ended December 31:                                                                          
  As previously reported                $ 3,406,418     $2,495,068   $    281,173       $334,761      $  0.06  
  Effect of McIntosh pooling                730,574        180,504         (4,124)        (7,508)       (0.00)  
  Effect of restatement                    (638,010)      (574,209)      (507,134)      (529,548)       (0.09)  
                                        ------------  -------------  -------------   ------------  -------------       
  As restated                           $ 3,498,982     $2,101,363      ($230,085)     ($202,295)      ($0.04)  
                                                                                                         
1994 Total:                                                                                      
  As previously reported                $ 9,627,323     $6,627,436      ($401,494)     ($334,072)      ($0.07)  
  Effect of McIntosh pooling              2,697,599        706,869         38,690         34,050         0.01   
  Effect of restatement                  (1,052,010)      (946,809)      (875,088)      (873,168)       (0.18)  
                                        ------------  -------------  -------------   ------------  -------------       
  As restated                           $11,272,912     $6,387,496    ($1,237,892)   ($1,173,190)      ($0.24)   
</TABLE>

(1) The unaudited quarterly financial data presented above are restated to
    include (i) a December 1996 pooling of interests transaction for all
    periods presented, and (ii) the effects of the restatement of consolidated
    results of operations for 1994 and 1995 as described in Note 2 to the
    consolidated financial statements. Such data for 1996 are also restated to
    reflect the continued effects of such matters, plus elimination of
    additional revenues recognized on new product introductions in 1996 pending
    completion of significant vendor obligations, performance of implementation
    and consulting services and finalization of contracts.

(2) Not previously reported. Represents amounts included in or derived from the
    Company's press release on February 26, 1997.

(3) Includes pre-tax charges to operations for in-process research and 
    development expensed at dates of purchase business combinations of 
    $7,435,000 in the quarter ended December 31, 1995 and $4,746,000 in the 
    quarter ended December 31, 1996.


                                      -30-
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

          The Company's cash and cash equivalents increased by $7.2 million
during 1996. This increase reflects net proceeds of $29.4 million provided by
financing activities including the sale of common stock in the Company's second
public offering completed in July 1996, offset by a net increase in investments
amounting to $14.5 million, purchases of equipment and fixtures of $2.7 million
and net cash used in operating activities of $3.8 million. Operating losses in
1996 resulted from lower than expected software license fees and increased
operating costs associated with selling, marketing and developing the Company's
new generation of software while continuing to support multiple product
platforms.

          As of December 31, 1996, the Company had $3.8 million in accounts
receivable, a decrease of $536,000 over the balance at December 31, 1995. The
Company believes its current provision of $650,000 for sales returns, allowances
and bad debts is adequate.

          Cash of $23.5 million was provided by financing activities 
during 1995 primarily from the net proceeds of sales of common stock in the
Company's initial public offering completed in August 1995. 

          Cash used in investing activities during 1996 and 1995 was $18.4
million and $18.9 million, respectively. Investing activities consisted
primarily of purchases of investments in excess of sales of investments of $14.5
million, $17.8 million, and $2.9 million for the years 1996, 1995, and 1994
respectively.

          As of December 31, 1996, the Company had net working capital of $41.7
million, compared to $24.3 million at December 31, 1995.  The increase in
working capital was primarily due to net proceeds from sales of common stock in
the Company's second public offering completed in July 1996. During 1995, the
Company had an increase in net working capital of $21.5 million, primarily
reflecting net proceeds of the sales of common stock in the Company's initial
public offering. The Company does not have any capital requirement needs for the
foreseeable future.

          The Company believes that the continued expenditure of funds will be
necessary to support its future growth.  The Company believes that the cash and
short-term investments on hand at December 31, 1996 together with funds
generated from operations, will be adequate to fund its operations, capital
requirements and expansion needs for the foreseeable future.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
---------------------------------------------------- 

          The financial statements of the Company as of and for the year ended
December 31, 1996 begin on page F-1 of this Annual Report.

                                      -31-
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
-------------------- 

          None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-----------------------------------------------------------

          Pursuant to General Instruction G(3), reference is made to the
information contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997, which information is incorporated herein
by reference. A list of executive officers is found in Item 1.

ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

          Pursuant to General Instruction G(3), reference is made to the
information contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997, which information is incorporated herein
by reference.

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

          Pursuant to General Instruction G(3), reference is made to the
information contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997, which information is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------------------------------------------------------

          Pursuant to General Instruction G(3), reference is made to the
information contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997, which information is incorporated herein
by reference.

                                      -32-
<PAGE>
 
                                    PART IV

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

(A)(1)    FINANCIAL STATEMENTS
          --------------------
<TABLE> 
<CAPTION> 
                                                                       PAGE NUMBER
                                                                         IN THIS
                         DESCRIPTION                                  ANNUAL REPORT
     --------------------------------------------------------------------------------------
     <S>                                                              <C> 
     Report of Independent Auditors.............................            F-2
 
     Consolidated Financial Statements
 
     Consolidated Statements of Financial Position..............            F-3
 
     Consolidated Statements of Operations......................            F-4
 
     Consolidated Statement of Changes in Shareholders' Equity..            F-5
 
     Consolidated Statement of Cash Flows.......................            F-6
 
     Notes to Consolidated Financial Statements.................            F-7
</TABLE>

(A)(2) FINANCIAL STATEMENT SCHEDULES
       -----------------------------

     Schedule II -- Valuation and Qualifying Accounts               S-1

     All other financial statement schedules normally required under Regulation
     S-X have been omitted because they are not applicable or not required, or
     because the required information is included in the consolidated financial
     statements or notes thereto.

 
(A)(3)    EXHIBITS
          --------

<TABLE> 
<CAPTION> 
     EXHIBIT
       NO.                 DESCRIPTION
     -------               -----------
     <S>             <C>                
      *3.1           Restated Articles of Incorporation of the Company, as amended
 
      *3.2           Bylaws of the Company
 
      *4.1           Form of Certificate for Common Stock
 
      *10.1          Agreement Regarding Distribution of Software Programs between Allergan,
                     Inc., and Summit Medical Systems, Inc., dated September 1, 1994
 
      *10.2          Agreement Regarding Distribution of Software Programs between SciMed Life
                     Systems, Inc., and Summit Medical Systems, Inc., dated March 1, 1994, as
                     amended in September 1994
 
      *10.3          ACC National Database Development Agreement, dated February 8, 1991
</TABLE> 

                                      -33-
<PAGE>
 
<TABLE> 
   <S>              <C>  
      *10.4         American Society of Cataract and Refractive Surgery National Database
                    Development Agreement, dated February 18, 1994
 
      *10.5         First Amendment and Restatement of STS National Database Agreement,
                    dated March 26, 1995
 
      *10.6         Summit Medical Systems, Inc., 1993 Stock Option Plan
 
      *10.7         Summit Medical Systems, Inc., 1995 Employee Stock Purchase Plan
 
      *10.8         Summit Medical Systems, Inc., 1995 Non-Employee Director Stock Option Plan
 
      *10.9         Employment Agreement dated October 19, 1992, between Summit Medical
                    Systems, Inc., and Edward F. Sweeney
 
      *10.10        Employment Agreement dated October 19, 1992, between Summit Medical
                    Systems, Inc., and Dennis Powers
 
      *10.11        Employment Agreement dated August 2, 1993, between Summit Medical
                    Systems, Inc., and William Cavanagh
 
   *****10.12       Employment Letter of December 29, 1995, between Summit Medical Systems,
                    Inc., and Kevin R. Green
 
   *****10.13       Employment Letter dated October 5, 1995, between Summit Medical
                    Systems, Inc. and Bruce S. Maller
  
      *10.14        Agreement Regarding Distribution of Software Programs between Boston
                    Scientific Corporation and Summit Medical Systems, Inc., dated June 30, 1995
 
      *10.15        Amendment by Letter dated July 26, 1995 of Agreement Regarding Distribution
                    of Software Programs between SciMed Life Systems, Inc. and Summit Medical
                    Systems, Inc., dated March 1, 1994, as amended in September 1994
 
      *10.16        Amendment by Letter dated July 18, 1995 of Agreement Regarding Distribution
                    of Software Programs between Summit Medical Systems, Inc., and Boston
                    Scientific Corporation, dated June 30, 1995
 
      *10.17        Amendment by Letter dated July 26, 1995 of Agreement Regarding Distribution
                    of Software Programs between Summit Medical Systems, Inc., and Boston
                    Scientific Corporation, dated June 30, 1995
 
    ****10.18       Agreement Regarding Distribution of Software Programs between Boston
                    Scientific Corporation and Summit Medical Systems, Inc. dated September 1,
                    1995
 
    ****10.19       Agreement Regarding Distribution of Software Programs between Smith &
                    Nephew Richards, Inc. and Summit Medical Systems, Inc. dated November 10,
                    1995
</TABLE> 

                                      -34-
<PAGE>
 
<TABLE> 
<S>                 <C> 
    ****10.20       Agreement Regarding Distribution of Software Programs between Boston
                    Scientific Corporation and Summit Medical Systems, Inc. dated December 1,
                    1995
 
      **10.21       Agreement and Plan of Merger between BSM Acquisition Corp., BSM Financial,
                    Inc., Bruce S. Maller and Summit Medical Systems, Inc. dated September 29,
                    1995
 
     ***10.22       Agreement and Plan of Merger between MIS Acquisition Corp., Medical
                    Information Systems Company, Inc. and Summit Medical Systems, Inc. dated
                    November 15, 1995
 
   *****10.23       License Agreement between Duke University and Summit Medical Systems,
                    Inc. dated December 29, 1995
 
   *****10.24       Cordillera L.L.C. Limited Liability Company Agreement dated December 29,
                    1995
 
   *****10.25       Sublicense and Distribution Agreement between Cordillera L.L.C. and Summit
                    Medical Systems, Inc. dated December 29, 1995
 
   *****10.26       Employment Letter dated January 19, 1996, between Summit Medical Systems,
                    Inc. and George J. Marshalek, Jr.
 
  ******10.27       Amendment by Letters dated January 2, 1996, January 16, 1996 and June 29, 1996,
                    of ACC National Database Development Agreement, dated February 8, 1991.
 
 10.28              First and Second Amendment to Summit Medical Systems, Inc., 1993 Stock 
                    Option Plan
 
*******10.29        Agreement and Plan of Merger between Summit Medical Systems, Inc. CLM
                    Acquisition Corp. and C. L. McIntosh & Associates, Inc. dated December 31,
                    1996.
 
10.30               Employment Agreement between Summit Medical Systems, Inc., C. L. McIntosh
                    & Associates, Inc. and Charles L. McIntosh dated December 31, 1996.
   
10.31               Option Agreement between Summit Medical Systems, Inc. and Charles L.
                    McIntosh dated December 31, 1996.

10.32               Reorganization Agreement between Summit Medical Systems, Inc., Cordillera
                    L.L.C., DR Ware LLP and Duke University dated December 31, 1996.

10.33               Employment Agreement between Summit Medical Systems, Inc. and Donald F.
                    Fortin dated December 31, 1996.

10.34               Option Agreement between Summit Medical Systems, Inc. and Donald F. Fortin
                    dated December 31, 1996

10.35               Option Agreement between Summit Medical Systems, Inc. and Robert Califf
                    dated December 31, 1996
</TABLE> 

                                      -35-
<PAGE>
 
<TABLE> 
<S>                 <C> 
10.36               Option Agreement between Summit Medical Systems, Inc. and Harry Phillips
                    dated December 31, 1996

10.37               Amendment to License Agreement between Duke University and Summit
                    Medical Systems, Inc. dated December 31, 1996

10.38               Amendment to Cordillera L.L.C. Limited Liability Company Agreement dated
                    December 31, 1996

10.39               Lease Agreement between Summit Medical Systems, Inc. and Red Circle L.L.P.
                    dated September 30, 1996

10.40               Employment Letter dated March 26, 1997 between Summit Medical Systems,
                    Inc. and Richard Willemin

10.41               Employment Letter dated June 12, 1996 between Summit Medical Systems, 
                    Inc. and David Teckman

11.1                Statement re:  computation of per share earnings
 
23.1                Consent of Ernst & Young LLP
 
27                  Financial Data Schedule

99                  Cautionary Statement.
</TABLE> 

_________________
    *     Incorporated by reference to the Company's Registration Statement on
          Form S-1 (File No. 33-93700)

   **     Incorporated by reference to the Company's Current Report on Form 8-K
          dated October 19, 1995 (File No. 0-26390).

  ***     Incorporated by reference to the Company's Current Report on Form 8-K
          dated December 4, 1995 (File No. 0-26390).

 ****     Confidential treatment requested as to certain portions.

*****     Incorporated by reference to the Company's Registration Statement on
          Form S-1 (File No. 333-01958).

******    Incorporated by reference to the Company's Registration Statement on
          Form S-1 (File No. 333-05711).

*******   Incorporated by reference to the Company's Current Report on Form 8-K
          filed January 14, 1997 (File No. 0-26390).

(B)  REPORTS ON FORM 8-K
     -------------------

     No current reports on Form 8-K were filed during the last quarter of the 
fiscal year ended December 31, 1996.

(C)  EXHIBITS
     --------

     See Item 14(a)(3) above.

(D)  FINANCIAL STATEMENT SCHEDULES
     -----------------------------

     See Item 14(a)(2) above.

                                      -36-
<PAGE>
 
                         Summit Medical Systems, Inc.

                       Consolidated Financial Statements


                 Years ended December 31, 1996, 1995 and 1994


                                   CONTENTS

<TABLE> 
<S>                                                                         <C> 
Report of Independent Auditors............................................. F-2

Consolidated Financial Statements

Consolidated Statements of Financial Position.............................. F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Changes in Shareholders' Equity.................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE> 
                                      F-1
<PAGE>
 
                        Report of Independent Auditors


The Board of Directors
Summit Medical Systems, Inc.

We have audited the consolidated statements of financial position of Summit
Medical Systems, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our 
audits also include the financial statement schedule listed in the Index at Item
14(a).  These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 consolidated financial position of Summit
Medical Systems, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, prior years'
financial statements have been restated.



Minneapolis, Minnesota
April 3, 1997

                                      F-2
<PAGE>
 
                         Summit Medical Systems, Inc.

                 Consolidated Statements of Financial Position

<TABLE> 
<CAPTION> 
                                                                                                     DECEMBER 31
                                                                                               1996               1995
                                                                                          ---------------------------------- 
                                                                                                                (Restated)
<S>                                                                                       <C>                 <C> 
ASSETS
Current assets:
  Cash and cash equivalents                                                                 $  9,386,069      $  2,202,004
  Short-term investments                                                                      35,243,624        20,718,674
  Accounts receivable (net of allowance of $650,000 and 
    $100,397 at 1996 and 1995, respectively)                                                   3,776,351         4,312,164
  Notes receivable--officer                                                                            -            59,632
  Advances to officers and employees                                                                   -           190,000
  Other current assets                                                                           678,627           481,786
                                                                                          ---------------------------------- 
Total current assets                                                                          49,084,671        27,964,260

Equipment and fixtures, net                                                                    3,203,931         1,483,682
Computer software costs, net                                                                   1,198,573           103,207
                                                                                          ---------------------------------- 
Total assets                                                                                $ 53,487,175      $ 29,551,149
                                                                                          ================================== 

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses                                                     $   3,617,718     $  1,286,860
  Accrued compensation                                                                          1,236,118          797,170
  Accrued royalties                                                                               375,332          332,773
  Deferred revenue                                                                              1,867,006        1,134,176
  Income tax payable                                                                                7,648                -
  Note payable--officer                                                                                 -           17,991
  Line of credit                                                                                  150,000           80,000
  Notes payable and convertible debentures                                                        100,000           15,000
  Current portion of long-term debt                                                                23,628           24,092
                                                                                          ---------------------------------- 
Total current liabilities                                                                       7,377,450        3,688,062

Long-term debt                                                                                     26,525           28,719

Commitments                                                                                             -                -
                                                                                
Shareholders' equity:
  Common stock, $.01 par value:
    Authorized shares-38,933,333 -- 1996 and 1995
    Issued and outstanding shares-10,343,830 -- 1996; 
      8,492,018 -- 1995                                                                           103,438           84,920
  Additional paid-in capital                                                                   69,700,376       36,187,859
  Accumulated deficit                                                                         (23,720,614)     (10,438,411)
                                                                                          ---------------------------------- 
Total shareholders' equity                                                                     46,083,200       25,834,368
                                                                                          ---------------------------------- 
Total liabilities and shareholders' equity                                                  $  53,487,175     $ 29,551,149
                                                                                          ==================================
</TABLE> 

See accompanying notes.

                                      F-3
<PAGE>
 
                            Summit Medical Systems, Inc.

                    Consolidated Statements of Operations 

<TABLE> 
<CAPTION> 
                                                                       YEAR ENDED DECEMBER 31                       
                                                                 1996              1995             1994                  
                                                          -----------------------------------------------------       
                                                                              (Restated)       (Restated)            
<S>                                                       <C>                 <C>             <C>                     
Revenues:                                                                                                           
  Software licenses                                       $   6,093,653       $  6,077,317    $  5,211,559          
  Support and service                                         4,975,223          3,684,842       2,156,721                       
  Consulting fees                                             6,102,558          5,719,952       3,904,632                
                                                          -----------------------------------------------------       
Total revenue                                                17,171,434         15,482,111      11,272,912          

Cost of sales:
  Software licenses                                             960,860            830,978         545,496      
  Support and service                                         2,590,011          1,797,388       1,420,574                
  Consulting fees                                             4,129,985          3,315,747       2,919,346         
                                                          -----------------------------------------------------       
Total cost of sales                                           7,680,856          5,944,113       4,885,416      
                                                          -----------------------------------------------------       
Gross profit                                                  9,490,578          9,537,998       6,387,496      
                                                                                                                
Operating expenses:                                                                                             
  Selling and marketing                                       8,824,971          6,276,646       4,666,669      
  Research and development                                    3,932,296          1,230,425         817,120        
  Purchase of in-process research and development             4,746,000          7,435,000               -         
  General and administrative                                  6,692,745          4,194,375       2,141,599                  
                                                          -----------------------------------------------------       
Total operating expenses                                     24,196,012         19,136,446       7,625,388      
                                                          -----------------------------------------------------       
Loss from operations                                        (14,705,434)        (9,598,448)     (1,237,892)     
Interest income, net                                          1,887,928            574,594          80,602        
                                                          -----------------------------------------------------       
Loss before income taxes                                    (12,817,506)        (9,023,854)     (1,157,290)     
Income tax expense                                               18,626               -             15,900     
                                                          -----------------------------------------------------       
Net loss                                                  $ (12,836,132)      $ (9,023,854)   $ (1,173,190)    
                                                          =====================================================        

Net loss per share                                        $       (1.37)      $      (1.37)   $      (0.24)
                                                          =====================================================        

Weighted average shares outstanding                           9,398,931          6,580,922       4,929,913
                                                          =====================================================        
</TABLE> 

See accompanying notes.

                                      F-4
<PAGE>
 
                         Summit Medical Systems, Inc.

           Consolidated Statement of Changes in Shareholders' Equity

<TABLE> 
<CAPTION> 
                                                                                                       ADDITIONAL           
                                                            PREFERRED STOCK          COMMON STOCK       PAID-IN            
                                                       ----------------------------------------------                      
                                                         SHARES       AMOUNT      SHARES     AMOUNT     CAPITAL            
                                                       -----------------------------------------------------------         
<S>                                                    <C>                                                                 
Balance December 31, 1993                                     -     $      -    4,218,352  $ 42,183  $ 1,211,558           
     Issuance of preferred stock at $2.50 per share,                                                                       
       net of offering costs of $106,900              1,600,000       16,000            -         -    3,877,100           
     Issuance of common stock for debt                        -            -        2,746        27        7,473           
     Issuance of common stock                                 -            -       10,416       104      119,896           
     Distribution to shareholders                             -            -            -         -            -           
     Net loss                                                 -            -            -         -            -           
                                                       -----------------------------------------------------------         
Balance December 31, 1994 (restated)                  1,600,000       16,000    4,231,514    42,314    5,216,027           
     Issuance of common stock                                 -            -        7,167        72      104,936           
     Exercise of stock options                                -            -       76,665       767       26,731           
     Employee stock purchase plan                             -            -       35,016       350      267,522           
     Issuance of stock related to establishment of                                                                         
       joint venture                                          -            -      200,000     2,000    4,198,000           
     Value of stock options and warrants issued in                                                                         
       connection with joint venture                          -            -            -         -    2,935,000           
     Value of stock option issued for services                -            -            -         -      218,684           
     Conversion of preferred stock into common stock (1,600,000)      (1,000)   1,066,656     10,667       5,333           
     Public offering proceeds, net of expenses of                                                                          
       $2,630,624                                             -            -    2,875,000     28,750  23,215,626           
     Distribution to shareholders                             -            -            -          -           -           
     Net loss                                                 -            -            -          -           -           
                                                       -----------------------------------------------------------         
Balance December 31, 1995 (restated)                          -            -    8,492,018     84,920  36,187,859           
     Exercise of stock options                                -            -       60,550        606     127,204           
     Employee stock purchase plan                             -            -       39,262        392     399,816           
     Public offering proceeds, net expenses of $590,503       -            -    1,752,000     17,520  29,193,497           
     Value of stock warrants issued in connection with                                                                     
       Cordillera purchase                                    -            -            -          -   3,792,000           
     Distribution to shareholders                             -            -            -          -           -           
     Net loss                                                 -            -            -          -           -           
                                                       -----------------------------------------------------------         
Balance December 31, 1996                                     -     $      -   10,343,830   $103,438 $69,700,376           
                                                       ===========================================================          
<CAPTION> 
                                                               ACCUMULATED             
                                                                                      
                                                                DEFICIT      TOTAL    
                                                          -------------------------   
<S>                                                                                   
Balance December 31, 1993                                 $    (120,939) $1,132,802   
     Issuance of preferred stock at $2.50 per share,                                  
       net of offering costs of $106,900                              -   3,893,100   
     Issuance of common stock for debt                                -       7,500   
     Issuance of common stock                                         -     120,000   
     Distribution to shareholders                               (89,714)    (89,714)
     Net loss                                                (1,173,190) (1,173,190)
                                                          -------------------------   
Balance December 31, 1994 (restated)                         (1,383,843)  3,890,498   
     Issuance of common stock                                         -     105,008   
     Exercise of stock options                                        -      27,498   
     Employee stock purchase plan                                     -     267,872   
     Issuance of stock related to establishment of                                    
       joint venture                                                  -   4,200,000   
     Value of stock options and warrants issued in                                    
       connection with joint venture                                  -   2,935,000   
     Value of stock option issued for services                        -     218,684   
     Conversion of preferred stock into common stock                  -           -   
     Public offering proceeds, net of expenses of                                     
       $2,630,624                                                    -   23,244,376   
     Distribution to shareholders                              (30,714)     (30,714)  
     Net loss                                               (9,023,854)  (9,023,854)  
                                                          -------------------------   
Balance December 31, 1995 (restated)                       (10,438,411)  25,834,368   
     Exercise of stock options                                       -      127,810   
     Employee stock purchase plan                                    -      400,208   
     Public offering proceeds, net expenses of $2,324,983            -   29,211,017   
     Value of stock warrants and options issued in 
       connection with Cordillera purchase                           -    3,792,000   
     Distribution to shareholders                             (446,071)    (446,071)  
     Net loss                                              (12,836,132) (12,836,132)  
                                                          -------------------------   
Balance December 31, 1996                                 $(23,720,614) $46,083,200   
                                                          =========================    
</TABLE> 

See accompanying notes.

                                      F-5
<PAGE>
 
                         Summit Medical Systems, Inc.

                     Consolidated Statements of Cash Flows

<TABLE> 
<CAPTION> 
                                                                               YEAR ENDED DECEMBER 31
                                                                     1996             1995               1994
                                                                   ---------------------------------------------
                                                                                   (Restated)         (Restated)
<S>                                                                <C>             <C>               <C> 
OPERATING ACTIVITIES
Net loss                                                           $(12,836,132)   $ (9,023,854)     $(1,173,190)
Adjustments to reconcile net loss to net cash 
 (used in) provided by operating activities:
   Depreciation                                                         977,444         581,384          345,185
   Amortization                                                         103,207          91,000            8,000
   Deferred income taxes                                                      -         (15,900)          15,900
   Value of warrants, options and common stock
    issued in connection with joint venture acquisitions              3,792,000       7,135,000                -
   Value of stock options issued for services                                 -         218,684                -
   Losses on partnership investments                                          -               -            1,895
   Changes in operating assets and liabilities:   
      Accounts receivable                                               535,813      (2,283,676)        (886,451)
      Advances to officers and employees                                190,000        (190,000)               -
      Other current assets                                             (137,209)       (389,577)         (67,097)
      Accounts payable and accrued expenses                           2,330,858         682,458          138,318
      Accrued compensation and royalties                                481,507         119,940          406,180
      Accrued settlement reserve                                              -               -           82,500
      Income tax payable                                                  7,648               -                -
      Deferred revenue                                                  732,830         428,797          425,313
                                                                   ---------------------------------------------
Net cash used in operating activities                                (3,822,034)     (2,645,744)        (703,447)

INVESTING ACTIVITIES
Purchase of short-term investments                                  (66,648,127)    (28,700,801)      (7,390,887)
Sale (purchase) of long-term investments                                      -          42,418           (4,700)
Sales of short-term investments                                      52,123,177      10,884,966        4,446,230
Purchases of equipment and fixtures                                  (2,705,958)     (1,110,299)        (642,629)
Disposal of equipment and fixtures                                        8,265          52,814                -
Purchase of software development -
 Cordillera acquisition                                              (1,152,000)              -                -
Computer software costs                                                 (46,573)        (65,000)        (137,899) 
                                                                   ---------------------------------------------
Net cash used in investing activities                               (18,421,216)    (18,895,902)      (3,729,885)

FINANCING ACTIVITIES
Net proceeds from line of credit                                         70,000          65,000                -
Proceeds from long-term debt                                             52,211               -          143,166
Principal payments on long-term debt                                    (54,869)        (61,742)        (112,195)
Principal payments on notes and debentures                              (15,000)        (93,699)          (7,500)
Proceeds from notes payable and convertible debentures                  100,000               -           12,490
Proceeds from note payable--officer                                           -          17,166           19,366
Payments on note payable--officer                                       (17,991)              -                -
Distributions to shareholders                                          (446,071)        (30,714)         (89,714)
Net proceeds from common stock transactions                          29,611,225      23,617,256          120,000
Net proceeds from exercise of common stock options                      127,810          27,498                -
Net proceeds from sale of preferred stock                                     -               -        3,893,100
                                                                   ---------------------------------------------
Net cash provided by financing activities                            29,427,315      23,540,765        3,978,713
                                                                   ---------------------------------------------
Increase (decrease) in cash and cash equivalents                      7,184,065       1,999,119         (454,619)
Cash and cash equivalents at beginning of period                      2,202,004         202,885          657,504
                                                                   ---------------------------------------------
Cash and cash equivalents at end of period                         $  9,386,069   $   2,202,004      $   202,885
                                                                   =============================================
Supplemental disclosures of cash flow information:
   Cash paid during the period for interest                        $     14,054   $      20,388      $     4,654

Supplemental disclosure of noncash investing activities:
  Equipment and fixtures acquired in exchange for long-term 
  debt                                                                   35,000          30,570               -
</TABLE> 

                                      F-6
<PAGE>
 
                         Summit Medical Systems, Inc.

                  Notes to Consolidated Financial Statements

                               December 31, 1996


1.   DESCRIPTION OF BUSINESS

Summit Medical Systems, Inc. (the "Company") is a leading provider of clinical
outcomes database software and related products and services for selected
medical specialties in the healthcare industry. The Company's database software
enables healthcare providers to record, analyze and report detailed clinical
information on medical procedures, diseases and patient outcomes. In addition,
the Company provides a range of consulting services related to regulatory
affairs and clinical studies.

2.   RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The accompanying financial statements reflect restatements of previously
reported consolidated financial position and results of operations as of and for
the years ended December 31, 1995 and 1994. The restatements are based on an
investigation of the Company's accounting practices by the Company's management,
auditors and outside counsel following concerns brought to the attention of
senior management and the Company's Board of Directors by a new chief financial
officer on February 27, 1997. The restatements primarily involve revenue
recognition practices related to certain sales of software licenses and related
services including revenue recognized based on purchase commitments made by
certain corporate marketing partners but prior to actual shipment of product,
and revenue recognized in advance of actual shipment of product in other
contexts.
 
The "as reported" consolidated results of operations and financial position
presented below give effect to the restatement for the acquisition of C. L.
McIntosh & Associates, Inc., accounted for as a pooling of interest, as
disclosed in Note 4. The effect of the restatement described in the previous
paragraph on the Company's 1995 and 1994 financial statements is as follows:

<TABLE> 
<CAPTION> 
                               1995                          1994
                     ------------------------    ---------------------------
                     AS REPORTED  AS RESTATED     AS REPORTED    AS RESTATED
                     -----------  -----------    -------------  ------------
<S>                  <C>          <C>            <C>             <C>   
Total revenue        $17,696,218  $15,482,111      $12,324,922   $11,272,912
Net loss              (7,163,196)  (9,023,854)        (300,022)   (1,173,190)

Net loss per share      (1.09)        (1.37)            (.06)        (.24)

Accumulated deficit   (7,704,585) (10,438,411)        (510,675)   (1,383,843)
Shareholders' equity  28,568,194   25,834,368        4,763,666     3,890,498
</TABLE> 

                                      F-7
<PAGE>
 
                         Summit Medical Systems, Inc.

                  Notes to Consolidated Financial Statements

                               December 31, 1996

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, BSM Financial, Inc., Medical Information Systems
Company, Inc., Summit Medical Europe, S.A.R.L. and C. L. McIntosh & Associates,
Inc. All intercompany balances and transactions have been eliminated.

REVENUE RECOGNITION

Software Licenses and Upgrades: The Company recognizes revenue from contracts
for sales of software licenses on shipment provided that no significant vendor
and post-contract support obligations remain outstanding and that collections of
resulting receivables are probable.

Support and Service: Revenue for service and support is deferred and recognized
over the period in which support services are provided using the straight-line
method. All other revenue, including training fees, is recognized upon
performance of the applicable services.

Consulting Services: Revenues from consulting services are recognized as the
services are performed.

Software Licenses With Other Significant Vendor Obligations: The Company will
recognize revenue under agreements requiring significant vendor obligations such
as installation, testing, interface, and system integration when all of the
following conditions have been satisfied: (i) delivery has occurred; (ii) system
installation, testing, integration and on-site consulting assistance has been
completed; (iii) customer acceptance has been received; and (iv) collectibility
is probable. If a significant portion of the revenue is due beyond twelve months
of the date of the agreement, revenue will be recognized as each annual payment
becomes due. In addition, certain contracts may require revenue recognition
under contract accounting rules, whereby revenue is recognized on a percentage
completion basis, subject to probability of collection.

                                      F-8
<PAGE>
 
                         Summit Medical Systems, Inc.

                  Notes to Consolidated Financial Statements (Continued)



3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

COST OF SALES

The Company records cost of sales on a basis that matches the expenses incurred
with the sales revenue generated. A portion of the costs is allocated between
software licenses and support and service based on the amount of employee time
spent completing the product shipments or providing services. Management
believes the allocation methods used for cost of sales are reasonable.

ROYALTY EXPENSE

The Company recognizes and accrues royalty expense at the time the Company
recognizes the related revenue from software licenses sold and services
rendered. Royalties are due and paid 45 days after the end of the quarter in
which the Company collects the related receivable.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.

SHORT-TERM INVESTMENTS

Investments with a maturity of more than ninety days at the date of purchase are
classified as short-term investments. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified its short-
term investments, consisting of U.S.Treasury Bills, U.S. Treasury Notes,
Commercial Paper and Discounted Notes, as available for sale. At December 31,
1995 and December 31, 1996, the fair market value of the short-term investments
approximated the amortized cost.

                                      F-9
<PAGE>
 
                         Summit Medical Systems, Inc.

                  Notes to Consolidated Financial Statements (Continued)

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ACCOUNTS RECEIVABLE ALLOWANCE

The Company determines an allowance for doubtful accounts based upon an analysis
of the collectibility of specific accounts and the aging of the accounts
receivable. The Company's accounts receivable consists of large corporations and
hospitals with excellent credit history.

EQUIPMENT AND FIXTURES

Equipment and fixtures are stated at cost. The Company provides for depreciation
using accelerated methods at rates designed to amortize the cost of equipment
and fixtures over their estimated useful lives of three to seven years.

COMPUTER SOFTWARE COSTS

Computer software costs include the cost of internally developed software, which
have been capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" and $1,152,000 of developed software technology
acquired in connection with the acquisition of a joint venture (see Note 5). The
capitalized costs are amortized at the faster of projected revenue or straight-
line basis over their estimated useful lives, generally three years or less,
commencing when each product is available to the market. Amortization expense,
based on an eighteen month useful life, for computer software during 1996, 1995 
and 1994 was $38,540 and $91,000 and $8,000, respectively. Accumulated
amortization for computer software at December 31, 1996 and 1995 was $137,540
and $99,000, respectively.

INCOME TAXES

The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and tax bases of assets and liabilities.

                                      F-10
<PAGE>
 
                         Summit Medical Systems, Inc.

                  Notes to Consolidated Financial Statements (Continued)

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of common
shares and common share equivalents, if dilutive, outstanding during the periods
presented after giving effect to the conversion of convertible preferred stock
into common stock. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No.83 ("SAB No. 83."), shares convertible into common stock
and common stock equivalent shares issued or granted by the Company at prices
less than the initial offering price during the 12 months immediately preceding
the initial public offering, in 1995, have been included in the determination of
shares used in calculation of net loss per share, as if they were outstanding
for all periods presented up to the initial public offering date.

Subsequent to the initial public offering date, net loss per share is computed
by dividing the net loss for the period by the weighted average number of shares
of common stock outstanding during the period.

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The Company does
not expect the adoption of the Statement to have a material impact on the
financial statements.


                                      F-11
<PAGE>
 
                         Summit Medical Systems, Inc.

                  Notes to Consolidated Financial Statements (Continued)


3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK COMPENSATION PLANS

The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Accordingly, the Company has made pro forma
disclosures of what net loss and loss per share would have been had the
provisions of Statement 123 been applied to the Company's stock options.

RECLASSIFICATION

Certain prior year items have been reclassified to conform with the 1996
presentation.

4.   MERGERS

Effective November 20, 1995, the Company exchanged 126,386 shares of common
stock in a pooling of interests for all outstanding shares of Medical
Information Systems Company, Inc., a developer of decision-support software for
determining expected outcomes from preventive care, occupational health, and
pharmacological interventions.

Effective October 6, 1995, the Company exchanged 182,524 shares of common stock
in a pooling of interests for all outstanding shares of BSM Financial, Inc., a
health care consulting firm providing services in the areas of strategic
planning, data analysis and various other services.

                                      F-12
<PAGE>
 
                         Summit Medical Systems, Inc.

                  Notes to Consolidated Financial Statements (Continued)

4.   MERGERS (CONTINUED)

Effective December 31, 1996, the Company exchanged 976,453 shares for all
outstanding shares of common stock in a pooling of interests of C. L. McIntosh &
Associates, Inc., a health care consulting firm providing services in the areas
of Medicare and regulatory affairs.

Condensed statements of operations data for the years ended December 31, 1996,
1995 and 1994 for the effects of the merger with C. L. McIntosh & Associates,
Inc. are as follows:

<TABLE> 
<CAPTION> 
                                                                 
                                                     Summit          C.L.                                         
                                                    Medical        McIntosh &                                
                                                  Systems, Inc.    Associates, Inc. Combined             
                                               ------------------------------------------------
                                                   (Restated)                                               
     <S>                                       <C>                <C>              <C>                      
     1994                                                                                                   
     Revenue                                   $  8,575,313       $2,697,599       $11,272,912              
     Net loss                                    (1,139,140)         (34,050)       (1,173,190)             
     Net loss per share                                (.29)            (.03)             (.24)             
                                                                                                            
                                                                                                            
     1995                                                                                                   
     Revenue                                   $ 11,586,577       $3,895,534       $15,482,111              
     Net loss                                    (8,529,270)        (494,584)       (9,023,854)             
     Net loss per share                               (1.52)            (.51)            (1.37)             
                                                                                                            
     1996                                                                                                   
     Revenue                                   $ 13,500,301       $3,671,133       $17,171,434              
     Net income (loss)                          (13,027,591)         191,459       (12,836,132)             
     Net income (loss) per share                      (1.55)             .20             (1.37)               
</TABLE> 
 

                                      F-13
<PAGE>
 
                          Summit Medical Systems, Inc

            Notes to Consolidated Financial Statements (continued)


5.   ACQUISITION OF JOINT VENTURE

On December 29, 1995, the Company entered into a software license agreement with
Duke University ("Duke") and formed a joint venture, Cordillera L.L.C., with
three of Duke's nationally recognized cardiologists. Under the software license
agreement, Duke granted the Company an exclusive license to the Duke Cardiology
Information System, a clinical information database system for cardiology. In
connection with the software license agreement, the Company issued 200,000
shares of common stock to Duke and a seven-year warrant to purchase an
additional 200,000 shares of common stock at $21.00 per share, the market value
of the Company's common stock on the day prior to the issuance of the warrant.
The Company also issued a vested option for 40,000 shares of common stock at
$15.50 per share, the market value of the Company's stock on the day of the
issuance of the option. The option was issued to the Company's chief executive
officer for assistance received from him related to this transaction while he
was acting as an independent consultant to the Company. In addition, Duke and
the individual cardiologists were entitled to subscribe for the purchase of up
to a 50% ownership position in the joint venture at any time prior to December
29, 2002, at a cost of $2,000.

The total purchase price of $7,435,000 consisting of the market price of the
stock ($4,200,000), the value of the option and warrant ($2,935,000) and
acquisition-related expenses ($300,000) was allocated to in-process software
development technology and was expensed upon closing of the transaction on
December 29, 1995.

The Company's ownership position in the joint venture until December 1996 was
99%, and resulted in all start-up losses being consolidated into the Company's
operating results.

                                      F-14
<PAGE>
 
                          Summit Medical Systems, Inc

            Notes to Consolidated Financial Statements (continued)


5. ACQUISITION OF JOINT VENTURE (CONTINUED)

On December 31, 1996, the Company acquired the outstanding equity interest and
all options to acquire equity interests in Cordillera L.L.C. not held by the
Company. The total purchase price of $5,898,000, consisting of cash
($2,000,000), the value of options and warrants to purchase 675,000 shares of
Company Common Stock for a ten year period at $7.50 per share ($3,792,000) and
acquisition related expenses ($106,000) has been allocated to developed software
($1,152,000) and to in-process software development technology $(4,746,000). The
in-process software development technology was expensed upon closing of the
transaction on December 31, 1996 and the developed software will be amortized
straight line over a three year period. The agreement also includes warrants to
purchase 200,000 shares of Company common stock for a ten year period at $7.50
per share if certain performance measurements are met. No value was assigned to
these warrants due to their contingent nature.

6. NOTE RECEIVABLE - OFFICER

The note receivable from an officer bearing interest at 9% was forgiven in
December 1996.

7. ADVANCES TO OFFICERS AND EMPLOYEES

On December 31, 1995, the Company paid bonuses to officers and employees on the
basis of preliminary financial results achieved in 1995. As a result of
subsequent adjustments in reporting the final results for 1995, it was
determined that $190,000 of these bonuses paid to officers and employees were
not in fact earned. The resulting payments made in December were treated as an
advance against 1996 bonuses, with the Company having the right to deduct this
advance from any bonus payment earned in 1996. These advances were expensed in
1996.

                                     F-15
<PAGE>
 
                          Summit Medical Systems, Inc

            Notes to Consolidated Financial Statements (continued)

8. EQUIPMENT AND FIXTURES

Equipment and fixtures are as follows:

<TABLE> 
<CAPTION> 
                                                    DECEMBER 31
                                                 1996          1995
                                           ---------------------------
     <S>                                   <C>            <C>    
     Furniture and fixtures                  $1,640,983   $  830,018
     Computer and telephone equipment         3,146,829    1,664,877
     Vehicles                                    55,261       90,070
     Leasehold improvements                     466,292       78,623
                                           ---------------------------  
                                              5,309,365    2,663,588
     Less accumulated depreciation           (2,105,434)   1,179,906 
                                           ---------------------------  
                                             $3,203,931   $1,483,682
                                           ===========================
</TABLE> 

The Company has adopted SFAS 121 "Accounting for the Impairment of Long-Lived
Assets," which requires losses on impairment of long-lived assets used in
operations to be recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. The adoption had no impact on the financial
statements.

9.  NOTE PAYABLE - OFFICER

During 1996 and 1995, an officer advanced funds in the form of a demand note
which was paid in full in 1996.

10. SHORT-TERM NOTES PAYABLE

On July 2, 1995, prior to the merger with the Company, Medical Information
Systems Company, Inc. issued an aggregate of $45,000 of 11% unsecured Promissory
Notes due July 1, 1996 to two members of its Board of Directors. The remaining
balance of $17,991 was paid in full in 1996.

Prior to the merger with the Company, C. L. McIntosh & Associates, Inc. had a
balance on its line of credit at December 31, 1995 of $80,000, the entirety of
which was due on May 1, 1996, along with unpaid accrued interest of one percent
over the bank's prime rate. In 1996, the Company paid $20,000 of this balance
and received an additional $90,000 for a balance of $150,000 at December 31,
1996 (prime rate 8.25% at December 31, 1996). The weighted-average interest rate
on the borrowings in fiscal 1996 was 8.875%.

                                      F-16
<PAGE>
 
                          Summit Medical Systems, Inc

            Notes to Consolidated Financial Statements (continued)


10. SHORT-TERM NOTES PAYABLE (CONTINUED)

On December 23, 1996, prior to the merger of the Company, C. L. McIntosh &
Associates, Inc. issued a $100,000 unsecured Promissory Note due July 1, 1997,
with interest of one percent over the bank's prime rate.

11. CONVERTIBLE DEBENTURE

During 1993, the Company borrowed $30,000 from two health organizations in the
amount of $15,000 each. The convertible debentures provided for a one-year term
with interest at six percent, due at maturity.

During 1994, one lender exercised its option and converted their debenture for
2,746 shares of Common Stock and $7,500 cash.

During 1996, the Company paid in full the remaining balance of $15,000.

12. LONG-TERM DEBT

<TABLE> 
<CAPTION> 
                                                         DECEMBER 31
                                                       1996       1995
                                                    ----------------------
<S>                                                 <C>         <C>  
Note payable, interest at 10% payable monthly, 
 secured by accounts receivable,
 principal due June 30, 1997                        $     -     $  3,533
                                                            
Note payable, interest at prime plus 2%, due                
 in equal monthly installments of                           
 $560, unsecured                                          -        7,680
                                                            
Note payable, interest at 8%, due in equal                  
 monthly installments of $627, secured by a vehicle       -       26,178
                                                      
Note payable, interest at 9.25% payable monthly, 
 secured by accounts receivable, principal due 
 September 15, 1997                                   6,920       15,420

Note payable, interest at 9.63%, due in 
 equal monthly installments of $1,127, unsecured     29,051            -
 
Capital lease,
 interest at 14.59%, due in equal monthly 
 installments of $601, secured by
 telephone system                                    14,182            -
                                                    ----------------------
Total debt                                           50,153       52,811
Less current portion                                (23,628)     (24,092)
                                                    ----------------------
Long-term debt, net of current portion              $26,525     $ 28,719
                                                    ======================
</TABLE> 

                                      F-17
<PAGE>
 
                          Summit Medical Systems, Inc

            Notes to Consolidated Financial Statements (continued)


13.  SALES OF PREFERRED STOCK

In 1994, the Company sold 1,600,000 shares of Series A Convertible Preferred
Stock in a private placement for $4,000,000 less related offering costs of
$106,900. Upon the closing of the initial public offering of the Company's
Common Stock in August 1995, all Preferred Stock then outstanding was converted
into an aggregate of 1,066,656 shares of Common Stock.

14.  SALES OF COMMON STOCK

In August 1995, the Company sold 2,875,000 shares of Common Stock in its initial
public offering for $25,875,000, less related costs of $2,630,624.

In July 1996, the Company sold an additional 1,752,000 shares of Common Stock in
a secondary offering for $31,536,000, less related costs of $2,324,983.

15.  LEASES

The Company leases its office space, an automobile and certain office equipment
under various operating leases which expire between April 1997 and November
2005. The Company is required to pay a pro rata share of taxes and utilities for
each of the office locations. Future minimum payments under the leases at
December 31, 1996 are as follows:

<TABLE> 
<CAPTION> 
Fiscal year:
<S>                                                  <C> 
  1997                                               $  903,441
  1998                                                  991,185
  1999                                                  988,500
  2000                                                1,016,614
  2001                                                  764,021
  Thereafter                                          2,639,151
                                                    ------------
                                                     $7,302,912
                                                    ============
</TABLE> 

Rent expense for the years ended December 31, 1996, 1995 and 1994 was $934,492,
$634,967 and $453,810, respectively.

                                      F-18
<PAGE>
 
                          Summit Medical Systems, Inc

            Notes to Consolidated Financial Statements (continued)


16.  INCOME TAXES

As of December 31, 1996, the Company had a net operating loss (NOL) and AMT
credit carryforwards of approximately $11,375,000 and $33,000, respectively,
available to offset its future income tax liability. The NOL and tax credit
carryforwards begin to expire in the year 2009.

Income tax expense for the years ended December 31, 1996, 1995 and 1994 is as
follows:

<TABLE> 
<CAPTION> 
                                                 YEAR ENDED DECEMBER 31
                                            1996       1995         1994
                                         ---------------------------------
     <S>                                 <C>         <C>          <C> 
     Current                             $18,626     $      -     $     -
     Deferred                                  -            -      15,900
                                         ---------------------------------
                                         $18,626     $      -     $15,900
                                         =================================
</TABLE> 

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows:

<TABLE> 
<CAPTION> 
                                                     DECEMBER 31
                                                1996            1995
                                           ------------------------------
  <S>                                      <C>               <C>    
  Deferred tax assets:
    Net operating loss carryforwards       $ 3,981,000       $ 1,016,000
    Temporary differences:
      Purchase of in-process research
        and development                      4,089,000         2,478,000
      Allowance for doubtful
        accounts                               227,000            35,000
    Valuation allowance                     (8,297,000)       (3,529,000)
                                           ------------------------------
  Net deferred tax asset                   $         -       $         -
                                           ==============================
</TABLE> 

A valuation allowance of 100% of tax benefits has been provided because of the
Company's recent history of operating losses. The Company has made private and
public offerings of its stock during the past three years and, as a result, may
have incurred ownership changes under Section 382 of the Internal Revenue Code.
Section 382 may limit the amount of net operating losses that can be utilized in
the future.

                                      F-19
<PAGE>
 
                          Summit Medical System, Inc.

            Notes to Consolidated Financial Statements (continued)




17. STOCK OPTIONS

In 1993, the Company established the Stock Option Plan of 1993, for which
2,126,666 shares of common stock were reserved. The options held by officers can
be either incentive stock options or nonstatutory options to be granted to
employees and consultants of the Company. The option price is equal to the fair
market value of the common stock on the date of grant. Options vest and become
exercisable at various intervals and expire 5 years from the date of grant.

In 1995, the Company adopted the 1995 Director Plan, for which 66,666 shares of
common stock have been reserved. The plan provides for an automatic grant of
nonqualified stock options to purchase 6,666 shares of common stock to
nonemployee directors on the date such individuals are first appointed directors
of the Company, and an automatic grant of an option to purchase an additional
2,000 shares of common stock on the day after each subsequent annual meeting of
the Company's shareholders. The option price is equal to the fair market value
of the common stock on the date of grant. Options vest and become exercisable as
to 100% of such shares on the first annual anniversary of the date of such grant
and expire 10 years from the date of grant.

Option activity is summarized as follows:

<TABLE> 
<CAPTION> 
                                                                                WEIGHTED                                
                                                                                AVERAGE     
                                   SHARES          PLAN          NON-PLAN       EXERCISE                          
                                  AVAILABLE       OPTION          OPTIONS        PRICE                     
                                  FOR GRANT      OUTSTANDING    OUTSTANDING    PER SHARE     
                              -------------------------------------------------------------- 
<S>                           <C>              <C>               <C>           <C> 
Balance at December 31, 1993       28,021         265,312        113,330       $ 1.25
  Shares reserved                 533,333               -              -            -
  Granted                        (275,991)        275,991         33,332         3.75
  Canceled                         40,000         (40,000)             -         1.50
                              -----------------------------------------------
Balance at December 31, 1994      325,363         501,303        146,662         2.43
  Granted                        (231,998)        231,998         18,794        12.17
  Exercised                             -          (9,999)       (66,666)        0.36
  Canceled                         13,333         (13,333)             -         3.75
                              -----------------------------------------------
Balance at December 31, 1995      106,698         709,969         98,790         5.53
  Shares reserved               1,300,000               -              -
  Granted                      (2,346,634)      2,346,634        610,666        10.63
  Exercised                             -         (54,975)        (5,575)        2.11
  Canceled                      1,266,609      (1,266,609)        (5,000)       15.41
                              -----------------------------------------------
Balance at December 31, 1996      326,673       1,735,019        698,881       $ 6.65
                              ==============================================================
</TABLE> 

                                      F-20
<PAGE>
 
                         Summit Medical Systems, Inc.

            Notes to Consolidated Financial Statements (continued)



17. STOCK OPTIONS (CONTINUED)

In late 1996, the Company repriced previously granted options held by management
to purchase 669,442 shares of common stock from original exercise prices that
ranged from $13.00 to $17.00 per share to new exercise prices that ranged from
$6.75 to $7.00 per share. Additionally, previously granted options held by the
same individuals to purchase 185,250 shares of common stock at exercise prices
ranging from $13.00 to $17.00 per share were canceled.

The following table summarizes information about the stock options outstanding
at December 31, 1996:


<TABLE> 
<CAPTION> 
                                      OPTIONS OUTSTANDING                  OPTION EXERCISABLE  
                          -------------------------------------------  ----------------------------  
                                             WEIGHTED 
                                              AVERAGE       WEIGHTED                     WEIGHTED
                                             REMAINING      AVERAGE                      AVERAGE 
        RANGE OF             NUMBER         CONTRACTUAL     EXERCISE       NUMBER        EXERCISE
     EXERCISE PRICES       OUTSTANDING          LIFE          PRICE      EXERCISABLE      PRICE
-----------------------   -------------------------------------------  ----------------------------
<S>                         <C>            <C>              <C>          <C>            <C> 
     $  .22 - $  2.25         233,230          $1.54         $ 1.47        124,365       $ 1.49                       
       3.75 -    5.00         297,859           2.97           3.75        107,600         3.75                
       5.00 -    7.50       1,708,858           6.69           7.05        227,056         6.95                
       7.50 -    8.00          57,166           5.56           7.65              -            -  
      14.00 -   14.50           2,787           3.60          14.34          2,787        14.34                
      17.00 -   17.50         130,000           4.08          17.25              -            -  
      22.00 -   22.50           4,000           9.32          22.50              -            -   
                          -------------------------------------------  ----------------------------        
                            2,433,900           5.58         $ 6.65        461,808       $  4.89
</TABLE>

Options outstanding expire at various dates during the period from 1998 through
2006. Exercise prices for options outstanding as of December 31, 1996 ranged
from $.22 to $22.50 per share. The number of options exercisable as of December
31, 1996, 1995 and 1994 were 461,808, 178,709 and 137,460, respectively at
weighted average exercise prices of $4.89, $2.35 and $.81 per share,
respectively.

The weighted-average grant date fair value of plan options granted at market
prices during the years ended December 31, 1996 and 1995 was $4.81 and $6.14 per
share, respectively. The weighted-average grant date fair value of plan options
granted above market prices during the years ended December 31, 1996 and 1995
was $-0- and $2.31 per share, respectively.

                                      F-21
<PAGE>
 
                         Summit Medical Systems, Inc.

            Notes to Consolidated Financial Statements (continued)



17. STOCK OPTIONS (CONTINUED)

The weighted-average grant date fair value of non-plan options granted at market
prices during the years ended December 31, 1996 and 1995 was $9.61 and $-0-,
respectively. The weighted-average grant date fair value of non-plan options
granted below market prices during the years ended December 31, 1996 and 1995
was $5.52 and $8.91, respectively. The weighted-average grant date fair value of
non-plan options granted above market prices during the years ended December 31,
1996 and 1995 was $0 and $4.19, respectively.

Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions for
1996 and 1995: risk free interest rate of 6.00%; no dividend yield; volatility
factors of 87.7% and 61.5% and a weighted-average expected life of the option of
2.29 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

                                      F-22
<PAGE>
 
                         Summit Medical Systems, Inc.

            Notes to Consolidated Financial Statements (continued)



17. STOCK OPTIONS (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

<TABLE> 
<CAPTION> 
                                             1996           1995
                                        ------------------------------
     <S>                                <C>            <C> 
     Pro forma net loss                  ($13,672,621)    ($9,598,186)

     Pro forma loss per share                  $(1.45)         $(1.46)
</TABLE> 

The pro forma effect on net loss for 1996 and 1995 is not representative of the
pro forma effect on net loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.

18. EMPLOYEE STOCK PURCHASE PLAN

In May 1995, the Company adopted the 1995 Employee Stock Purchase Plan whereby
133,333 shares of common stock have been reserved. All employees who have met
the service eligibility requirements are eligible to participate and may direct
the Company to make payroll deductions of two to fifteen percent of their
compensation during a purchase period for the purchase of shares under the plan.
The 1995 Stock Purchase Plan provides participating employees the right, subject
to certain limitations, to purchase the Company's common stock at a price equal
to the lower of 85% of the fair market value of the Company's common stock on
the first day, or the last day, of the applicable purchase period. The first
purchase period commenced on August 3, 1995 and ended on December 29, 1995.
Subsequent purchase periods will run for six months, subject to acceleration in
the case of a merger or consolidation in which the Company is not the surviving
corporation, or the liquidation, dissolution or sale of substantially all of the
assets of the Company. In 1996 and 1995, 39,262 shares and 35,016 shares were
purchased and issued, respectively.

                                      F-23
<PAGE>
 
                         Summit Medical Systems, Inc.

            Notes to Consolidated Financial Statements (continued)




19. STOCK AUTHORIZATION AND STOCK SPLITS

In June 1995, the Board of Directors approved a 1.5-to-1 reverse stock split for
common stock and options of the Company, effective June 15, 1995.

All share, per share, weighted average share, and stock option information in
these financial statements has been restated to reflect the stock split as if it
occurred at the beginning of the earliest period presented.

20. DISTRIBUTION AND LICENSE AGREEMENTS

In 1995 and 1994, the Company entered into product distribution agreements with
several companies. These agreements grant each distributor an exclusive right
and license to market, sell and distribute selected programs worldwide. In order
to maintain exclusivity, each distributor has agreed to purchase a minimum
number of programs over the next five years.

In June 1995, Medical Information Systems Company, Inc. ("MIS"), a wholly-owned
subsidiary of the Company, entered into a license agreement with DRI/McGraw-Hill
("DRI") to utilize DRI's proprietary data and forecast services for a two-year
period. Pursuant to the agreement, MIS pays a monthly license fee to DRI in the
amount of $6,667 for twelve months and issued a warrant to purchase 4,460 shares
of the Company's common stock at $1.00 per share for ten years. The value of
this warrant was determined to be $60,000 and is being amortized as a cost of
the data base over the two-year license agreement period.

21. SIGNIFICANT CUSTOMER

The Company sells a substantial portion of its product to one customer. During
1996 and 1995, sales to this customer aggregated $1,651,039 and $1,344,639,
respectively. At December 31, 1996 and 1995, amounts due from this customer
included in accounts receivable were $478,267 and $735,590, respectively.

                                      F-24
<PAGE>
 
                         Summit Medical Systems, Inc.

            Notes to Consolidated Financial Statements (continued)




22. COMMITMENTS AND CONTINGENCIES

The Company has been named as a defendant in two federal court securities
punitive class action suits filed in United States District Court of the
District of Minnesota on March 10, 1997 and March 26, 1997, respectively. These
actions allege, in essence, that the Company made misleading public disclosures
relating to its financial statements. The Company believes both these actions
are without merit and intends to defend against them vigorously.

The Company has been informed by the Division of Enforcement of the
Securities and Exchange Commission (the "Commission"), through service of a
subpoena on March 25, 1997, that the Commission is conducting an investigation
of the Company, relating to the Company's restatement of certain financial
statements. The Company is cooperating fully with the Commission and its
investigation and intends to continue to do so.

23. SUBSEQUENT EVENT

The Company terminated several employees subsequent to year end in order to
reduce its expense levels. In connection with this reduction, severance payments
of approximately $400,000 were made and will be expensed in the first quarter of
1997.

                                      F-25
<PAGE>
 
               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                         SUMMIT MEDICAL SYSTEMS, INC.

<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------
        COL. A                        COL. B              COL. C              COL. D          COL. E
-----------------------------------------------------------------------------------------------------
                                                        Additions
                                                  ---------------------
                                                  Charged      Charged                       Balance
                                     Balance at   to Costs     to Other                       at End
                                     Beginning       and       Accounts-    Deductions-         of
        Description                  of Period    Expenses     Describe      Describe         Period
        -----------                  ---------    --------     --------      --------         ------
<S>                                  <C>          <C>          <C>          <C>              <C> 
Year ended December 31, 1994
 Deducted from asset accounts:
  Allowance for doubtful accounts      $20,000     $82,783     $ -           $23,250 (1)      $79,533

Year ended December 31, 1995
 Deducted from asset accounts:
  Allowance for doubtful accounts      $79,533     $20,864     $ -           $ -             $100,397

Year ended December 31, 1996
 Deducted from asset accounts:
  Allowance for doubtful accounts     $100,397    $308,806     $300,000 (2)  $59,203         $650,000
</TABLE> 

(1) Write-off uncollectible accounts receivable.
(2) Sales Return Allowance

                                      S-1

<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.


Date:  March 31, 1997            SUMMIT MEDICAL SYSTEMS, INC.



                                  By  /s/ Kevin R. Green
                                    ---------------------------------------
                                    Kevin R. Green, President and
                                    Chief Executive Officer


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

<TABLE>
<CAPTION>
 
 
      Signature                     Title                   Date
      ---------                     -----                   ----
<S>                        <C>                           <C>
                                                              
/s/ W. Hudson Connery      Chairman of the Board         March 31, 1997
-------------------------
W. Hudson Connery
 
/s/ Kevin R. Green         President, Chief Executive    March 31, 1997
-------------------------
Kevin R. Green             Officer and Director
                           (principal executive officer)
 
/s/ Richard J. Willemin    Interim Vice President,       March 31, 1997
-------------------------
Richard J. Willemin        Finance and Chief Financial 
                           Officer (principal financial 
                           and accounting officer)
 
/s/ John M. Nehra          Director                      March 31, 1997
-------------------------
John M. Nehra
 
/s/ Kent J. Thiry          Director                      March 31, 1997
-------------------------
Kent J. Thiry
 
/s/ Edward F. Sweeney      Director                      March 31, 1997
-------------------------
Edward F. Sweeney
</TABLE>
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 
Exhibit                                                                                 Page    
Number                                                                                    Number 
--------------------------------------------------------------------------------------------------
<S>            <C>                                                                      <C>  
         *3.1  Restated Articles of Incorporation of the Company, as amended.........

         *3.2  Bylaws of the Company.................................................

         *4.1  Form of Certificate for Common Stock..................................

        *10.1  Agreement Regarding Distribution of Software Programs
               between Allergan, Inc., and Summit Medical Systems, Inc.,
               dated September 1, 1994...............................................

        *10.2  Agreement Regarding Distribution of Software Programs
               between SciMed Life Systems, Inc., and Summit Medical
               Systems, Inc., dated March 1, 1994, as amended in
               September 1994........................................................

        *10.3  ACC National Database Development Agreement, dated
               February 8, 1991......................................................

        *10.4  American Society of Cataract and Refractive Surgery
               National Database Development Agreement, dated
               February 18, 1994.....................................................

        *10.5  First Amendment and Restatement of STS National
               Database Agreement, dated March 26, 1995..............................

        *10.6  Summit Medical Systems, Inc., 1993 Stock
               Option Plan...........................................................

        *10.7  Summit Medical Systems, Inc., 1995 Employee Stock
               Purchase Plan.........................................................

        *10.8  Summit Medical Systems, Inc., 1995 Non-Employee
               Director Stock Option Plan............................................

        *10.9  Employment Agreement dated October 19, 1992,
               between Summit Medical Systems, Inc., and
               Edward F. Sweeney.....................................................

       *10.10  Employment Agreement dated October 19, 1992,
               between Summit Medical Systems, Inc., and
               Dennis Powers.........................................................

       *10.11  Employment Agreement dated August 2, 1993, between
               Summit Medical Systems, Inc., and William Cavanagh....................

   *****10.12  Employment Letter of December 29, 1995, between
               Summit Medical Systems, Inc., and Kevin R. Green......................

   *****10.13  Employment Letter dated October 5, 1995, between
</TABLE> 
<PAGE>
 
<TABLE> 
<S>            <C>                                                                      <C>  
               Summit Medical Systems, Inc. and Bruce S. Maller......................

       *10.14  Agreement Regarding Distribution of Software Programs
               between Boston Scientific Corporation and Summit
               Medical Systems, Inc., dated June 30, 1995............................

       *10.15  Amendment by Letter dated July 26, 1995 of Agreement
               Regarding Distribution of Software Programs between
               SciMed Life Systems, Inc. and Summit Medical Systems, Inc.,
               dated March 1, 1994, as amended in September 1994.....................

       *10.16  Amendment by Letter dated July 18, 1995 of Agreement
               Regarding Distribution of Software Programs between
               Summit Medical Systems, Inc., and Boston Scientific
               Corporation, dated June 30, 1995......................................

       *10.17  Amendment by Letter dated July 26, 1995 of Agreement
               Regarding Distribution of Software Programs between
               Summit Medical Systems, Inc., and Boston Scientific
               Corporation, dated June 30, 1995......................................

    ****10.18  Agreement Regarding Distribution of Software Programs
               between Boston Scientific Corporation and Summit
               Medical Systems, Inc. dated September 1, 1995.........................

    ****10.19  Agreement Regarding Distribution of Software Programs
               between Smith & Nephew Richards, Inc. and Summit
               Medical Systems, Inc. dated November 10, 1995.........................

    ****10.20  Agreement Regarding Distribution of Software Programs
               between Boston Scientific Corporation and Summit
               Medical Systems, Inc. dated December 1, 1995..........................

      **10.21  Agreement and Plan of Merger between BSM Acquisition
               Corp., BSM Financial, Inc., Bruce S. Maller and Summit
               Medical Systems, Inc. dated September 29, 1995........................

     ***10.22  Agreement and Plan of Merger between MIS Acquisition
               Corp., Medical Information Systems Company, Inc. and
               Summit Medical Systems, Inc. dated November 15, 1995..................

   *****10.23  License Agreement between Duke University and Summit
               Medical Systems, Inc. dated December 29, 1995.........................

   *****10.24  Cordillera L.L.C. Limited Liability Company Agreement
               dated December 29, 1995...............................................

   *****10.25  Sublicense and Distribution Agreement between
               Cordillera L.L.C. and Summit Medical Systems, Inc.
               dated December 29, 1995...............................................

   *****10.26  Employment Letter dated January 19, 1996, between Summit
               Medical Systems, Inc. and George J. Marshalek, Jr.....................
</TABLE> 
<PAGE>
 
<TABLE> 
<S>            <C>                                                                      <C>  
  ******10.27  Amendment by Letters dated January 2, 1996, January 16,
               1996 and June 29, 1996, of ACC National Database Development
               Agreement, dated February 8, 1991.....................................

        10.28  First and Second Amendment to Summit Medical Systems, Inc., 1993 
               Stock Option Plan.....................................................

 *******10.29  Agreement and Plan of Merger between Summit Medical Systems,
               Inc. CLM Acquisition Corp. and C. L. McIntosh & Associates, Inc.
               December dated 31, 1996...............................................

        10.30  Employment Agreement between Summit Medical Systems, Inc.,
               C. L. McIntosh & Associates, Inc. and Charles L. McIntosh
               dated December 31, 1996...............................................

        10.31  Option Agreement between Summit Medical Systems, Inc. and
               Charles L. McIntosh dated December 31, 1996...........................

        10.32  Reorganization Agreement between Summit Medical Systems, Inc.,
               Cordillera L.L.C., DR Ware LLP and Duke University dated December
               31, 1996..............................................................

        10.33  Employment Agreement between Summit Medical Systems, Inc. and
               Donald Fortin dated December 31, 1996.................................

        10.34  Option Agreement between Summit Medical Systems, Inc. and
               Donald Fortin dated December 31, 1996.................................

        10.35  Option Agreement between Summit Medical Systems, Inc. and
               Robert Califf dated December 31, 1996.................................


        10.36  Option Agreement between Summit Medical Systems, Inc. and Harry
               Phillips dated December 31, 1996......................................

        10.37  Amendment to License Agreement between Duke University and Summit
               Medical Systems, Inc. dated December 31, 1996.........................

        10.38  Amendment to Cordillera L.L.C. Limited Liability Company
               Agreement dated December 31, 1996.....................................

        10.39  Lease Agreement between Summit Medical Systems, Inc. and Red
               Circle L.L.P. dated September 30, 1996................................

        10.40  Employment Letter dated March 26, 1997 between Summit Medical
               Systems, Inc. and Richard Willemin....................................

        10.41  Employment letter dated June 12, 1996 between Summit Medical
               Systems, Inc. and David Teckman.......................................

         11.1  Statement re:  computation of per share earnings......................

         23.1  Consent of Ernst & Young LLP..........................................

         27    Financial Data Schedule...............................................

         99    Cautionary Statement..................................................
</TABLE> 
________________
     *  Incorporated by reference to the Exhibit with the same number in the
        Company's Registration Statement on Form S-1 (File No. 33-93700).

    **  Incorporated by reference to the Company's Current Report on Form 8-K
        dated October 19, 1995 (File No. 0-26390).

   ***  Incorporated by reference to the Company's Current Report on Form 8-K
        dated December 4, 1995 (File No. 0-26390).
<PAGE>
 
   ****   Confidential treatment requested as to certain portions.

  *****   Incorporated by reference to the Exhibit with the same number in the
          Company's Registration Statement on Form S-1 (File No. 333-01958).

 ******   Incorporated by reference to the Company's Registration Statement on
          Form S-1 (File No. 333-05711).

*******   Incorporated by reference to the Company's Current Report on Form 8-K
          filed January 14, 1997 (File No. 0-26390).