<PAGE>

================================================================================
                                                         

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                 ______________

                                  FORM 10-K/A

               (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 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.



                                                /s/ Ernst & Young LLP


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 income (loss)                           (1,207,240)          34,050        (1,173,190)             
     Net income (loss) per share                       (.31)             .03              (.24)             
                                                                                                            
                                                                                                            
     1995                                                                                                   
     Revenue                                   $ 11,586,577       $3,895,534       $15,482,111              
     Net income (loss)                           (9,518,438)         494,584        (9,023,854)             
     Net income (loss) per share                      (1.70)             .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:  April 25, 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>
                                                              
                           Chairman of the Board         April 25, 1997
-------------------------
W. Hudson Connery
 
/s/ Kevin R. Green         President, Chief Executive    April 25, 1997
-------------------------
Kevin R. Green             Officer and Director
                           (principal executive officer)
 
/s/ Richard J. Willemin    Interim Vice President,       April 25, 1997
-------------------------
Richard J. Willemin        Finance and Chief Financial 
                           Officer (principal financial 
                           and accounting officer)
 
/s/ John M. Nehra          Director                      April 25, 1997
-------------------------
John M. Nehra
 
/s/ Kent J. Thiry          Director                      April 25, 1997
-------------------------
Kent J. Thiry
 
/s/ Edward F. Sweeney      Director                      April 25, 1997
-------------------------
Edward F. Sweeney
</TABLE>