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

                        For the transition period from to

                           Commission File No. 0-19666

                        PHYSICIAN COMPUTER NETWORK, INC.

               New Jersey                              22-2485688
    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     incorporation or organization)

                             1200 The American Road
                            Morris Plains, N.J. 07950
                    (Address of principal executive offices)

               Registrant's telephone number, including area code:
                                 (201) 490-3100

           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

        Indicate by check mark whether the  Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                  Yes X   No__

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

        This aggregate market value of the voting stock (Common Stock,  $.01 par
value) held by non-affiliates  of the Registrant was approximately  $222,563,000
on March 27, 1997 based on the closing  sales price of the Common  Stock on such
date.

        The aggregate  number of  outstanding  shares of Common Stock,  $.01 par
value, of Registrant was 52,985,554 on March 27, 1997.

                                                        Exhibit Index on Page 43


<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.
                          1996 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I                                                                                     Page
------                                                                                     ----
<S>     <C>                                                                                 <C>
ITEM 1. Business..........................................................................   3
ITEM 2. Properties........................................................................  17
ITEM 3. Legal proceedings.................................................................  17
ITEM 4. Submission of Matters to Vote of Security Holders.................................  17

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.............  18
ITEM 6. Selected Financial Data...........................................................  19
ITEM 7. Management's Discussion and Analysis of Results of Operations and Financial
           Condition......................................................................  21
ITEM 8. Financial Statements and Supplementary Data.......................................  30
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
           Disclosure.....................................................................  30
PART III

ITEM 10. Directors and Executive Officers of the Registrant...............................  31
ITEM 11. Executive Compensation...........................................................  34
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................  40
ITEM 13. Certain Relationships and Related Transactions...................................  41

PART IV

ITEM 14. Exhibits, Consolidated Financial Statement Schedule, and Report on Form 8-K......  42

EXHIBIT INDEX.............................................................................  43

SIGNATURES................................................................................  52

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE................................................ F-1
</TABLE>



                                      -2-
<PAGE>



                                     PART I


ITEM 1. BUSINESS

General

        The Company is a leader in developing, marketing and supporting practice
management software products for physician practices. The Company's objective is
to establish a large installed base of physician  practice customers who use the
Company's most advanced practice  management  software  product,  the PCN Health
Network  Information  System,   thereby  becoming  an  important  link  for  the
electronic  exchange of information between physician practices and other health
care  providers and  organizations.  In  furtherance  of this  objective,  since
September  1993,  the Company has acquired eight  practice  management  software
businesses  which,  along with new system  sales,  has  increased  the number of
physicians  associated  with sites which have  purchased the Company's  practice
management software products from approximately  2,000 to approximately  95,000,
making the Company one of the largest providers of practice  management software
products  in the United  States.  The  Company  plans to  migrate a  substantial
majority of all of its customers to the PCN Health  Network  Information  System
during the next  several  years.  In an effort to rapidly  and  cost-effectively
supplement   its   practice   management   software   product   offerings   with
knowledge-based clinical products and services, in January 1996, the Company and
Glaxo  Wellcome,  Inc.  ("Glaxo  Wellcome")  formed a joint  venture.  The joint
venture,  HealthPoint  G.P.  ("HealthPoint"),  was formed to develop  and market
clinical  information  technology  products and  services  that will provide the
clinical  information  needed at the point of patient care and assist physicians
and other health care providers  practice  medicine more  efficiently.  In March
1996,  HealthPoint  introduced  its first  product,  HealthPoint  ACS, a product
developed  for medical  offices to enable  physicians  to,  among other  things,
manage the clinical  information  required  for  treatment at the point of care.
HealthPoint ACS first became commercially available in December 1996.

        The Company's practice management software products,  which, among other
things,  automate physician scheduling and generate patient billings,  insurance
claims billings and other financial reports,  include interactive  communication
software  that  links  physician  practices  with  hospitals,  Medicare/Medicaid
carriers,   commercial  insurance  carriers,  claims  clearinghouses,   clinical
laboratories,  pharmacies,  HMOs and other  health care  organizations  who have
established  electronic  communication  links under  agreement  with the Company
(collectively,   "Connecting  Service   Providers").   The  PCN  Health  Network
Information System is designed to become the common practice management software
platform used by a  substantial  majority of the  Company's  physician  practice
customers and, as an integrated unit with HealthPoint's products, is expected to
provide  physicians with  comprehensive  financial,  administrative and clinical
applications.  The PCN Health Network  Information  System will primarily manage
the business  elements of the physician's  practice and  HealthPoint's  software
products  and  services  will  primarily   provide   physicians   with  clinical
applications  and  functionality  intended to assist  physicians in the clinical
aspects of their practices.

        The Company was  incorporated  under the laws of the state of New Jersey
on August 25, 1983.  Its executive  offices are located at 1200  American  Road,
Morris Plains, New Jersey 07950. Its telephone number is (201) 490-3100.


Industry

        Based on publicly available industry sources,  the Company believes that
there are over 350,000



                                      -3-
<PAGE>



office-based  physicians  in the  United  States,  and  that  in  excess  of 800
businesses are marketing practice  management software products to them. Current
economic  influences,  including the increasing influence of managed care in the
health care marketplace,  are leading to fundamental  changes in the health care
industry in the United States.  As the health care delivery system evolves,  the
need  for  state-of-the-art  information  management  tools  becomes  critically
important.

        Managed care  organizations  are attempting to control health care costs
by pressuring  health care providers to become more cost  effective  through the
use of  capitated  fees  and  intense  monitoring  of the  number  and  types of
procedures  used. As a result,  sophisticated  practice  management  software is
increasingly  needed in order to track  costs,  clinical  outcomes  and  patient
health  care  needs  and  to  successfully   negotiate  contracts  and  maximize
profitability.  This  focus on costs has  increased  the need for  communication
links to permit the  electronic  exchange of  information,  such as  eligibility
checks, claims processing, treatment guidelines, prescribing guidelines, managed
care parameters and clinical laboratory  results,  rather than incur the cost of
processing paper transactions.  In addition,  payers need information to monitor
the  performance of physicians and to learn which clinical  protocols  result in
high quality,  cost effective treatment.  Large purchasers of medical care, such
as employers and governments,  require information in order to make decisions on
how best to spend limited resources.

        Other factors are also increasing the demand for more  comprehensive and
accurate medical information systems. The growing  administrative burdens placed
on medical  practices  have caused  doctors and  hospitals to  consolidate  both
vertically  and  horizontally  in  search  of  administrative  efficiencies  and
economies of scale.  Primary care physicians,  specialty  physicians,  ancillary
providers  and payers are  forming  sophisticated  networks  designed to provide
comprehensive  health care services  ranging from  preventive to  rehabilitative
care in order to maximize efficiency,  reduce  administrative costs and increase
profits.  The  integrations  of such health care  delivery  systems has and will
continue  to result in a greater  need for  information  management  tools which
permit the rapid exchange of information and provide  quantitative  measures and
financial  resource  management in order to match desired clinical outcomes with
appropriate reimbursements.

        The Company  believes that these trends have increased the demand within
the health care industry for  information  management  tools which allow various
participants in the industry to communicate and transmit both administrative and
clinical  information among themselves.  Further, the Company believes that such
trends have and will  continue to  encourage  greater  consolidation  within the
practice  management  software  business,   as  many  of  the  smaller  practice
management   companies   find  it  more  difficult  to  satisfy  the  industry's
increasingly  complex demands for  sophisticated  practice  management  software
products which provide  networking and  communication  capabilities,  as well as
clinical information technology products and services.


Strategy

        The  Company's  objective  is to  establish  a large  installed  base of
physician practice customers who use the PCN Health Network  Information System,
thereby  becoming an important link for the  electronic  exchange of information
between physician  practices and other health care providers and  organizations.
The  Company's  strategy for  achieving  its  objective has and will continue to
include:  (i) increasing the usage of the PCN Health Network  Information System
by continuing  to acquire  practice  management  software  businesses  having an
installed  base  of  physician  practice  customers;  (ii)  migrating  both  the
Company's existing and newly acquired practice  management software customers to
the PCN Health Network  Information  System during the next several years; (iii)
marketing and licensing the PCN Health Network Information System, both directly
and  through  independent  resellers,  to  additional  physician  customers,  in



                                      -4-
<PAGE>



particular,   large  group  practices;  (iv)  marketing  HealthPoint's  clinical
information  system products and other services to the Company's  installed base
of PCN Health Network Information System customers,  as well as customers of the
Company's other practice management software products; and (v) providing new and
enhanced services,  including new Connecting Service Providers,  through the PCN
Health  Network  Information  System  and  HealthPoint's   clinical  information
technology  products.  In addition to revenues generated by the Company from the
licensing of both its practice  management  software  products and HealthPoint's
clinical information products, as well as related sales of computer hardware and
services,  as a partner in the joint venture, the Company will generally receive
50% of any  profits  (as  well as  recognize  approximately  15% of the  losses)
generated by HealthPoint from its products and services,  whether or not sold by
the Company.

        Acquisition  Strategy.  In order to provide the Company with access to a
larger  base of  potential  customers  for the PCN  Health  Network  Information
System,  the  Company  intends to  continue  to pursue a strategy  of  acquiring
practice  management  software  businesses having an installed base of physician
practice customers who, over time, based on the product  offerings,  can migrate
from their  current  practice  management  software  products  to the PCN Health
Network Information System.

        As a result of this  strategy,  since  September  1993,  the Company has
completed eight  acquisitions  which, along with new system sales, has increased
the number of physicians who are associated  with sites which have purchased its
practice  management  software  products  from  approximately  2,000 to  95,000,
thereby making the Company one of the largest  providers of practice  management
software  products  in the  United  States.  See  "Management's  Discussion  and
Analysis of Results of Operations and Financial Condition -- Overview."

        The Company's most  significant  acquisition to date occurred in October
1995 when it acquired Versyss  Incorporated  ("Versyss").  The Versyss business,
through both a direct sales force of approximately 25 employees and a network of
approximately 50 independent resellers, has sold its "MENDS" practice management
software  products and related computer hardware to sites having an aggregate of
approximately  30,000  physicians  and  provides  service  and  support  of such
products and equipment.  Versyss also provides application software packages and
related  hardware  services,   for  certain  other  industries,   including  the
construction,   timber,  fuel  oil  and  publishing  businesses.   See  "Versyss
Commercial Business." In addition to its software products, Versyss provides its
independent  resellers  and its direct  customers  with  computer  hardware  and
peripherals,  for which purpose it operates a national  distribution  center for
hardware systems in Torrance, California. See "Products."

        In 1996, the Company completed two acquisitions.  On September 10, 1996,
the  Company  acquired  Wismer-Martin,  Inc.  ("Wismer-Martin"),  a provider  of
practice  management  and  healthcare   information  systems  located  in  Mead,
Washington.  On July 2, 1996,  the  Company  acquired  substantially  all of the
assets of the medical practice  management  software  business and certain other
software   businesses  of  CUSA   Technologies,   Inc.  (the  "CTI   Business").
Wismer-Martin,  through a direct sales force of approximately 10 employees,  has
sold its "SM*RT Practice" and "SM*RT Link" practice management software products
to sites having an  aggregate of  approximately  4,000  physicians  and provides
maintenance and support of such products.  In addition,  Wismer-Martin,  through
its wholly-owned subsidiary,  Integrated Health Systems, Inc. ("IHS"),  develops
and  licenses  software  products  for  hospitals  and  related  entities.   Its
ADDvantage  Hospital  Information  System  has  been  sold to  approximately  70
hospitals  ranging in size up to 400 beds.  The CTI  Business,  through a direct
sales force of approximately 25 employees, had been a reseller of Versyss' MENDs
product,  as well as certain  other  proprietary  practice  management  software
products, to sites having an aggregate of approximately 4,000 physicians.

        The  Company  expects to continue  to pursue its  acquisition  strategy.
However,  given,  among other



                                      -5-
<PAGE>



factors,  the rapid  consolidation  that has  taken  place in the  industry,  no
assurances can be given that any other acceptable  acquisition candidates can be
identified  and, if  identified,  that any such  potential  acquisitions  can be
consummated.

        Migration  Strategy.  Through its  independent  resellers and the direct
sales  force,  during the next  several  years the Company  intends to migrate a
substantial portion of its existing physician customers, and over time any newly
acquired physician  customers,  from their current practice  management software
products  to  the  PCN  Health  Network  Information  System.  The  Company  has
established  migration  plans  for  each  of its  practice  management  software
products to the PCN Health  Network  Information  System,  with the migration of
certain  products  expected  to  proceed  rapidly  and the  migration  of  other
products,  such as MENDS (which is a more  advanced  product and has a number of
different  versions in the  market),  expected  to proceed at a somewhat  slower
pace. If successful,  the Company's migration strategy will result in the use of
a common software  platform by a substantial  portion of its physician  practice
customers,  replacing the assorted  communication  links required to connect the
users of the Company's  eight other  practice  management  software  products to
Connecting  Service  Providers  and  reducing  the  costs  of  maintaining  such
products.

        In order to promote this migration,  the Company has developed migration
software  which  permits  the  information  stored  in  a  customer's   practice
management  software system to be  electronically  transferred to the customer's
new PCN  Health  Network  Information  System  in an  efficient,  cost-effective
manner. The Company has developed the software for electronic migration of users
of its Resident, MDX, DOM/2, original PCN software, Acclaim, System III Gold and
MENDs  practice   management   software  products  to  the  PCN  Health  Network
Information  System,  and is in the  process  of  developing  similar  migration
software  for the  users of the  SM*RT  Practice  practice  management  software
products. See "Sales and Marketing."

        Clinical  Information Product Strategy.  The Company and Glaxo Wellcome,
through wholly-owned  subsidiaries of each (the "Company Partner" and the "Glaxo
Wellcome Partner," respectively) formed HealthPoint to integrate the health care
and  clinical  information  technology  expertise  of  Glaxo  Wellcome  with the
information technology and distribution capabilities of the Company. In addition
to its cash contributions, the Glaxo Wellcome Partner contributed to HealthPoint
a clinical patient records product which had been in development for a number of
years. As a result,  the Company believes that the joint venture will permit the
Company to rapidly  and  cost-effectively  supplement  its  practice  management
software product offerings with knowledge-based clinical technology products and
services  expected to be developed by  HealthPoint.  In March 1996,  HealthPoint
introduced  its first product,  HealthPoint  ACS.  HealthPoint  ACS, which first
became commercially available in December 1996, is developed for medical offices
to enable  physicians  to, among other things,  manage the clinical  information
required for  treatment  at the point of care.  HealthPoint  ACS will  initially
interface  and  is  expected  to be  integrated  with  the  PCN  Health  Network
Information  System,  thereby  permitting the Company to provide  customers with
comprehensive  financial,  administrative and clinical  applications in a single
package.

        The  Company's  strategy  is to  market  HealthPoint  ACS,  as  well  as
HealthPoint's  other products and services,  to both new business  opportunities
and the  Company's  installed  base of PCN  Health  Network  Information  System
customers,  as well as  customers of the  Company's  other  practice  management
software products, in particular, MENDS. The Company believes that this strategy
will not  only  provide  the  Company  with  revenues  as a  result  of sales of
HealthPoint's  products and services,  but will  complement  and thereby help to
promote sales of the PCN Health Network Information System to new customers,  in
particular, larger group practices. See "Products" and "HealthPoint."



                                      -6-
<PAGE>



Products

        Practice Management Software Products

        All of the practice  management software products offered by the Company
provide  physicians with  comprehensive  office management  software designed to
automate the  administrative,  financial,  practice  management and, to a lesser
extent,  the  clinical  requirements  of  a  physician's  office  practice.  The
applications  of  the  practice   management   software   products  include  the
computerization of patient billing,  insurance claims and collection processing,
electronic  claims  submission,  patient  records,  appointment  scheduling  and
financial  reporting.  The Company's most advanced practice  management software
product,  the PCN Health  Network  Information  System,  is a UNIX-based  system
designed to provide enhanced  applications and communication  link capabilities.
The  Company  continually  seeks to enhance and  upgrade  the  applications  and
functionality  of the PCN Health Network  Information  System to ensure that the
product remains  competitive and satisfies the needs of the Company's  physician
practice  customers.  It is the  Company's  strategy  to  migrate a  substantial
majority of users of its other practice  management software products to the PCN
Health Network Information System product over the next several years.

        The PCN  Health  Network  Information  System.  The PCN  Health  Network
Information  System is designed to, among other  things,  provide the  following
applications:

                Patient   Appointment   Scheduling.   The  PCN  Health   Network
        Appointment  Scheduling  Module is designed to improve the efficiency of
        managing  appointments and  cancellations.  The Scheduling Module allows
        providers to: (i) schedule  appointments by first available time slot or
        by open calendar;  (ii)  coordinate  physicians,  facilities,  rooms and
        equipment in multiple provider locations;  (iii) track cancellations and
        no-shows;  (iv) generate  recall  correspondence  to remind  patients of
        appointments  or to track  patients  not seen  within a  specified  time
        frame;  (v)  produce  patient  reports  such as  hospital  round  lists,
        discharged patient lists,  reschedule,  cancel and no show reports;  and
        (vi) generate fee slips.

                Patient Registration. The PCN Health Network Registration Module
        is designed to permit  patients to be registered  into a central patient
        file  which can be  accessed  across  the  physician  organization.  The
        registration  workflow  is designed  to support an  efficient,  complete
        record of patient demographic data.  Integration with other areas of the
        system  eliminates the need for redundant data entry.  The  registration
        system can be tied to the PCN Health  Network  master  patient  index, a
        hospital  demographics  database,  or other patient data  repositories -
        which can be accessed during patient registration.

                Plan   Management.   The  PCN  Health   Network   Managed   Care
        Productivity  Module is designed to help managed care  providers  reduce
        the administrative  costs associated with managed care's detailed record
        keeping  requirements.  The Managed Care Module allows providers to: (i)
        electronically  communicate  with  managed care  organizations  to check
        membership  rosters,   referral  lists,  covered  services  and  patient
        eligibility prior to providing  services;  and (ii) track plan benefits,
        patient co-payments and noncovered services.

                Patient &  Insurance  Billing.  The PCN Health  Network  Billing
        Module is designed to improve the cash flow and  collection  performance
        of offices ranging from solo  practitioners  to  multi-specialty  groups
        with a large number of providers.  Functions include:  (i) processing of
        Medicare/Medicaid, Worker's Compensation, HMOs and other carriers' bills
        on  appropriate  forms;  (ii) group  procedure  function  which  handles
        billing of multiple procedures which are performed together; (iii) batch
        billing to post  charges for multiple  patients;  (iv)  coordination  of
        patient   benefits;   (v)   preparation,   submission  and  tracking  of
        preauthorizations; and (vi) establishment of prepayment plans.



                                      -7-
<PAGE>



                Electronic  Patient Records.  The PCN Health Network is designed
        to interface  with (and is expected to be integrated  with)  HealthPoint
        ACS,  which is designed to provide  advanced  clinical  patient  records
        functionality. See "Clinical Products" below.

                Financial Reporting. The accounts receivable function of the PCN
        Health  Network  Information  System  allows  providers  to  manage  the
        financial aspects of their practice.  This function allows providers to:
        (i) post payments to a specific visit and procedure or to the account in
        general;  (ii) adjust payments and handle  automatic  write-offs;  (iii)
        batch post a single check to a number of patient accounts; (iv) generate
        patient  statements;  (v)  establish  prepayment  plans;  (vi)  generate
        reports on, among others,  aged account  receivables,  account  ledgers,
        collection  agency  reports,   unapplied  credits  reports  and  patient
        financial  reviews;  and (vii) generate revenue and production  reports,
        trial  balances,  credit  balances,  charge and medical  history labels,
        identification  cards and other reports and  statements  required by the
        physician practice customer.

                Collections.  The  PCN  Health  Network  Collections  Module  is
        designed to monitor and improve  providers'  collection  ratios,  reduce
        delinquent accounts and manage accounts in collection. The module allows
        providers  to: (i)  establish  and  monitor  payment  plans;  (ii) track
        collection ratios, identify potential collection accounts and anticipate
        expected  payments  from plans;  (iii) remove  delinquent  accounts from
        accounts  receivable;  (iv)  manage  balances  in  collection;  and  (v)
        generate  collection  reports on, among others,  accounts in collection,
        collections aged trial balances,  cash flow projections,  credit manager
        reports, trend analysis and collection ratios.

                Communication  Links. The PCN Health Network  Information System
        is  designed  to enable  physician  practice  customers  to  communicate
        electronically with hospitals,  Medicare/Medicaid  carriers,  commercial
        insurance  carriers,   claims  clearinghouses,   clinical  laboratories,
        pharmacies,   HMOs  and  other  health  care   organizations   who  have
        established  electronic  communication  links under  agreements with the
        Company.  The Company has established  communication  links with various
        Connecting  Service  Providers  for the PCN Health  Network  Information
        System,   including  clinical  laboratories,   a  claims  clearinghouse,
        insurance  carriers and  hospitals.  Communication  links with  clinical
        laboratories,  which the Company has established  with LabCorp,  Corning
        Clinical  Laboratories  and SmithKline  Beecham,  as well as a number of
        smaller  regional  laboratories,   computerize  and  expedite  the  test
        requisition  and  result  reporting   process  thereby   benefiting  the
        physician  and patient  and  providing a  competitive  advantage  to the
        clinical laboratory  offering this capability.  Communication links with
        hospitals enable admitting physicians to, among other things, access the
        hospital's  information system to transmit patient  pre-admission  data,
        operating   room  and   laboratory   scheduling,   financial  and  other
        information,  thereby  increasing the services the hospital  provides to
        its  attending  physicians.  An  electronic  communication  link between
        insurance  carriers or other  third-party  payers and physicians help to
        reduce  the cost of  processing  claims  submitted  by such  physicians,
        including  clerical  data input costs  associated  with manual  entry of
        medical claims,  and should  expedite the payment of the claim,  thereby
        providing an additional economic benefit to the physician.  In addition,
        a  communication  link can allow the physician to  communicate  with the
        insurance   carrier  or  other   third-party  payer  to  verify  patient
        eligibility.  In order to streamline  this claims  processing  function,
        medical claims clearing organizations currently link electronically with
        hospitals  and/or  physicians via computer to submit claims to a variety
        of  third-party  payers and  reconcile  payments  received.  The Company
        provides such electronic  claims clearing services through National Data
        Corporation  ("NDC")  which  acquired  the claims  clearing  business of
        Equifax  Healthcare EDI Service,  Inc.  ("Equifax EDI"), a subsidiary of
        Equifax, Inc. See "NDC Relationship."

        In addition to NDC, the Company has entered into  agreements  with major
Blue  Cross/Blue  Shield  ("BC/BS")  carriers under which  physicians  using the
Company's  practice  management  software products may  electronically  transmit
claims payable by BC/BS using communication link software.  The Company



                                      -8-
<PAGE>



also has a service available to link physician offices directly to various other
insurance  carriers.  Further,  the Company has established  communication links
between a number of managed care organizations and their affiliated physicians.

        The Company has  standardized  and embedded into the PCN Health  Network
Information  System the  software  bridges  that will enable the Company to more
easily provide  communication  links with  Connecting  Service  Providers.  As a
result,  after the  Company  has  entered  into a  contractual  arrangement  and
established a communication  link with a Connecting  Service Provider,  upon the
request of a user of the PCN Health Network Information System, such link can be
electronically  activated on the  customer's  system by the Company.  Under such
agreements,  the Company  generally  receives a royalty,  an access fee and/or a
transaction fee from the Connecting Service Provider.  Typically,  such fees are
based on:  (i) a  percentage  of the fees  received  by the  Connecting  Service
Provider for providing services to physician practice customers; (ii) the number
of practices  and/or  physicians with whom the Company  provides a communication
link; and/or (iii) the number of transactions transmitted between the physicians
and the Connecting Service Provider.

        In the future, the Company expects  sophisticated  network communication
links which  facilitate  the  delivery of  clinical  information  to be provided
through  HealthPoint  ACS and  HealthPoint's  other  products.  Such  links  are
expected  to,  among  other  things,  permit  the  delivery  of  information  to
physicians at the point of patient  care.  It is expected that such  information
will include, among other things, drug formularies and treatment protocols, from
health care plan  providers  and  sponsors,  as well as more  advanced  clinical
laboratory information. See "HealthPoint."

        Other  Practice  Management  Software  Products.  In addition to the PCN
Health  Network   Information  System,  the  Company  currently  supports  eight
different practice management software products:  MENDS, SM*RT Practice,  System
III Gold, The Resident,  MDX, DOM/2, Acclaim and the original PCN software.  All
of these practice  management software products provide physicians with software
designed to automate the  administrative,  financial,  practice  management  and
clinical  requirements of a physician's office practice. In addition, to varying
degrees,  each of these practice  management  software products provides for the
automation  of patient  billing,  insurance  claims and  collection  processing,
electronic  claims  submission,  patient  records,  appointment  scheduling  and
clinical and  financial  reporting,  as well as  communication  links to certain
Connecting Service Providers.

        Full Risk Managed Care (Mcare) Software  Product.  The Company's "Mcare"
product is a full risk  managed  care  application  that is  designed to benefit
large group  practices or provider  groups that are entering  into  risk-sharing
arrangements.  Mcare  provides  practices  that are entering into  risk-sharing
contracts  with one or more health  plans with the ability to manage and monitor
contractual  performance.  Functions include:  (i) health plan  contract/benefit
management;  (ii)  membership  enrollment/eligibility  tracking;  (iii) provider
network contracting and reimbursement; (iv) referral authorization tracking, (v)
pre-certification tracking; and (vi) claims/encounter processing and utilization
reporting.  Mcare is expected to be made  commercially  available  in the second
quarter of 1997.


        Clinical Products

        In March 1996, HealthPoint introduced its first product, HealthPoint ACS
(Advanced  Clinical  System),  a product  designed for medical offices to enable
physicians to, among other things,  manage the clinical information required for
treatment at the point of care. This product,  which has been in development for
a number of years, first became  commercially  available in December 1996. Under
its



                                      -9-
<PAGE>



arrangements with HealthPoint, the Company has agreed to market HealthPoint ACS,
as well as HealthPoint's other products and services to the Company's customers.

        Among other  features,  HealthPoint  ACS  provides  physicians  with the
ability  to  enter,   revise  and  display  each  patient's   medical   history,
medications,  allergies and previous clinical encounters. It is also designed to
provide the physician customer with drug formularies,  referral lists, treatment
protocols  under the  patient's  health care plan,  drug  interaction  warnings,
patient education material and a medical database of common patient  complaints.
The product incorporates a problem oriented,  structured database and integrated
medical knowledge with features such as: (i) traditional SOAP methodology;  (ii)
customizable,  user-defined  lists and  templates  based upon a broad,  built-in
database;  (iii) a knowledge  base  including  SNOMED,  ICD-9,  CPT,  Medi-Span,
LifeArt,  and Clinical Reference System; (iv) a linear  problem-based  encounter
approach;  and, (v) alerts and drug  reactions.  HealthPoint  ACS is expected to
serve as a foundation for additional clinical  information products and services
such as  enhanced  network  capabilities,  including  clinical-based  Connecting
Service Providers, and clinical and analytical products and services.

        HealthPoint  ACS  will  initially   interface  and  is  expected  to  be
integrated with the PCN Health Network Information System, thereby complementing
and enhancing the capabilities of the PCN Health Network  Information System. As
an integrated  unit, the PCN Health Network  Information  System and HealthPoint
ACS are expected to provide physician  customers with  comprehensive  financial,
administrative and clinical applications.

        Computer Hardware and Peripherals

        In order to provide a  complete  product  offering,  the  Company  sells
computers,  terminals, printers, modems and other peripherals in connection with
the  licensing  of its software  products.  The PCN Health  Network  Information
System and MENDS  generally  operate on IBM RS/6000 systems running AIX, as well
as 486 and  Pentium-based  systems  running UNIX.  The Company's  other practice
management  software products operate  primarily on IBM compatible,  Intel-based
processors.  Versyss is a party to an  agreement  with IBM to private  label and
resell IBM RS/6000  Reduced  Instruction  Set  Computing  (RISC) based  hardware
systems to MENDS  customers.  Following  the Company's  acquisition  of Versyss,
International  Business  Machines Corp.  ("IBM") agreed to permit the Company to
take  advantage of the favorable  volume-based  discounts  available  under that
agreement  for all of the  Company's  customers,  including  those using the PCN
Health Network Information System.

        The Company  purchases  computer hardware for resale to customers of its
direct sales force and provides  maintenance and support of such equipment.  The
Company's  independent  resellers  generally  provide  customers  with  computer
hardware and maintenance and support of the entire hardware and software system.
As a result,  the Company  generally does not provide computer hardware directly
to the customers  serviced by  independent  resellers.  However,  because of the
favorable  volume-based  discounts  available to the  Company,  the Company does
purchase  computer  hardware  and  peripherals  at a discount  for resale to its
independent resellers,  based upon the resellers' orders for such equipment. The
Company  operates  a  national  distribution  center  for  hardware  systems  in
Torrance,  California.  At  the  Torrance  facility,  the  Company  maintains  a
just-in-time  inventory  system for the purchase of computer  hardware,  thereby
controlling  the size of its  inventory of  equipment,  which on average has not
exceeded a 30 day supply.

HealthPoint

        In January 1996, the Company and Glaxo Wellcome  formed  HealthPoint,  a
joint venture partnership, to integrate the health care and clinical information
technology   expertise  of  Glaxo   Wellcome,



                                      -10-
<PAGE>



one of the nation's leading research-based  pharmaceutical  companies,  with the
information  technology  and  distribution  capabilities  of  the  Company.  The
objective of the venture is to design and market clinical information technology
products and services that will help  physicians and other health care providers
practice medicine more efficiently.  These products and services are expected to
consist of computerized  patient records  software  products,  clinical  network
capabilities and data analysis.

        The  Partnership.   HealthPoint  is  a  general  partnership  formed  by
wholly-owned  subsidiaries  of the  Company  and Glaxo  Wellcome.  A  management
committee  comprised  of  two  representatives  of  the  Company  Partner,   two
representatives  of  the  Glaxo  Wellcome  Partner  and  one  representative  of
HealthPoint's   management  oversees  the  venture's  operations.   Accordingly,
HealthPoint sets its own business strategy and objectives independently from the
objectives and strategies adopted by the Company.

        Both the Company and Glaxo Wellcome have committed to contribute a total
of at least $50 million in cash to the  venture,  of which $43  million  will be
contributed by Glaxo Wellcome and $7 million will be contributed by the Company.
Of  such  amounts,  as of  March  31,  1997,  the  Glaxo  Wellcome  Partner  had
contributed  approximately $30.7 million and the Company Partner had contributed
approximately $5.5 million, with the remainder to be contributed proportionately
by the partners in semi-annual installments as needed by HealthPoint,  but in no
event later than December 31, 1998.

        Any losses incurred by HealthPoint  will generally be allocated  between
the  Glaxo  Wellcome  Partner  and the  Company  Partner  in  proportion  to the
partners' respective cash contributions (approximately 85% to the Glaxo Wellcome
Partner and 15% to the Company  Partner),  while  profits  will,  generally,  be
allocated equally between the partners.

        Strategy.  HealthPoint's objective is to improve the quality, efficiency
and cost  effectiveness  of health care  delivery by providing  state-of-the-art
clinical  information  management  and  communication  services  to health  care
providers, suppliers, payers and patients.  HealthPoint's strategy for achieving
its  objective is to develop and market  competitive:  (i) clinical  information
systems and related  services which,  among other things,  enable  physicians to
efficiently record their patient  evaluations and  recommendations  and transmit
portions of this  information  to other  health care system  participants;  (ii)
network  communication  systems to facilitate  the delivery of clinical data and
services from and to physicians,  managed care  organizations,  health insurance
plan sponsors and payers, suppliers, pharmacies, clinical laboratories and other
health care  industry  participants;  and (iii)  products  and  services for the
electronic collection,  support,  management and analysis of anonymous aggregate
patient and provider data.

        Distribution  of  Products  and  Services.  HealthPoint's  products  and
services have been and are expected to continue to be marketed to physicians and
other health care providers, payers and suppliers, whether or not they are users
of  the  Company's  practice  management  software  products.   Distribution  of
HealthPoint's  products will be performed by a number of independent  resellers,
the  primary  one of which is the  Company.  In its  capacity  as a reseller  of
HealthPoint's  software products, the Company generates revenue from the sale of
HealthPoint's software products, such amounts being in addition to the Company's
allocable share of any of HealthPoint's profits as a partner of the partnership.
The Company has agreed with  HealthPoint  to use its best efforts to  distribute
HealthPoint's  clinical  information  products and  services,  both directly and
through  the  Company's  network  of  independent  resellers,  generally  on  an
exclusive basis. In addition, the Company has agreed to generally prohibit other
clinical patient record products from  interfacing  with the Company's  practice
management software products.

        Products  and  Services.  In  addition  to  its  cash  contributions  to
HealthPoint, Glaxo Wellcome contributed a clinical patient records product which
had been under  development  for a number of years and into which Glaxo Wellcome
had invested substantial resources.  This product,  HealthPoint ACS, is designed



                                      -11-
<PAGE>



to provide a foundation upon which HealthPoint  provides to customers additional
products and services designed to facilitate the electronic exchange of clinical
information  and outcome  analysis.  See "Products -- Clinical  Patient  Records
Product."

        The products and services to be developed by HealthPoint are expected to
include clinical and analytical information and knowledge products and services,
including  those developed to support the disease  management  efforts of health
care providers and suppliers,  including  pharmaceutical  companies. The Company
expects  that  HealthPoint  will  put  in  place  security   features  to  allow
HealthPoint,  through its software  products,  to facilitate the utilization and
sharing of anonymous  aggregate  clinical data contained in the databases of its
physician   practice   customers  in  compliance  with  applicable  law.  It  is
contemplated  that this  anonymous  aggregate  clinical data will be of value to
health care providers and suppliers by supplying such analytical  information as
treatment  variables within a particular health care provider network,  severity
measures,  chronic disease  monitoring,  treatment interval outcome analysis and
quality  analysis.  Such  products  and analyses are expected to be developed by
HealthPoint  both  at  the  request  of  specific   customers  and  for  general
distribution  and sale by  HealthPoint.  In addition,  the Company  expects that
HealthPoint  will be able to market and sell reports and services  based on such
clinical data to its physician  customers.  The Company  believes that this data
will  supplement  the  existing  information  available  to health care  service
providers and physicians and will increase in value as the  availability of such
data grows.  The Company and Glaxo  Wellcome  have agreed  that,  as between the
Company and Glaxo Wellcome, on the one hand, and HealthPoint, on the other hand,
all data  generated  or  collected  through  the use of  HealthPoint's  software
products shall belong to HealthPoint.

        To date,  neither the  Company nor  HealthPoint  has  marketed  any such
clinical or analytical  products or services and  HealthPoint has not determined
the nature of the  products  and  services  to be  developed  or  established  a
marketing  strategy with respect to any such products or services.  There can be
no  assurances  given that any such  products  or services  can be  successfully
developed,  marketed and sold.  Further, as HealthPoint  operates  independently
from the Company,  all issues  regarding the use of clinical data by HealthPoint
shall be subject to the approval of  HealthPoint's  management  and partners and
there can be no assurance that HealthPoint's objectives or strategy with respect
to its use of clinical data will not be inconsistent  with those of the Company.
In  addition,  there are a number of  significant  legal and  regulatory  issues
relating to the  utilization  and sharing of anonymous  aggregate  clinical data
that the Company and HealthPoint are currently evaluating.  HealthPoint plans to
commit to its customers that it will comply with all applicable laws and, to the
extent required by applicable law, will not access such data without the express
consent of the health care provider. The AMA has issued a Current Opinion to the
effect that a physician  that does not obtain a patient's  consent to disclosure
of patient  information,  including  anonymous  disclosure,  violates  the AMA's
ethical standards with respect to patient confidentiality. While the AMA Current
Opinions  are not law,  they may  influence  physicians'  willingness  to obtain
patient consents or agree to permit HealthPoint to access clinical data in their
systems  without  such  consent.  Any such  restrictions  could  have a material
adverse  effect  on  HealthPoint's   ability  to  market  certain  clinical  and
analytical products and services. The Company expects HealthPoint to continue to
monitor and review the status and  interpretations of laws and regulations which
impact  HealthPoint's  ability  to access  and  utilize  anonymous,  non-patient
identifiable clinical and other data.
See "Government Regulation."


NDC Relationship

        In connection with the Company's goal of expanding the services provided
by Connecting Service  Providers,  on January 25, 1995, Equifax EDI entered into
an Exclusive Marketing Agreement (the "Marketing Agreement") with the Company to
establish "PCN Link," a communication  link between Equifax EDI and users of the
Company's practice management  software products.  In the third quarter of



                                      -12-
<PAGE>



1996, NDC acquired Equifax EDI.

        Pursuant to the Marketing Agreement,  the Company generally promotes NDC
as the exclusive  provider of electronic data  interchange  services,  including
claims processing,  electronic  eligibility and credit and check  authorization,
and generally  does not offer,  sell or market any such service to its physician
practice  customers,  by or on behalf of any other person or entity.  During the
term of the  Marketing  Agreement,  NDC  agrees  to  make  its  electronic  data
interchange services available to the Company's physician practice customers and
will pay to the Company a  percentage  of the gross  revenues  earned by NDC for
providing such services.

        The Marketing  Agreement  designates  NDC,  generally,  as the exclusive
source of all claims  submission and related services,  on-line  eligibility and
benefit  inquiries  for  indemnity  plans,  credit card and check  guarantee and
verification  services and  electronic  remittance  services.  In addition,  the
Company  has  agreed  to share  with  NDC  certain  of the  costs  and  expenses
associated with the further  development and enhancement of PCN Link, as well as
to partially  compensate  NDC for offering  certain free  one-year  introductory
services to  physician  practices  who  subscribe  for PCN Link.  The  Marketing
Agreement has an initial term of four years, but may be terminated by PCN on not
less than ninety days written  notice at any time on or after July 1, 1997.  See
"Management's  Discussion  and Analysis of Results of  Operations  and Financial
Condition Liquidity and Capital Resources."



Versyss Commercial Business

        In addition to developing  and marketing  practice  management  software
products,  Versyss  provides  application  software  packages for certain  other
industries,  including  the  construction,   timber,  fuel  oil  and  publishing
businesses.  Such  software  packages are designed to provide the customer  with
such  applications  as  payroll,  accounts  payable,  general  ledger,  billing,
accounts  receivable  management,   job  scheduling,   invoicing  and  inventory
management.  These software products are marketed and distributed by a dedicated
direct sales  organization  within Versyss,  as well as by Versyss'  independent
resellers  (some of which are also  resellers  of Versyss'  practice  management
software product). See "Sales and Marketing." Versyss also provides customers of
its  commercial  business with computer  hardware,  as well as  maintenance  and
support services. See "Products -- Computer Hardware and Peripherals."


Sales and Marketing

        The Company markets and distributes its products  through a direct sales
force and  through  value-added  independent  resellers.  Independent  resellers
generally provide  customers with computer  hardware and direct  maintenance and
support of the entire  computer  hardware  and software  system.  In addition to
independent  resellers,  the Company has also  entered  into  agreements  with a
number of hospitals and hospital  buying groups pursuant to which such hospitals
market the  Company's  practice  management  software  products to its attending
physicians.  Since 1995,  the Company has  acquired a  significant  direct sales
force which markets and distributes  practice management  software products,  as
well as computer hardware,  maintenance and other services. The Company utilizes
the direct  sales  forces to focus on national  accounts and larger new business
sales opportunities.

        Pursuant  to the  Company's  standard  distribution  agreement  with its
resellers for the PCN Health Network Information System, the Company has granted
to such  resellers  the right to market  licenses for such  practice  management
software  product to customers on the Company's  behalf.  The Company receives a



                                      -13-
<PAGE>



license  fee for each  license  sold based on the number of users of the product
licensed.  The  reseller  determines  the price  charged to the customer for the
license,  retaining the difference  between the license fee paid by the customer
and the amount payable to the Company. The resellers,  generally,  may only sell
the Company's practice management software products.


        Pursuant to the standard  license  agreement for the PCN Health  Network
Information  System, the Company licenses to the physician customer the right to
use  such  practice  management  software  product.  In  addition,  the  license
agreements provide that, for an annual fee (currently, ranging from a minimum of
$450 to a  maximum  of $2,400  per year  based  upon the  number of users of the
product  licensed),  the Company agrees to provide the customer with maintenance
of and certain updates to the product.


Software Development

        Technological  changes  in  hardware  and  operating  software  systems,
changing  requirements  of outside  parties  (such as  insurance  companies  and
clinical  laboratories)  and  changing  needs of health care  providers  require
software to be flexible,  easily  modified or revised to meet their needs.  With
the PCN Health Network Information System, the Company believes it has developed
a common  software  platform for use by all physician  practices and the Company
continually  seeks to enhance and upgrade the applications and  functionality of
this  product  in order to  ensure  that the  product  remains  competitive  and
satisfies the needs of the Company's physician practice  customers.  The Company
may  also be  required  to  establish  customized  software  bridges  to  permit
Connecting Service Providers to establish communication links with the Company's
physician practice  customers and develop interfaces to HealthPoint's  products.
The  Company  maintains  a staff  of  approximately  100  systems  analysts  and
programmers to develop and enhance its products.

        Research  and  development  expenses  were  $5,739,518,  $2,219,223  and
$1,838,823 in 1996, 1995 and 1994,  respectively.  The Company expects  research
and  development  expenses to continue  to increase  significantly  in 1997 as a
result of ongoing  efforts to (i)  enhance  the PCN Health  Network  Information
System,  (ii)  develop  additional  modules  for the  Company's  other  practice
management  software products,  (iii) develop electronic  migration software for
the SM*RT Practice  product,  as well as products  acquired in the future,  (iv)
develop  interfaces between each of the PCN Health Network  Information  System,
MENDS and SM*RT  Practice,  on the one hand, and  HealthPoint  ACS, on the other
hand;  and  (v)  integrate  the  PCN  Health  Network  Information  System  with
HealthPoint ACS. In addition,  the Company expects to incur additional  research
and development  expenses as a result of its agreement to share with NDC certain
development  costs  associated  with enhancing the PCN Link  services.  See "NDC
Relationship." In connection with certain of its  acquisitions,  the Company has
acquired technology in process that had not achieved  technological  feasibility
at the date of acquisition and had no alternative  future uses. As a result, the
Company has, and with respect to any acquired  technology in process acquired as
part of  future  acquisitions  may,  charge  the  fair  value  of such  acquired
technology in process  against  operations at the time of the  acquisition.  The
Company has no significant  material customer sponsored research and development
activities, nor any vendor providing material development expertise or resources
to the  Company at this time.  See  "Management's  Discussion  and  Analysis  of
Results of Operations and Financial Condition."


Government Regulation

        The Company's business is not directly subject to government regulation.
However,  the health care  industry is subject to extensive  Federal,  state and
local regulation  governing  reimbursements for services



                                      -14-
<PAGE>



rendered  and conduct of  operations  at health care  facilities.  The effect of
future  legislation and regulation on current and prospective  customers may, in
certain  circumstances,  have an adverse  effect  upon the  Company's  business.
However,  the Company cannot predict the impact,  if any, of future  legislation
and regulation on its business.

        The  Company  expects  HealthPoint  to  utilize  anonymous,  non-patient
identifiable  clinical  data  electronically  accessed from the databases of its
physician  practice  customers  to develop and market  clinical  and  analytical
information products and services,  as well as to support the disease management
efforts of health care  suppliers and  pharmaceutical  company  customers of the
venture.  There are a number  of legal and  regulatory  issues  relating  to the
utilization  and sharing of anonymous  aggregate  clinical data that the Company
and  HealthPoint  are  evaluating.   There  can  be  no  assurance  that  future
interpretations  by  regulatory  authorities  of  existing  or  future  laws and
regulations  will not directly or indirectly  restrict the  collection or use of
information derived from patient records.


Competition

        The practice  management  software industry is highly  competitive.  The
Company's  principal  competitors  include other physician  practice  management
software companies,  software distributors which sell off-the-shelf programs and
compatible  hardware to practices where competition is based primarily on price,
certain large national and regional companies which offer information systems to
health  care  providers,   and   data-processing   organizations  which  provide
computerized  billing  and record  management  services to medical  offices.  In
addition,  certain  claims  processing  organizations,  hospitals,  third  party
administrators,  insurers  and  other  health  care  organizations  now  provide
computer and/or other  electronic  data  transmission  systems,  which sometimes
include practice management software,  to physicians for a direct communications
link between the physician and the organization.  Likewise, firms with financial
and other  resources  greater  than those of the Company  may seek to  establish
competitive communication links with physician customers.

        The  Company  believes  that the  principal  competitive  factors in the
practice management software market are product  sophistication,  ongoing system
service and support,  flexibility,  price,  ease of use and compatibility of the
system, the potential for product enhancements, customer satisfaction and vendor
reputation  and  financial   stability.   The  Company  believes  its  principal
competitive  advantages are the features and capability of the PCN Heath Network
Information System,  including its ability to interface with and, in the future,
be integrated with  HealthPoint  ACS, the high level of customer support and the
Company's  reputation  and  relationship  with both its  resellers and physician
practice  customers.  A  number  of  other  companies  have  developed  clinical
information  products,  some of which are  commercially  available.  The Company
believes that  HealthPoint  ACS'  principal  competitive  advantage  will be its
advanced  features and  functionality.  As the market for the Company's  product
develops,  additional  competitors  may  enter  the  market  for  both  practice
management  software products and clinical  information  technology products and
competition   may  intensify.   Certain  of  the  Company's  and   HealthPoint's
competitors have greater financial, development,  technical, marketing and sales
resources  than the Company and  HealthPoint  and no assurance can be given that
the Company will be able to compete  successfully  with its  competitors  in the
future.


Proprietary Rights and Licenses

        The Company depends upon a combination of trade secrets,  copyright, and
trademark  laws,  license  agreements,   non-disclosure  and  other  contractual
provisions  and  technical  measures  to protect its  proprietary  rights in its
products.  The Company  distributes its products under license  agreements which
grant a



                                      -15-
<PAGE>



non-exclusive,  non-transferable  license to the  practice  management  software
product  and  contain  terms  and  conditions   prohibiting   the   unauthorized
reproduction or transfer of the practice management software.  In addition,  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 trade  secrets and as  unpublished
copyright work. Despite these  precautions,  it may be possible for unauthorized
third parties to copy aspects of the Company's products or to obtain information
that the Company  regards as proprietary.  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.  Because the Company believes that having the source-code for
its  products,  and  thereby  the  ability  to  develop  migration  software  to
electronically transfer data to the PCN Health Network Information System, gives
the Company a competitive  advantage, a third party's unauthorized access to the
source-code  could have an adverse effect on the Company.  Notwithstanding  such
fact, prior to its acquisition by the Company, Versyss had granted to certain of
its  independent  resellers  copies of the source-code for older versions of the
MENDS  products.  Accordingly,  such  resellers  have the  ability  to alter the
functionality  of older  versions of MENDS  without the Company's  consent.  The
Company has sought to centralize the source-code for these versions of MENDS and
neither  the  Company  nor  Versyss  permits  resellers  to grant  access to the
source-code to customers.


Employees

        At  March  31,  1997,  the  Company  had   approximately  725  full-time
employees. The Company is not a party to any collective bargaining agreement and
believes its relationship with its employees to be good.



                                      -16-
<PAGE>



ITEM 2. PROPERTIES

        The  Company's   current   headquarters  and  executive  offices  occupy
approximately  48,000 square feet of office space located at 1200 American Road,
Morris Plains, New Jersey, under a sublease expiring December 2004.

        The Company's subsidiary,  Versyss, occupies approximately 37,544 square
feet of office space in Needham Heights,  Massachusetts and approximately 41,730
square feet of office and warehouse space in Torrance,  California  under leases
expiring May 2000 and January 2000, respectively.

        The Company's subsidiary, PMS, occupies approximately 35,000 square feet
of office space in Needham, Massachusetts under a lease expiring March 2001.

        The  Company's  subsidiary,  Wismer-Martin,  owns  approximately  35,000
square feet of office space in Mead, Washington.

        In addition, the Company,  primarily through its subsidiaries,  leases a
number of other  operating  offices  through the country with leases expiring at
various dates.  The Company  believes that such  facilities are adequate for its
immediate needs and does not anticipate that it will have any problem  obtaining
additional space if needed in the future.


ITEM 3. LEGAL PROCEEDINGS

        The Company is a party to litigation  and claims which are normal in the
course of its  operations.  While the results of litigation and claims cannot be
predicted with  certainty,  the Company  believes that the final outcome of such
matters will not have a material  adverse  effect on its  financial  position or
results of operations.



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

None applicable.



                                      -17-
<PAGE>



                                     PART II


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


        PCN's  Common  Stock is traded  in the  over-the-counter  market  and is
quoted on the Nasdaq  National  Market  under the symbol  "PCNI." The  following
table sets forth the quarterly high and low sale prices of the Common Stock,  as
reported by the Nasdaq National Market, since January 1, 1995:

                                                                 PRICE
                                                           ------------------
                                                           High           Low
                                                           ----           ---
1995
   First Quarter ..................................       5 3/4          3 5/8
   Second Quarter .................................       5 1/8          3 11/16
   Third Quarter ..................................       6 3/4          3 3/4
   Fourth Quarter .................................       9 1/8          5 1/8

1996
   First Quarter ..................................       14 7/8         8 1/2
   Second Quarter .................................       14 7/8         8 3/4
   Third Quarter ..................................       11 15/16       6 7/8
   Fourth Quarter .................................       11 1/4         7 1/4

1997
   First Quarter (through March 27, 1997) .........       9 5/8          7 1/2

         There were  approximately  16,000 holders of record of Common Stock, as
of March 28, 1997.  The last reported  sales price of a share of Common Stock on
March 27, 1997 was 7 1/2.

Dividends

        The  Company has never  declared  or paid a cash  dividend on its Common
Stock.  The Company  currently  intends to retain any future earnings to finance
the growth and development of its business and,  therefore,  does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.



                                      -18-
<PAGE>



ITEM 6. SELECTED FINANCIAL DATA

        The following  selected  financial  data with respect to the years ended
1996, 1995, 1994, 1993 and 1992 (in thousands, except per share data) is derived
from the Company's  audited  Consolidated  Financial  Statements which as to the
years ended 1996,  1995 and 1994 are  included  elsewhere  in this  report.  The
selected  financial  data  should  be read  in  conjunction  with  "Management's
Discussion and Analysis of Results of Operations and Financial  Condition,"  the
Consolidated Financial Statements, related notes and other financial information
included elsewhere in this report.

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                -------------------------------------------------------------------
                                                                1996(1)        1995(2)        1994(3)        1993(3)         1992
                                                                -------        -------        -------        -------        -------
<S>                                                             <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................................       $95,797        $41,805        $20,504        $ 6,109        $ 3,124
Costs and expenses:
   Cost of revenues .....................................        38,562         16,289          6,076         10,255          7,850
   Research and development .............................         5,740          2,219          1,839            898            678
   Selling and marketing ................................         9,116          3,038          2,145          1,717          1,441
   General and administrative ...........................        10,990         10,354          5,529          6,454          7,877
   Amortization of acquired intangible
     assets .............................................         7,192          2,884          1,857            239           --
   Acquired technology in process .......................          --           14,516           --           10,633           --
   Restructuring ........................................          --            3,072           --            3,165           --
   Write-down of assets and other charges ...............          --            1,477           --            3,300           --
   Interest expense, net of interest
     income .............................................         1,156            875          1,709            942          1,242
                                                                -------        -------        -------        -------        -------
Income (loss) before income tax expense
   (benefit), loss on equity investment .................        23,041        (12,919)         1,349        (31,494)       (15,964)
   and extraordinary item
Income tax expense (benefit) ............................         4,818         (1,419)           102           --             --
                                                                -------        -------        -------        -------        -------
Income (loss) before loss on equity
investment and extraordinary item .......................        18,223        (11,500)         1,247        (31,494)       (15,964)
Loss on equity investment, net of
   taxes ................................................        (2,167)          --             --             --             --
                                                                -------        -------        -------        -------        -------
Income (loss) before extraordinary ......................        16,056        (11,500)         1,247        (31,494)       (15,964)
   items
Extraordinary items:
   Gain (loss) from the extinguishment
     of capital lease obligations and
     debt ...............................................          --             (180)          --            8,498           --
                                                                -------        -------        -------        -------        -------
Net income (loss) .......................................        16,056        (11,680)         1,247        (22,996)       (15,964)
Forfeited (accrued) dividends on
   preferred stock ......................................          --             --             --            2,957         (2,896)
                                                                -------        -------        -------        -------        -------
Net income (loss) available to common
   shareholders .........................................       $16,056       $(11,680)(4)    $ 1,247       $(20,039)      $(18,860)
                                                                =======        =======        =======        =======        =======

Net income (loss) per common share:
   Before extraordinary items ...........................       $   .30        $ (0.29)       $   .04        $ (1.38)       $ (2.19)
   Extraordinary items ..................................          --             --             --             0.41           --
                                                                -------        -------        -------        -------        -------
   Net income (loss) ....................................       $   .30        $ (0.29)       $   .04        $ (0.97)       $ (2.19)
                                                                =======        =======        =======        =======        =======

Weighted average number of common shares
   outstanding (5) ......................................        54,308         40,068         35,634         20,688          8,601
                                                                =======        =======        =======        =======        =======
</TABLE>

<TABLE>
<CAPTION>

                                                                                           At December 31,
                                                                -------------------------------------------------------------------
                                                                 1996           1995           1994           1993           1992
                                                                -------        -------        -------        -------        -------
<S>                                                             <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...............................        34,291        $15,517        $ 2,512        $ 9,671        $ 1,472
Working capital (deficit) ...............................        31,126         (9,006)        (3,971)        (2,675)          (790)
Current assets ..........................................        67,100         42,326          8,731         11,890          4,141
Intangible assets, net ..................................        69,076         53,701          8,342          6,707          1,612
Total assets ............................................       150,165        100,260         18,233         20,504         15,604
Current liabilities .....................................        35,974         51,332         12,702         14,565          4,931
Long-term liabilities ...................................         5,285         19,730         14,105         15,807         16,204
Shareholders' equity (deficiency) .......................       108,907         29,198         (8,574)        (9,868)        (5,531)
</TABLE>



(footnotes on following page)



                                      -19-
<PAGE>



(footnotes for preceding page)

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

(1)  Includes  the  operations  of the  CTI  Business  from  July  2,  1996  and
Wismer-Martin from September 10, 1996.

(2) The year ended  December 31, 1995  includes the  operations  of the Practice
Management  Systems Corp.  business (the "PMS Business") from April 24, 1995 and
Versyss from  October 27, 1995.  See  "Management's  Discussion  and Analysis of
Results of Operations and Financial  Condition"  and the Company's  Consolidated
Financial Statements included elsewhere in this report.

(3) The year ended December 31, 1994 includes the operations of Wallaby Software
Corporation  ("Wallaby") and Calyx Corporation  ("Calyx") for the full year, the
operations of the DOM/2  business from March 11, 1994 and the  operations of the
Acclaim  business  from  November  15,  1994.  The year ended  December 31, 1993
includes the  operations  of Calyx from  September 23, 1993.  See  "Management's
Discussion  and Analysis of Results of Operations  and Financial  Condition" and
the  Company's  Consolidated  Financial  Statements  included  elsewhere in this
report.

(4) The year ended  December  31, 1995  includes  charges of $14,516  related to
acquired  technology in process and $5,579 principally related to provisions for
restructuring and the write-down of assets and other charges.  See "Management's
Discussion  and Analysis of Results of Operations  and Financial  Condition" and
the  Company's  Consolidated  Financial  Statements  included  elsewhere in this
report.

(5) Primary and fully  diluted  earnings per common  share are the same,  as the
assumed  exercise of  outstanding  stock options and warrants  would not cause a
material  dilutive  effect on the  earnings per common share for the years ended
December 31, 1996 and 1994 and would be  anti-dilutive in the calculation of the
loss per common share for December 31, 1995,  1993 and 1992.  As of December 31,
1996,  warrants and options to purchase  10,003,586  shares of Common Stock were
outstanding,  of which  warrants and options to purchase  2,954,252  shares were
exercisable on such date.  Weighted average shares used in per share calculation
did not include  shares  issuable  upon  conversion of 15,750 shares of Series A
Convertible Preferred Stock outstanding as of December 31, 1995.



                                      -20-
<PAGE>



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

        The following discussion and analysis should be read in conjunction with
"Selected  Financial  Data" and the  Consolidated  Financial  Statements  of the
Company and related notes included  elsewhere herein.  The following  discussion
and analysis, as well as the discussion and analysis contained in the "Business"
above, includes certain forward-looking  statements.  Forward-looking statements
in this report are made  pursuant to the safe harbor  provisions  of the Private
Securities  Litigation  Reform  Act of 1995.  Persons  reading  this  report are
cautioned that such  forward-looking  statements involve risks and uncertainties
that could cause the  Company's  actual  results to differ  materially  from the
forward-looking  statements.  Factors that could cause actual  results to differ
materially from the forward-looking  statements include, without limitation, the
effect of the Company's  acquisition  strategy on future operating results;  the
uncertainty  of acceptance of the Company's new product and migration  strategy;
the  Company's   relationship  with  HealthPoint;   the  effects  of  government
regulation on the Company's business; competition; and other matters referred to
in this report.

Overview

        The Company is a leader in developing, marketing and supporting practice
management  software products for physician  practices.  The Company's  products
include software which, among other things,  automates physician  scheduling and
general patient billing,  insurance claims billing and other financial  reports.
Through  HealthPoint,  the  Company  also  offers a product  designed  to enable
physicians  to  automate  the  patient  medical  record and manage the  clinical
information required for treatment at the point of care.

        Beginning in 1993,  the Company  instituted a strategy of developing and
expanding  its business by acquiring  practice  management  software  businesses
having an installed  base of physician  practice  customers and of acquiring and
developing a common software platform to which such customers could migrate over
time. As a result, since September 1993, the Company has increased the number of
physicians  associated  with sites which have  purchased the Company's  practice
management software products from approximately  2,000 to approximately  95,000,
thereby making the Company one of the largest  providers of practice  management
software products in the country.

        Acquisition  History. On September 23, 1993, the Company acquired Calyx,
a company which has developed and sold practice  management software products to
sites having an aggregate of approximately  9,000 physicians,  for $4,050,000 in
cash and notes,  as well as the assumption of certain  liabilities.  On December
31, 1993, the Company acquired  Wallaby,  a company which has developed and sold
practice   management   software  products  to  sites  having  an  aggregate  of
approximately  20,000 physicians,  for $12,500,000 in cash and notes, as well as
the assumption of certain  liabilities.  On March 11, 1994, the Company acquired
the DOM/2  practice  management  software  business  (the "DOM/2  Business"),  a
business which has sold practice management software products to sites having an
aggregate of  approximately  9,000  physicians,  for $1,024,000,  as well as the
assumption of certain  liabilities.  On November 15, 1994, the Company  acquired
the Acclaim practice  management software business (the "Acclaim  Business"),  a
business  which  has  sold  practice  management  software  to sites  having  an
aggregate of approximately  6,000 physicians,  for $1,200,000 in cash and notes,
as well as the assumption of certain liabilities.

        On April 24, 1995,  the Company  acquired the PMS  Business,  a business
which has developed and,  through its own direct sales force,  has sold practice
management software products and related equipment, to sites having an aggregate
of approximately  6,000  physicians,  for  approximately  $4,861,000 in cash and
notes,  as well as the assumption of certain  liabilities.  On October 27, 1995,
the Company acquired Versyss, a business which has developed and, through both a
direct  sales force and  through a network of  independent  resellers,  has sold
practice  management  software products and related equipment to sites having an
aggregate



                                      -21-
<PAGE>



of  approximately  30,000  physicians.  The purchase  price of such  acquisition
consisted of $12,333,000 in cash,  $11,750,000 in the form of a promissory  note
and the repayment or assumption of  approximately  $45,800,000  in  liabilities.
Versyss also provides integrated information systems to certain industries other
than health care,  including the construction,  timber,  fuel oil and publishing
businesses.

        On July 2, 1996,  the Company  acquired the CTI Business,  a reseller of
the Versyss  MENDS  product  and a direct  provider  of certain  other  practice
management  systems and equipment to sites having an aggregate of  approximately
4,000  physicians,  for  $9,200,000 in cash,  the  assumption  of  approximately
$4,130,000 in liabilities  and the  cancellation of debt owed by CTI to PCN. The
CTI Business also  provides  other  industry  specific  information  systems and
equipment  through a direct sales force.  Most recently,  on September 10, 1996,
the Company acquired Wismer-Martin, a provider, through a direct sales force, of
practice management and healthcare  information  systems, and related equipment,
to sites having an aggregate of approximately 4,000 physicians for $1,980,000 in
cash, 935,000 shares of PCN Common Stock valued at approximately  $9,366,000 and
the assumption of approximately $4,733,000 in liabilities.

        In connection  with certain of its  acquisitions,  the Company  acquired
technology  in process that had not achieved  technological  feasibility  at the
date of acquisition and had no alternative future uses. As a result, the Company
has charged,  and with respect to any acquired technology in process acquired as
part of  future  acquisitions  may  charge  the  fair  value  of  such  acquired
technology in process against operations at the time of the acquisition.

        HealthPoint.  In January  1996,  the Company and Glaxo  Wellcome  formed
HealthPoint to develop and market clinical  information  technology products and
services.  See  "Business   -HealthPoint."  The  Company  agreed  to  distribute
HealthPoint's  products and services to the Company's  customers generally on an
exclusive basis.  Both the Company and Glaxo Wellcome,  through their respective
wholly-owned  subsidiaries,  will  contribute  at least $50  million  in cash to
HealthPoint,  of which $43 million  will be  contributed  by the Glaxo  Wellcome
Partner  and $7 million  will be  contributed  by the Company  Partner.  Of such
amounts, as of March 31, 1997, the Company Partner has contributed approximately
$5.5 million,  with the remainder to be contributed in semi-annual  installments
as needed by  HealthPoint,  but in no event later than  December 31,  1998.  Any
losses incurred by HealthPoint are allocated  between the Glaxo Wellcome Partner
and the Company Partner in proportion with their  respective cash  contributions
(approximately  85%  to the  Glaxo  Wellcome  Partner  and  15%  to the  Company
Partner),  while  profits  will  generally  be  allocated  equally  between  the
partners.

        In March 1996,  HealthPoint  introduced its first  product,  HealthPoint
ACS, which first became  commercially  available in December  1996.  HealthPoint
ACS, which  interfaces  (and is expected to be  integrated)  with the PCN Health
Network  Information System,  enables physicians to, among other things,  manage
the clinical information required for treatment at the point of care.

         Certain Historical Financing Arrangements.  In order to finance certain
payments required to be made by the Company to IBM Credit  Corporation  ("ICC"),
as well as finance a portion of the purchase price for the Company's acquisition
of Wallaby,  on December 31, 1993, the Company borrowed  $12,000,000 from Jeffry
M. Picower (the "Investor") and issued a $12,000,000 principal amount promissory
note (the "Investor Note"). On January 3, 1995,  pursuant to a debt refinancing,
the Company  issued to the Investor a $16,050,000  principal  amount  promissory
note due January 2, 1996 (the "1995  Investor  Note") in exchange for $3,210,000
in cash and the cancellation of the Investor Note, together with all $840,000 of
interest  accrued  thereon  through  January 3, 1995. The 1995 Investor Note was
prepaid in full out of the net proceeds of the February 15, 1995 public offering
(the  "February  1995  Offering")  pursuant to which the Company sold  6,250,000
shares of its Common Stock at a price of $4.00 per share.



                                      -22-
<PAGE>



        On October 20, 1995,  the Company  completed a placement  of  securities
pursuant to Regulation S of the Securities Act of 1933. In connection  with such
placement  (the "October  1995  Offering"),  the Company  raised net proceeds of
$24,689,326  through the  issuance of  1,902,748  shares of its Common Stock and
18,500 shares of its Series A non-dividend  paying convertible  preferred stock.
The Company  used a  substantial  majority  of the  proceeds  received  from the
October 1995 Offering to finance the acquisition of Versyss.

        In connection  with the execution of the Marketing  Agreement by Equifax
EDI and the Company on February 12, 1995,  Equifax  Inc.,  the parent of Equifax
EDI, purchased a $10 million, five year convertible subordinated promissory note
of the Company which bore interest at a rate of 6% per annum and was convertible
into  shares of Common  Stock at a  conversion  price of $5.175  per share  (the
"Equifax  Note").  On May 10, 1996, in accordance  with the terms of the Equifax
Note  purchase  agreement,  Equifax  converted  the  Equifax  Note in full  into
1,932,217 shares of Common Stock.

         On May 10, 1996, the Company completed the public offering of 5,600,000
shares of its Common Stock for $10.00 per share and, on May 24, 1996,  issued an
additional 840,000 shares of Common Stock for $10.00 per share upon the exercise
in full of the underwriters'  over-allotment option (the "1996 Public Offering).
Included  within the shares of Common  Stock sold  pursuant  to the 1996  Public
Offering  were  1,932,217  shares  issued by the  Company  to  Equifax  upon the
conversion  in full of the Equifax  Note. As a result of the sale by the Company
of the  remaining  4,507,783  shares  of Common  Stock  sold as part of the 1996
Public Offering, the Company received net proceeds of approximately $41 million.



                                      -23-
<PAGE>



Results of Operations

        The following  chart  provides a break-down  of the Company's  Revenues,
Cost of revenues,  and Operating expenses for the years ended December 31, 1996,
1995 and 1994:

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                                            -----------------------
                                                                               1996                  1995                  1994
                                                                            -----------           -----------           -----------
<S>                                                                         <C>                   <C>                   <C>
Revenues:
    Software license fees ........................................          $29,396,612           $15,450,897           $ 6,302,181
    Hardware .....................................................           25,301,761             9,721,559             2,592,713
    Software support and maintenance fees ........................           21,015,952             8,823,507             4,507,388
    Hardware maintenance fees ....................................           15,461,911             3,508,552                  --
    Communication fees and other .................................            4,621,256             4,300,827             7,101,524
                                                                            -----------           -----------           -----------
           Revenues ..............................................           95,797,492            41,805,342            20,503,806
                                                                            -----------           -----------           -----------
Cost of revenues:
    Hardware .....................................................           15,213,697             7,336,196             2,057,763
    Software, maintenance, support,
        communication fees and other .............................           23,347,900             8,952,757             4,018,189
                                                                            -----------           -----------           -----------
           Cost of Revenues ......................................           38,561,597            16,288,953             6,075,952

Gross margin .....................................................           57,235,895            25,516,389            14,427,854
    As a % of Revenues ...........................................                 59.7%                 61.0%                 70.4%

Operating expenses:
    Research and development .....................................            5,739,518             2,219,223             1,838,823
    Selling and marketing ........................................            9,115,683             3,038,069             2,144,464
    General and administrative ...................................           10,990,028            10,354,611             5,528,738
    Amortization of acquired intangible assets ...................            7,192,551             2,883,658             1,857,054
    Acquired technology in process ...............................                 --              14,516,000                  --
    Restructuring ................................................                 --               3,072,450                  --
    Write-down of assets and other charges .......................                 --               1,477,000                  --
                                                                            -----------           -----------           -----------
        Operating expenses .......................................          $33,037,780           $37,561,011           $11,369,079
</TABLE>



                  Year Ended December 31, 1996 Compared to the
                          Year Ended December 31, 1995

        Revenues.   Revenues   for  the  year  ended   December  31,  1996  were
$95,797,492, an increase of $53,992,150 or 129% over revenues of $41,805,342 for
1995.

        The Company's  software license fees are derived primarily from sales of
licenses for the PCN Health Network  Information  System and the Company's other
practice  management  software  products.  Revenues from  software  license fees
increased by $13,945,715 or 90% from $15,450,897 in 1995 to $29,396,612 in 1996,
as a result  of (i)  increased  sales of  licenses  for the PCN  Health  Network
Information  System; (ii) the effect on 1996 of a full year of sales of licenses
for the Versyss and PMS Business software



                                      -24-
<PAGE>



products;  and, (iii) the  acquisitions  of  Wismer-Martin  and the CTI Business
during 1996.

        Hardware  revenues  increased by $15,580,202 or 160% from  $9,721,559 in
1995 to $25,301,761  in 1996,  primarily due to (i) increased PCN Health Network
Information  System sales; (ii) the effect on 1996 of a full year of Versyss and
the PMS Business product sales; and, (iii) the acquisitions of Wismer-Martin and
the CTI Business during 1996. Versyss,  the PMS Business,  Wismer-Martin and the
CTI Business  all sell  computer  hardware,  peripherals  and  complete  systems
(hardware  and  practice  management  software)  directly,  and in the  case  of
Versyss, through resellers, to physician practices and hospitals.

        Software  support and maintenance  fees increased by $12,192,445 or 138%
from  $8,823,507 in 1995 to $21,015,952 in 1996,  primarily due to (i) increased
sales of software and hardware  systems;  (ii) the effect on 1996 of a full year
of Versyss and the PMS Business  product sales;  and, (iii) the  acquisitions of
Wismer-Martin and the CTI Business during 1996.

        Hardware  maintenance  revenue  increased  by  $11,953,359  or 341% from
$3,508,552 in 1995 to $15,461,911 in 1996, primarily due to (i) increased system
sales;  (ii) the effect on 1996 of a full year of Versyss  and the PMS  Business
product sales; and, (iii) the acquisitions of Wismer-Martin and the CTI Business
during 1996.

        Communication  fees increased by $320,429 or 7% from  $4,300,827 in 1995
to  $4,621,256  in  1996,  primarily  as a result  of  increased  fees  paid for
communications  links to the PCN Health Network Information System as well as to
other acquired practice  management  software systems by clinical  laboratories,
insurance companies,  claims  clearinghouses and hospitals partially offset by a
decline  in fees  generated  from users of  certain  PCN legacy  systems as they
migrate to the PCN Health Network Information System.

               Cost  of  revenues.  Cost  of  software,  maintenance,   support,
communication  fees and other  revenue  increased  by  $14,395,143  or 161% from
$8,952,757  in 1995  to  $23,347,900  in  1996,  primarily  as a  result  of the
increased  sales of the PCN Health  Network  Information  System,  the full year
effect of the Versyss and PMS Business  acquisitions and the acquisitions of the
practice  management software products and services of Wismer-Martin and the CTI
Business  during  1996.  These  costs  include  the costs of labor for  software
support, hardware maintenance and training.

        Cost of hardware,  including installation costs, increased by $7,877,501
or 107%  from  $7,336,196  in 1995 to  $15,213,697  in 1996 as a  result  of (i)
increased  system  sales;  (ii) the effect on 1996 of a full year of Versyss and
the PMS Business product sales; and, (iii) the acquisitions of Wismer-Martin and
the CTI Business during 1996.

        Total cost of revenues  increased as a percentage of total revenues from
39.0% in 1995 to 40.3%  in 1996  primarily  as a  result  of the  higher  mix of
hardware  sales  caused by the full year effect of the Versyss and PMS  Business
acquisitions and the  acquisitions of Wismer-Martin  and the CTI Business during
1996.

        Research and  Development.  Research and development  costs increased by
$3,520,295 or 159% from $2,219,223 in 1995 to $5,739,518 in 1996, primarily as a
result of (i) the investment in new technology and product development, (ii) the
effect on 1996 of a full year of Versyss  and the PMS  Business  product  sales;
and, (iii) the acquisitions of  Wismer-Martin  and the CTI Business during 1996.
Increases  in  expenditures  related to core  products was  partially  offset by
savings  realized from the  elimination of development  charges  associated with
non-core  products.  The  Company  expects  research  and  development  costs to
continue to increase in 1997. See "Liquidity and Capital Resources."



                                      -25-
<PAGE>



        Selling and  Marketing.  Selling and  marketing  expenses  increased  by
$6,077,614 or 200% from  $3,038,069 in 1995 to $9,115,683 in 1996 as a result of
the full effect of the increased  headcount  attributable to the Versyss and PMS
Business  acquisitions,  and  the  acquisitions  of  Wismer-Martin  and  the CTI
Business during 1996, all of which employ a direct sales force, partially offset
by continued efficiency savings realized from the elimination of duplicate print
advertising and trade show costs.

        General  and   Administrative.   General  and  administrative   expenses
increased by $635,417 or 6% from $10,354,611 in 1995 to $10,990,028 in 1996 as a
result of  additional  headcount and increased  facilities  and occupancy  costs
attributable  to the  acquisitions  of Versyss and the PMS Business in 1995, and
Wismer-Martin  and the CTI Business in 1996,  mostly offset by savings resulting
from the  centralization  of certain  operations,  the  elimination of duplicate
responsibilities and other functional downsizings.

        Amortization  of acquired  intangible  assets.  Amortization of acquired
intangible  assets  increased by $4,308,983  or 149% from  $2,883,658 in 1995 to
$7,192,551  in 1996 as a result of the full year  effect in 1996 of the  Versyss
and PMS  Business  acquisitions,  completed  in 1995,  and the  acquisitions  of
Wismer-Martin and the CTI Business during 1996.

        Interest  Income/Expense.  Interest income  increased by $101,362 or 18%
from $577,039 in 1995 to $678,401 in 1996,  primarily  due to the  investment by
the Company of the net proceeds from the 1996 Public Offering.

         Interest  expense  increased by $383,487 or 26% from $1,451,604 in 1995
to $1,835,091  in 1996  primarily due to the full effect of the increase in debt
service related to the Versyss  acquisition,  as well as debt service related to
the  acquisition  of  Wismer-Martin,  partially  offset by the conversion of the
Equifax  Note and the  payment  of debt  associated  with the PMS  Business  and
Wallaby acquisitions.



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

        Revenues.   Revenues   for  the  year  ended   December  31,  1995  were
$41,805,342, an increase of $21,301,536 or 104% over revenues of $20,503,806 for
1994.

        The Company's software license fees were derived primarily from sales of
licenses for the PCN Health Network  Information  System and the Company's other
practice  management  software  products.  Revenues from  software  license fees
increased by $9,148,716 or 145% from  $6,302,181 in 1994 to $15,450,897 in 1995,
primarily  as a  result  of  approximately  $11,951,000  of  increased  sales of
licenses for the PCN Health Network Information System and sales of licenses for
the  Versyss and PMS  Business  acquired  software  products.  This  increase in
software licensing fees was partially offset by a $2,822,000  reduction in sales
of the  Company's  other  acquired  software  products  as  physician  customers
migrated to the PCN Health Network Information System.

        Hardware  revenues  increased by $7,128,846  or 275% from  $2,592,713 in
1994 to $9,721,559 in 1995, primarily as a result of the acquisitions of Versyss
and the PMS Business,  both of which sell  computer  hardware,  peripherals  and
complete  systems  (hardware  and  practice  management  software)  directly  to
physician  practices and, in the case of Versyss,  to  independent  resellers of
Versyss' practice  management  software products.  Revenue in 1994 was primarily
derived  from the  hardware  portion  of sales  under  certain  lease  financing
arrangements   between  the  Company  and  Carolan  Leasing   Corporation   (the
"Alternative Financing Strategy").

        Software  support and  maintenance  fees  increased by $4,316,119 or 96%
from  $4,507,388  in 1994



                                      -26-
<PAGE>



to $8,823,507 in 1995,  primarily as a result of the  acquisition of Versyss and
the PMS Business.  Hardware maintenance revenue of $3,508,552 was also generated
from the acquisitions of Versyss and the PMS Business.

        Communication fees declined by $1,227,691 or 32% from $3,793,598 in 1994
to $2,565,907 in 1995,  primarily as a result of declining  fees  generated from
users of certain PCN legacy  systems as they  migrate to the PCN Health  Network
Information System.

        Leasing  and other  fees  revenue  declined  by  $1,573,006  or 48% from
$3,307,926  in 1994 to  $1,734,920  in 1995 due to the reduction in fees derived
from the  Alternative  Financing  Strategy.  In 1995,  Leasing  and  other  fees
primarily included revenues derived from sales of forms and supplies directly to
physician  customers.  In 1994,  Leasing  and other fees  primarily  include the
revenues from the Alternative Financing Strategy not related to hardware.

        Cost of revenues. Cost of software, maintenance,  support, communication
fees and other revenue  increased by $4,934,568 or 123% from  $4,018,189 in 1994
to $8,952,757 in 1995,  primarily as a result of the increased  sales of the PCN
Health  Network  Information  System  and as a result of sales of the  Company's
newly acquired Versyss and PMS Business  practice  management  software products
and  services.  These  costs  include the costs of labor for  software  support,
hardware maintenance and training.

        Cost of hardware,  including installation costs, increased by $5,278,433
or 257%  from  $2,057,763  in  1994 to  $7,336,196  in 1995 as a  result  of the
increased computer hardware sales resulting from the acquisitions of Versyss and
the PMS Business.

        Total cost of revenues  increased as a percentage of total revenues from
29.6% in 1994 to 39.0%  in 1995  primarily  as a  result  of the  higher  mix of
hardware sales.

        Research and  Development.  Research and development  costs increased by
$380,400 or 21% from  $1,838,823 in 1994 to  $2,219,223 in 1995,  primarily as a
result of the acquisitions of Versyss and the PMS Business.

        Selling and  Marketing.  Selling and  marketing  expenses  increased  by
$893,605 or 42% from  $2,144,464  in 1994 to  $3,038,069  in 1995 as a result of
increased  headcount  attributable  to the  acquisitions  of Versyss and the PMS
Business,  partially offset by efficiency  savings realized from the elimination
of duplicate print advertising and trade show costs.

        General and  Administrative  and  Amortization  of  Acquired  Intangible
Assets.  General  and  administrative  expenses  and  amortization  of  acquired
intangible  assets  increased by  $5,852,477  or 79% from  $7,385,792 in 1994 to
$13,238,269 in 1995 as a result of additional headcount and increased facilities
and occupancy  costs  attributable  to the  acquisitions  of Versyss and the PMS
Business.  In the fourth quarter of 1995, the Company  announced a restructuring
plan to  centralize  and  consolidate  certain  of these  functions  in order to
achieve  efficiency savings in 1996. See "Restructuring and Write Down of Assets
and Other Charges" below.

        Acquired Technology in Process. The acquired technology in process costs
of $14,516,000  incurred in 1995 reflect the fair value of the software products
under development at Versyss that had not achieved technological  feasibility at
the date of acquisition,  and had no alternative future uses, and were therefore
charged against operations at the time of the acquisition.

        Restructuring  and Write  Down of Assets and Other  Charges.  During the
fourth  quarter  of 1995,  after  the  completion  of the  Versyss  acquisition,
management  completed a review of the Company's



                                      -27-
<PAGE>



operations  in  conjunction  with the newly  acquired  PMS  Business and Versyss
operations and announced a restructuring  plan (the "1995  Restructuring  Plan")
designed to eliminate  duplicate  administrative  responsibilities,  consolidate
warehousing and distribution of the Company's products and streamline other core
businesses in order to improve  operating  efficiencies.  The Company recorded a
restructuring charge aggregating  $3,922,450,  partially offset by a recovery of
$850,000  from a change in estimated  requirements  previously  charged  against
operations  as part of the  restructuring  accrual  recorded  in 1993.  The 1995
Restructuring  Plan provision  included  $2,509,950 for lease  termination costs
(principally  commencing  in July 1996) and  $1,412,500  for severance and other
employee  reduction-related  costs.  The  implementation  of this plan commenced
immediately and it was  substantially  completed by the end of 1996.  During the
fourth  quarter of 1995, the Company also recorded a provision of $1,477,000 for
the  writedown  of  certain  assets  and other  charges.  The  charge  consisted
primarily  of a $500,000  writedown of impaired  acquisition-related  intangible
assets,   a   $400,000   settlement   of  a  customer   dispute   related  to  a
previously-acquired  software  product and $577,000 of other asset writedowns to
fair value.

        Interest  Income/Expense.  Interest income increased by $488,222 or 550%
from  $88,817 in 1994 to  $577,039  in 1995,  primarily  as a result of interest
earned on the investment of the proceeds from the February 1995 public  offering
and the issuance of the Equifax Note.

        Interest expense decreased by $346,449 or 19% from $1,798,053 in 1994 to
$1,451,604 in 1995 due to a net reduction of term  indebtedness of approximately
$2,042,000 through October 27, 1995,  primarily  resulting from the repayment of
the 1995 Investor  Note from the proceeds of the February 1995 public  offering,
partially  offset  by an  increase  in  debt  service  related  to  the  Versyss
acquisition on October 27, 1995. As a result of the early  extinguishment of the
1995 Investor Note, the Company recorded an extraordinary loss of $180,000.


Liquidity and Capital Resources

         At  December  31,  1996,  the  Company  had  available  cash  and  cash
equivalents  of  $34,291,000.  In  addition,  the Company had  consolidated  net
accounts  receivable of  $21,103,000.  For the years ended December 31, 1996 and
1995, net cash provided from operating activities was $7,641,000 and $1,815,000,
respectively  as compared to net cash used in operating  activities  of $464,000
for the year ended  December  31,  1994.  The  increase in net cash  provided by
operating  activities was achieved primarily from the Company's improved results
of operations for the year ended December 31, 1996, partially offset by payments
of  accrued   expenses   related  to  the  Versyss   acquisition  and  the  1995
Restructuring.  At  December  31,  1996,  the  Company  had  working  capital of
approximately  $31,126,000  compared to a working capital deficit  $9,006,000 at
December 31, 1995,  primarily as a result of: (i) increased  cash generated from
the improved results of operations in 1996, as compared to 1995, (ii) a decrease
in  accrued  expenses  and  other  liabilities  due to the pay  down of  accrued
charges, and, (iii) the net proceeds of the 1996 Public Offering.

         Historically,  the Company has funded its working capital  requirements
and acquisitions through external financing sources,  including borrowing and/or
the sale of equity  securities  as well as, in 1996,  from cash  generated  from
operations.  In the year ended December 31, 1996,  the Company raised  financing
proceeds,  net of fees and expenses,  of  $42,824,000  primarily  related to (i)
$41,248,000 in net proceeds from the 1996 Public Offering;  and, (ii) $1,576,000
in net proceeds from the exercise of options to purchase  Common  Stock.  In the
year ended December 31, 1995, the Company raised financing proceeds, net of fees
and expenses,  of $59,175,000  primarily  consisting of: (i)  $22,340,000 in net
proceeds from the February 1995 Offering,  (ii)  $9,853,000 from the issuance of
the Equifax Note in February  1995;  (iii)  $24,689,000 in net proceeds from the
October 1995  Offering;  (iv)  $810,000 from the exercise of options to purchase
Common Stock;  and (v) $1,483,000  from the sale to the Investor of a warrant to
purchase 5,000,000 shares



                                      -28-
<PAGE>



of Common  Stock.  For the year ended  December  31,  1994,  the Company  raised
$46,000 in financing  proceeds  from the exercise of options to purchase  Common
Stock.

        For the year ended December 31, 1996, the Company used  $20,323,000  for
investing  activities,  which consisted  primarily of $11,670,000 related to the
purchases of the CTI Business and  Wismer-Martin  and $4,759,000  related to the
investment in HealthPoint.  The Company also used approximately  $11,052,000 for
the  paydown of debt  associated  with the  Wallaby,  PMS  Business  and Versyss
acquisitions. For the year ended December 31, 1995, the Company used $21,387,000
for investing activities, primarily related to the purchases of the PMS Business
and of Versyss,  and $26,598,000 to repay indebtedness  primarily related to the
Wallaby and Versyss  acquisitions and the 1995 Investor Note. For the year ended
December  31,  1994,  the Company  used  $1,804,000  for  investing  activities,
primarily related to the purchase of the DOM/2 Business and the Acclaim Business
and $5,113,000 to repay indebtedness primarily relating to the Wallaby and Calyx
acquisitions.

        Significant payment obligations of the Company during 1997 include:  (i)
repurchasing  2,325,000  shares of Common Stock held by ICC for $4.60 a share by
March  31,1997;  (ii) the payment in October  1997 of  $5,875,000  in  principal
amount  under  the  promissory  note  issued  in  connection  with  the  Versyss
acquisition,  together with accrued and unpaid interest  thereon;  (iii) capital
contributions  required to be made by the Company to  HealthPoint;  and (iv) the
payment of  $125,000  per month to NDC,  as  successor  to Equifax EDI under the
Amended and Restated Marketing Agreement. See "Business - NDC Relationship."

        Research  and  development  expenses  were  $5,739,518,  $2,219,223  and
$1,838,823 in 1996,  1995 and 1994,  respectively.  The Company expects that its
research and  development  expenses will continue to increase  significantly  in
1997 as a result of ongoing  efforts  to:  (i)  enhance  the PCN Health  Network
Information  System  including its  integration  and interface with  HealthPoint
products; (ii) develop a full risk managed care software product and a graphical
user interface  ("GUI")  Windows  version of the PCN Health Network  Information
System;  (iii) develop additional  modules for, as well as maintain,  certain of
the  Company's  other  acquired  practice  management  software  products;  (iv)
continue the development of electronic migration software for the SM*RT Practice
acquired software product,  as well as products acquired in the future;  and (v)
share development costs incurred by NDC to enhance the PCN Link products.

        The Company  expects that its operating  cash flow will be sufficient to
fund  the  Company's  working  capital  requirements   (including  research  and
development)  through  at least 1998 and permit  the  Company  to  continue  its
acquisition  strategy.  However, the Company's ability to continue to pursue its
acquisition  strategy  will be  affected  by the  extent  and pace at which  the
Company  utilizes its available  resources for  acquisitions.  Accordingly,  the
Company may in the future be required to seek  additional  sources of financing,
including  borrowing and/or the sale of equity  securities.  If additional funds
are raised by issuing equity  securities,  further  dilution to shareholders may
result. No assurances can be given that any such additional sources of financing
will be available on acceptable terms or at all.

        At December 31, 1996, the Company had net operating  loss  carryforwards
for federal  income tax purposes of  approximately  $66,000,000  which expire in
1999 through 2009. This includes approximately $15,000,000 of net operating loss
carryforwards from Versyss and $4,500,000 from  Wismer-Martin  which are subject
to separate return  limitation year ("SRLY") rules.  The Company believes it has
previously  experienced ownership changes, which under the provisions of Section
382 of the Internal Revenue Code of 1986, as amended ("IRC"), have resulted in a
significant  annual  limitation  on the  Company's  ability to  utilize  its net
operating losses in the future. As a result, the Company is limited each year as
to the amount of pre-ownership change net operating losses that can be utilized.
However,  it is the opinion of management that the losses will be fully utilized
prior to expiration of the rollforward period.



                                      -29-
<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        See Index to Financial Statements and Schedule on page F-1.

        See Exhibit 11.


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

        None.



                                      -30-
<PAGE>



                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The  following  table  sets  forth  certain  information  regarding  the
Company's directors and executive officers as of March 27, 1997:

Executive Officers and Directors

  Name                   Age  Office

  Jeffry M. Picower      54   Chairman of the Board and Director
  Henry Green            54   President, Chief Executive Officer and Director
  John F. Mortell        54   Executive Vice President,  Chief Operating Officer
                              and Director
  James R. Bailey        43   Senior Vice President
  Steven E. Kelsky       46   Senior Vice President
  William S. Edwards     51   Senior Vice President
  Kenneth W. Ernsting    43   Senior Vice President
  Thomas F. Wraback      36   Senior Vice President and Chief Financial Officer
  Jerry Brager           48   Director
  Frederick Frank        64   Director
  Frederic Greenberg     56   Director
  Richard B. Kelsky      41   Director
  Russell J. Ricci, M.D. 50   Director

        Jeffry M. Picower has been a Director of the Company since January 1994,
and was elected  Chairman of the Board in June 1994.  Mr. Picower is Chairman of
the Board of Monroe  Systems For  Business,  Inc.  which is a  worldwide  office
equipment  distribution  and  service  organization.  Mr.  Picower  is also  the
Chairman of the Board and Chief Executive Officer of Advanced  Medical,  Inc., a
publicly-held company ("Advanced  Medical"),  which, through its subsidiary IMED
Corporation,  manufactures  intravenous  infusion  pumps.  He is an attorney and
certified public accountant.

        Henry  Green has been a Director  of the  Company  since July 1993,  its
President  since  May  1993,  and in June  1994 was  appointed  Chief  Executive
Officer. Mr. Green was President and Chief Operating Officer of Advanced Medical
from  September  1990 to March 1993.  He  continues to be a Director of Advanced
Medical.  From 1988 to September 1990, Mr. Green was Vice President of Johnson &
Johnson International, a manufacturer and provider of medical and home products.
From 1981 to 1988,  Mr. Green was  President of Vistakon,  Inc., a subsidiary of
Johnson & Johnson.

        John F. Mortell has been a Director of the Company since  September 1996
and has been the  Executive  Vice  President and Chief  Operating  Officer since
March 1995. Prior thereto, Mr. Mortell was the Company's Chief Financial Officer
from May 1992 until September 1996. From May 1991 to April 1992, Mr. Mortell was
a Senior Vice President of Northpoint  Software  Ventures,  Inc., a software and
consulting  company.  Prior  thereto,  Mr. Mortell was Senior Vice President and
Chief  Financial  Officer  at  IBAX  Healthcare  Systems  ("IBAX"),  a  hospital
information  systems company,  from October 1989 to April 1991. Prior to joining
IBAX,  Mr. Mortell was employed by IBM for  twenty-five  years in various senior
executive positions in both the United States and Asia.

        James R. Bailey has been a Vice  President  of the  Company  since April
1994 and in March 1995 was appointed a Senior Vice President of the Company. Mr.
Bailey is also  President of Calyx,  a position he



                                      -31-
<PAGE>



has held since November  1991.  For four years prior thereto,  Mr. Bailey was in
senior management at Versyss.

        Steven  E.  Kelsky  has  been a Vice  President  of  the  Company  since
September  1994 and in March 1995 was  appointed a Senior Vice  President of the
Company.  For ten years prior thereto, Mr. Kelsky was President of Comptech Data
Systems,  Inc., a systems and management consulting firm, the last year of which
was spent by Mr. Kelsky as a consultant  to the Company in product  development,
technology planning,  and acquisition  analysis.  Prior to that, Mr. Kelsky held
technical, marketing, and executive positions at IBM, General Foods Corporation,
Mobil Oil Corporation and Paine Webber  Incorporated.  Mr. Kelsky is the brother
of Richard B. Kelsky, a Director of the Company.

        William S. Edwards has been a Vice President of the Company since August
1995 and in February 1997 was appointed a Senior Vice  President of the Company.
Prior to that, Mr. Edwards was Vice President,  Customer  Service of Versyss,  a
position  he held  since  September  1992.  Prior  to  that,  Mr.  Edwards  held
management  positions  at LTX  Corporation,  Apollo  Computer,  Inc. and Nixdorf
Computer Corporation.

        Kenneth W.  Ernsting  has been a Vice  President  of the  Company  since
August  1995 and in July  1996 was  appointed  a Senior  Vice  President  of the
Company.  Prior to that, Mr.  Ernsting was the Senior Vice President and General
Manager of the Healthcare  Systems Division of Versyss, a position he held since
1993. Prior to his appointment as Senior Vice President of Versyss, Mr. Ernsting
held various marketing positions at Versyss since March 1983.

        Thomas F. Wraback has been Vice President,  Finance since March 1995 and
in September  1996 was  promoted to Senior Vice  President  and Chief  Financial
Officer.  Prior to joining the  Company as its  Corporate  Controller  in August
1993,  Mr.  Wraback had served in various  financial  and  executive  management
positions in the financial services and distribution industries.  From July 1991
to August 1993 he was a financial  executive  at J.P.  Morgan & Co.,  Inc.  From
September  1985 to July 1991,  Mr.  Wraback was Controller of the Baker & Taylor
division of W.R. Grace & Co., a distributor of books, video and software.  Prior
thereto,  he held several  positions at Arthur  Andersen & Co. Mr.  Wraback is a
certified public accountant.

        Jerry Brager  co-founded the Company in 1983 and was its Chairman of the
Board from  inception  until June 1994.  In 1982,  Mr.  Brager  also  co-founded
Strategic Medical  Communications,  Inc., a health care advertising  agency. Mr.
Brager  has also held  sales and  marketing  management  positions  with  Becton
Dickinson and Company and with Baxter Travenol Laboratories, Inc.

        Frederick  Frank has been a Director of the Company since June 1989. Mr.
Frank has been an  investment  banker with Lehman  Brothers  Inc. and  successor
firms since 1969, and is currently Vice-Chairman of Lehman Brothers Inc. He is a
Chartered  Financial  Analyst,  a member  of the New York  Society  of  Security
Analysts and a past President of the Chemical Processing  Industry Analysts.  In
addition  to serving as a Director  of Applied  Bioscience  International  Inc.,
Diagnostic  Products  Corporation and R.P.  Scherer  Corporation,  publicly-held
corporations,  Mr. Frank is a Chairman of the National Genetics Foundation and a
Director  of the Salk  Institute  and a member  of the Salk  Institute  National
Council.

        Frederic  Greenberg  has been a Director of the Company since July 1993.
He served as a pharmaceutical  analyst with Goldman,  Sachs & Co., an investment
banking firm, from 1974 to 1989, where he was instrumental in organizing  health
care industry  symposiums and conferences for leading  pharmaceutical  companies
and  the  investment   community.   He  has   participated  in  numerous  merger
acquisitions  and  valuation  analyses  of  some  of  the  leading  health  care
organizations.  In 1989, Mr. Greenberg



                                      -32-
<PAGE>



founded EGS Partners,  an asset  management and merchant banking firm located in
New York City. Mr. Greenberg serves as a Director of Advanced  Medical,  as well
as  several  privately-held  companies  and  non-profit  institutions,  and as a
consultant to numerous pharmaceutical manufacturers.

        Richard B.  Kelsky has been a Director  of the  Company  since  December
1991. Mr. Kelsky has been Vice President and General  Counsel for Monroe Systems
For Business,  Inc.  ("Monroe"),  a worldwide office equipment  distribution and
service  organization  since 1984 and a Director since 1990, and in January 1996
was  appointed  Vice-Chairman  of Monroe.  Mr.  Kelsky is a Director of Advanced
Medical,  as well as of several  privately  held  companies.  Mr.  Kelsky is the
brother of Steven E. Kelsky, a Senior Vice President of the Company.

        Russell  J.  Ricci,  M.D.  has  been a  Director  of the  Company  since
September  1996.  Dr. Ricci is currently  the General  Manager of IBM  WorldWide
Healthcare Industries. From June 1994 to September 1996, Dr. Ricci was President
of the New Health Ventures  Division of Blue Cross/Blue Shield of Massachusetts.
Prior to joining  Blue  Cross/Blue  Shield,  Dr.  Ricci  worked with a number of
for-profit  healthcare  companies  in  the  financing,  planning,   development,
marketing,  and  management  of  their  healthcare  businesses.  These  included
positions as Chief Executive  Officer of Winchester Health Care Enterprises from
1991 to 1994 and  founder and  director  of VHA  Enterprises,  an  affiliate  of
Voluntary  Hospitals  of  America,  from  1983 to 1990.  Dr.  Ricci  has been an
assistant clinical professor at Boston University School of Medicine.



                                      -33-
<PAGE>



ITEM 11.       EXECUTIVE COMPENSATION

Summary Compensation

        The following  table  summarizes for the last three fiscal years certain
information regarding the Company's  compensation of its chief executive officer
or an  individual  acting  in a  similar  capacity  and its  other  most  highly
compensated  executive  officers (other than the chief executive  officer) whose
total annual salary and bonus  (excluding  unusual and  nonrecurring  items) for
fiscal year 1996 exceeded $100,000.

                                  SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                                  Long Term Compensation
                                                                                     ----------------------------------------------
                                               Annual Compensation                           Awards                  Payouts
                                    -----------------------------------------------  ----------------------   ---------------------
                                                                                     Restricted
                                                                      Other Annual     Stock        Options/   LTIP      All Other
Name And Principal Position         Year     Salary        Bonus     Compensation(1)   Awards(s)      SARS    Payouts  Compensation
---------------------------         ----     ------        -----     ---------------   ---------      ----    -------  ------------
<S>                                 <C>     <C>           <C>            <C>               <C>     <C>            <C>      <C>
Henry Green (2) ................    1996    $229,750      $125,000       $  6,694          --         --           --       --
President and CEO ..............    1995    $213,860      $110,000       $  3,500          --       90,000(3)      --       --
                                    1994    $213,860      $ 75,000       $ 38,085(4)       --      125,000(5)      --       --


John F. Mortell ................    1996    $225,315      $100,000       $  2,030          --       90,000(6)      --       --
Executive Vice .................    1995    $203,860      $ 85,000       $  8,400          --       75,000(7)      --       --
President and Chief ............    1994    $185,400      $ 55,000       $  8,400          --       85,000(8)      --       --
Operating Officer

Steven E. Kelsky (9) ...........    1996    $187,250      $ 70,000       $  6,000          --       50,000(10)     --       --
Senior Vice President ..........    1995    $183,490      $ 50,000       $  6,000          --       50,000(11)     --       --
                                    1994    $ 56,667      $ 30,000       $  2,000          --       85,000(12)     --       --

James R. Bailey (13) ...........    1996    $188,083      $ 40,000       $  6,000          --       40,000(14)     --       --
Senior Vice President ..........    1995    $188,860      $ 40,000       $  6,000          --       40,000(15)     --       --
                                    1994    $166,088(16)  $ 30,000       $ 11,294          --       45,000(17)     --       --

Kenneth W. Ernsting (18) .......    1996    $166,651      $ 60,000       $ 36,700(19)      --       40,000(20)     --       --
Senior Vice President ..........    1995    $ 23,076      $ 40,000           --            --       50,000(21)     --       --
</TABLE>

-----------

(1)     Includes perquisites, automobile allowances and other personal benefits,
        the  aggregate  amount of which  exceeds the lesser of $50,000 or 10% of
        the total annual salary and bonus for the named executive officer.

(2)     The Company's Board of Directors elected Henry Green as President on May
        28, 1993 and appointed him Chief Executive Officer in June 1994.

(3)     In February  1996,  the Company  granted  options  under its Amended and
        Restated  1993  Incentive  and  Non-Incentive  Stock  Option  Plan  (the
        "Employee  Plan") to purchase  90,000  shares of Common Stock which vest
        over the next four year period  commencing  February 1997.  Such options
        were granted in 1996 with respect to 1995.

(4)     Represents  relocation  expenses  of  $35,321  and  $2,764 for a vehicle
        leased by the Company on behalf of Mr. Green.

(5)     In January 1994, the Company  granted options under the Employee Plan to
        purchase  75,000 shares of Common Stock,  of which 45,000 were exercised
        as of December 31, 1996 and the remaining  30,000 of which vest over the
        next two year  period.  In March 1995,  the Company  granted  additional
        options to purchase  50,000 shares of Common Stock, of which 10,000 were
        exercised  as of December  31, 1995 and 10,000  were  exercisable  as of
        December 31, 1996 and the  remaining  30,000 of which vest over the next
        three year  period.  Such  options  were granted in 1995 with respect to
        1994.



                                      -34-
<PAGE>



(6)     In February 1997, the Company  granted options to purchase 90,000 shares
        of  Common  Stock  under  the  Employee   Plan,  of  which  18,000  were
        exercisable  as of February 1997 and the remaining  72,000 of which vest
        over the next four year  period.  Such options were granted in 1997 with
        respect to 1996.

(7)     In February 1996, the Company  granted options to purchase 75,000 shares
        of  Common  Stock  under  the  Employee   Plan,  of  which  15,000  were
        exercisable  as of December 31, 1996 and the  remaining  60,000 of which
        vest over the next four year  period.  Such options were granted in 1996
        with respect to 1995.

(8)     In January 1994, the Company  granted  options to purchase 50,000 shares
        of Common Stock under the Employee  Plan, of which 30,000 were exercised
        as of December  31, 1996 and the  remaining  20,000 of which vest over a
        two year period. In March 1995, the Company granted  additional  options
        to purchase 35,000 shares of Common Stock, of which 7,000 were exercised
        as of December  31, 1996 and 7,000 were  exercisable  as of December 31,
        1996,  the  remaining  21,000  of which  vest over the next  three  year
        period. Such options were granted in 1995 with respect to 1994.

(9)     Mr. Kelsky became a Vice  President in September  1994 and a Senior Vice
        President of the Company in March 1995.

(10)    In February 1997, the Company  granted options to purchase 50,000 shares
        of  Common  Stock  under  the  Employee   Plan,  of  which  10,000  were
        exercisable  as of February 1997 and the remaining  40,000 of which vest
        over the next four year  period.  Such options were granted in 1997 with
        respect to 1996.

(11)    In February 1996, the Company  granted options to purchase 50,000 shares
        of  Common  Stock  under  the  Employee   Plan,  of  which  10,000  were
        exercisable  as of December 31, 1996 and the  remaining  40,000 of which
        vest over the next four year  period.  Such options were granted in 1996
        with respect to 1995.

(12)    In September 1994, the Company granted options to purchase 75,000 shares
        of Common Stock under the Employee  Plan, of which 12,000 were exercised
        as of December 31, 1996 and 33,000 were  exercisable  as of December 31,
        1996, the remaining  30,000 of which vest over the next two year period.
        In March 1995, the Company granted additional options to purchase 10,000
        shares of Common Stock, of which 2,000 were exercised as of December 31,
        1996 and 2,000 were  exercisable  as of December 31, 1996, the remaining
        6,000 of which vest over the next three year  period.  Such options were
        granted in 1995 with respect to 1994.

(13)    Mr.  Bailey  became a Vice  President of the Company in April 1994 and a
        Senior Vice President in March 1995.

(14)    In February 1997, the Company  granted options to purchase 40,000 shares
        of Common Stock under the Employee Plan, of which 8,000 were exercisable
        as of February 1997 and the remaining 32,000 of which vest over the next
        four year  period.  Such  options  were  granted in 1997 with respect to
        1996.

(15)    In February 1996, the Company  granted options to purchase 40,000 shares
        of Common Stock under the Employee Plan, of which 8,000 were exercisable
        as of December 31, 1996 and the remaining  32,000 of which vest over the
        next four year period. Such options were granted in 1996 with respect to
        1995.

(16)    Represents his salary as an employee from January through March of 1994,
        which was $59,918,  plus his salary as Vice President from April through
        December 31, 1994 of $106,170.

(17)    In January 1994, the Company  granted  options to purchase 20,000 shares
        of Common Stock under the Employee  Plan, of which 12,000 were exercised
        as of December 31, 1996 and the remaining 8,000 of which vest over a two
        year period.  In March 1995, the Company granted  additional  options to
        purchase 25,000 shares of Common Stock, of which 5,000 were exercised as
        of December 31, 1996 and 5,000 were exercisable as of December 31, 1996,
        the remaining 15,000 of which vest over the next three year period. Such
        options were granted in 1995 with respect to 1994.

(18)    Mr. Ernsting became a Vice President of the Company in October 1995 and
        a Senior Vice President in January 1996.

(19)    Represents  relocation  expenses  of $33,700  and $3,000 for  automobile
        allowance.



                                      -35-
<PAGE>



(20)    In February 1997, the Company  granted options to purchase 40,000 shares
        of Common Stock under the Employee Plan, of which 8,000 were exercisable
        as of February  1997,  and the  remaining  32,000 of which vest over the
        next four year period.  Such options were granted in 1997 wth respect to
        1996.

(21)    In February 1996, the Company  granted options to purchase 15,000 shares
        of Common Stock under the Employee Plan, of which 3,000 were exercisable
        as of December 31, 1996 and the remaining  12,000 of which vest over the
        next four year period. Such options were granted in 1996 with respect to
        1995. In October 1995, the Company  granted  options to purchase  35,000
        shares of Common Stock, of which 7,000 were exercised as of December 31,
        1996 and 7,000 were  exercisable  as of December 31, 1996, the remaining
        21,000 of which vest over the next three year period.



                                      -36-
<PAGE>



Option Grants in Last Fiscal Year

        The following table sets forth certain  information in respect of grants
made by the Company of stock options to its executive  officers  pursuant to the
Company's stock option plans during fiscal year 1996.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                                             Potential Realizable
                                                                                                            Value at Assumed Annual
                                                                                                              Rates of Stock Price
                                                                                                            Appreciation for Option
                                                                  Individual Grants                                 Term
                                              -------------------------------------------------------------------------------------
                                              Number of       % of Total
                                              Securities        Options
                                              Underlying       Granted to    Exercise       Exercise
                                               Options        Employees in     Price       Expiration
Name                                           Granted(1)      Fiscal Year  (Per Share)(2)     Date          5%              10%
----                                          -------------------------------------------------------------------------------------
<S>                                            <C>                <C>        <C>              <C>          <C>            <C>
Henry Green ........................           90,000(3)          15.0%      $    12.625      1/1/06       714,150        1,811,250

John F. Mortell ....................           75,000(4)          12.5%      $    12.625      1/1/06       595,125        1,509,375

Steven E. Kelsky ...................           50,000(5)           8.3%      $    12.625      1/1/06       396,750        1,006,250

James R. Bailey ....................           40,000(6)           6.7%      $    12.625      1/1/06       317,400          805,000

Kenneth W. Ernsting ................           15,000(7)           2.5%      $    12.625      1/1/06       119,100          301,875
</TABLE>

-----------

(1)     Includes  options  granted in 1996 with  respect  to 1995,  but does not
        include  options granted in 1997 with respect to 1996. In February 1997,
        the  Company  granted  Messrs.  Mortell,  Kelsky,  Bailey  and  Ernsting
        additional options to purchase 90,000,  50,000, 40,000 and 40,000 shares
        of Common Stock, respectively, at an exercise price of $9.188 per share.
        Twenty  percent of the  options  vested  immediately  and the  remaining
        balance will vest over the next 4 year period.

(2)     The potential realizable values of all options above are calculated with
        the  assumption  that all  options  are  exercised  on their  respective
        vesting dates.

(3)     Options are  subject to a maximum  exercise  period of 10 years.  22,500
        options vest over the next 4 years  succeeding  the initial grant on the
        anniversary date.

(4)     Options are  subject to a maximum  exercise  period of 10 years.  15,000
        options vest on the date of the grant and 15,000 options vest in each of
        the 4 years succeeding the initial grant on the anniversary date.

(5)     Options are  subject to a maximum  exercise  period of 10 years.  10,000
        options vest on the date of grant and 10,000 options vest in each of the
        4 years succeeding the initial grant on the anniversary date.

(6)     Options  are  subject to a maximum  exercise  period of 10 years.  8,000
        options vest on the date of grant and 8,000  options vest in each of the
        4 years succeeding the initial grant on the anniversary date.

(7)     Options  are  subject to a maximum  exercise  period of 10 years.  3,000
        options  vest on the date of grant 3,000  options  vest in each of the 4
        years succeeding the initial grant on the anniversary date.



                                      -37-
<PAGE>



                Aggregated Option Exercises in Last Fiscal Year
                       and Fiscal Year-End Option Values

The following table sets forth certain  information with respect to the exercise
of stock options by the Company's  Named  Executive  Officers during fiscal year
1996 and  information  concerning  the  number  and value of  unexercised  stock
options at December 31, 1996.

<TABLE>
<CAPTION>
                                                                          Number of Securities             Value of Unexercised
                                                                         Underlying Unexercised          In-the-Money Options at
                                                                         Options at December 31,            December 31, 1996
                                                                                  1996
                                                                        ------------------------------------------------------------
                                        Shares
                                       Acquired         Value
Name                                  on Exercise      Realized         Exercisable     Unexercisable    Exercisable   Unexercisable
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>                 <C>             <C>              <C>          <C>
Henry Green ..................          225,000        2,160,000           50,000          190,000          225,000      450,000
John F. Mortell ..............           77,000          712,250           42,000          121,000          125,000      254,500
Steven E. Kelsky .............           20,000          182,500           45,000           80,000          157,500      180,000
James R. Bailey ..............           47,000          423,000           23,000           65,000           67,500      148,500
Kenneth W. Ernsting...........            7,000           34,125           10,000           33,000           14,000       42,000

</TABLE>

Compensation of Directors

        Directors who are not executive officers of the Company,  are reimbursed
for their  expenses and receive a fee of $2,500 for each meeting of the Board of
Directors attended. Directors who are also executive officers of the Company are
not compensated for their services as directors.

        In September 1993, the Company entered into an agreement with Richard B.
Kelsky, a member of the Company's Board of Directors,  for Mr. Kelsky to provide
consulting services to the Company for a monthly fee of $2,500.

Employment Contracts

        Henry Green entered into an amended and restated employment agreement in
March 1996 for a period of three years pursuant to which Mr. Green's  employment
as President and Chief Executive Officer of the company was extended until March
19, 1999. The agreement  provides for, among other things,  a base annual salary
of $230,000 and a severance  payment on termination  by the Company,  other than
for death, disability or cause, equal to one year's base salary, less applicable
deductions.  The Agreement  permits either Mr. Green or the Company to terminate
Mr. Green's  employment  upon ninety (90) days prior written notice and, if such
termination  is  effected,  Mr.  Green will,  from the time of such  termination
through March 19, 1999, serve as a consultant to the Company.

        In March 1996,  John F.  Mortell,  Executive  Vice  President  and Chief
Operating Officer of the Company,  entered into an employment agreement with the
Company for a term of three years,  which  provides for,  among other things,  a
base annual salary of $225,000,  and a severance  payment on  termination by the
Company,  other than for death,  disability  or cause,  equal to one year's base
salary,  less  applicable



                                      -38-
<PAGE>



deductions.  The  Agreement  permits Mr.  Mortell to  terminate  the  employment
agreement  in the event of a change  of  control  of the  Company  and,  if such
termination is effected,  the Company will pay Mr.  Mortell a severance  payment
equal to one year's compensation, less applicable deductions.

        In April 1994, James R. Bailey entered into an employment agreement with
Calyx and the Company  pursuant to which he became President of Calyx and a Vice
President  of PCN.  The  agreement  is for an  indefinite  period of time and is
terminable at any time by any party thereto. The agreement provides, among other
things, for the Company to pay Mr. Bailey a base annual salary of $185,000 and a
severance  payment of six  months  base  salary if Mr.  Bailey's  employment  is
terminated without cause.

        In November 1994, Steven E. Kelsky entered into an employment  agreement
with the Company,  for a term of three years,  which  provides for,  among other
things, a base annual salary of $185,000 and a severance  payment of four months
base salary if Mr. Kelsky's employment is terminated without cause.

        In August 1995, Kenneth W. Ernsting entered into an employment agreement
with the  Company  pursuant  to which he  became a Vice  President  of PCN.  The
agreement is for an  indefinite  period of time and is terminable at any time by
any party thereto.  The agreement provides,  among other things, for the Company
to pay Mr. Ernsting a base annual salary of $175,000 and a severance  payment of
four months base  salary if Mr.  Ernsting's  employment  is  terminated  without
cause.



                                      -39-
<PAGE>



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth certain  information  with respect to the
ownership  of Common Stock of the  Company,  as of March 31, 1997,  by: (i) each
person known by the Company to own beneficially 5% or more of such shares;  (ii)
each  director  of the  Company;  (iii) each of the  Company's  chief  executive
officer and the Company's  four most highly paid  executive  officers other than
its chief executive officer; and (iv) all directors and officers as a group.

<TABLE>
<CAPTION>
                                                                 Shares Beneficially Owned
                                                                 -------------------------
Name and Address                                                                  Percent
of Beneficial Owners                                                Number        of Class
------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>
Jeffry M. Picower (1).......................................     22,951,522 (2)    42.19%
State of Wisconsin Investment Board (3).....................      3,868,800         7.30%
Jerry Brager................................................      1,592,999 (4)     3.01%
Henry Green.................................................         97,500 (5)     *
John F. Mortell.............................................         92,000 (6)     *
James R. Bailey.............................................         48,000 (7)     *
Steven E. Kelsky............................................         69,000(8)      *
Kenneth W. Ernsting.........................................         21,000(9)      *
Frederick Frank.............................................        111,870(10)     *
Frederic Greenberg..........................................         94,087(11)     *
Richard B. Kelsky...........................................        110,000(12)     *
Russell Ricci...............................................          4,000(13)     *
All Directors and Executive Officers as a group (13 persons)     25,245,978(14)    45.97%
</TABLE>

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

*       Less than 1%

(1)     Address is South Ocean Blvd., Palm Beach, FL 33480.

(2)     Includes 1,420,000 shares currently purchasable upon exercise of
        warrants. The shares of Common Stock and such warrants are owned by J A
        Special Limited Partnership ("J A Special"). Mr. Picower is the sole
        general partner of J A Special and, as such, has the power to vote or
        direct the vote of and to dispose or direct the disposition of such
        shares of Common Stock and the warrants and, accordingly, may be deemed
        to be the beneficial owner of such shares and warrants. Does not include
        warrants to purchase 5,000,000 shares granted September 13, 1995, which
        become exercisable two years from the date granted.

(3)     Address is P.O. Box 7842, Madison, WI 53707.

        (4)     Includes  150,000  shares  held by the  wife of Mr.  Brager  and
                87,500  shares  held by the minor  children of Mr.  Brager,  the
                beneficial ownership of which Mr. Brager disclaims.

        (5)     Includes 97,500 shares  currently  purchasable  upon exercise of
                stock options.

        (6)     Includes 92,000 shares  currently  purchasable  upon exercise of
                stock options.

        (7)     Includes 48,000 shares  currently  purchasable  upon exercise of
                stock options.

        (8)     Includes 69,000 shares  currently  purchasable  upon exercise of
                stock options.

        (9)     Includes 21,000 shares  currently  purchasable  upon exercise of
                stock options.

        (10)    Includes 10,000 shares  currently  purchasable  upon exercise of
                stock  options.  Beneficial  ownership  of shares held by Lehman
                Brothers  Inc. is  disclaimed  by Mr.  Frank,  Vice-Chairman  of
                Lehman Brothers Inc.

        (11)    Includes   71,574  shares  held  by  EGS  Partners,   a  general
                partnership of which Mr.  Greenberg is a general  partner.  Also
                includes  6,000  shares  held  by  Mr.   Greenberg's  wife,  the
                beneficial  ownership  of which  Mr.  Greenberg  disclaims,  and
                3,333  shares  currently  purchasable  by  Mr.  Greenberg  upon
                exercise of stock options.

        (12)    Includes 10,000 shares  currently  purchasable  upon exercise of
                stock  options and 100,000  shares  currently  purchasable  upon
                exercise of warrants issued February 1, 1994.

        (13)    Includes  4,000 shares  currently  purchasable  upon exercise of
                stock options.

        (14)    Includes 415,499 shares  currently  purchasable upon exercise of
                stock  options  and  1,520,000  of warrants  inclusive  of those
                described in notes (2), (5), (6),  (7),  (8), (9),  (10),  (11),
                (12), and (13).



                                      -40-
<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


        On December 6, 1994,  the Company  entered into an agreement with Monroe
Systems For Business,  Inc., a company  wholly-owned by the Investor,  Jeffry M.
Picower,  to  sublease  44,725  square feet of office  space,  for a term of ten
years,  at The  American  Road,  Morris  Plains,  New  Jersey,  to  serve as the
Company's new corporate  headquarters  and executive  offices.  The monthly base
rent for such  space,  initially  $44,352,  increases  to  $59,260  by 2003.  On
September 1, 1996,  the Company  amended its agreement  with Monroe  Systems For
Business, Inc. to sublease 14,170 square feet of additional office space at 1200
The American  Road,  Morris  Plains,  New Jersey.  The provisions of the amended
lease require the Company to make lease payments of $73,257 per month increasing
to  $78,165  per  month in March  1997,  and  every  other  year  thereafter  an
additional  $1.00 per square foot per year. The Company  believes that the terms
of such lease are no less  favorable  than a lease that could have been obtained
by the Company from an unrelated  third party in a transaction  negotiated on an
arm's-length basis. See "Business -- Properties."


        In September  1993,  the Company  entered into an agreement with Richard
Kelsky, a member of the Company's Board of Directors,  for Mr. Kelsky to provide
consulting services to the Company for a monthly fee of $2,500.

        The Company  believes that the foregoing  transactions  were at least as
fair to the  Company  as  transactions  which  could have been  negotiated  with
unaffiliated third parties.



                                      -41-
<PAGE>



                                     PART IV

ITEM 14. FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K

A. and D.      See Index to Financial  Statements  and Schedule on page F-1 and
               Exhibits Index on page E-1.

B.             Reports on Form 8-K.

               None.



                                      -42-
<PAGE>



EXHIBIT INDEX


<TABLE>
<CAPTION>
                                                                                      Sequentially
                                                                                        Numbered
Exhibits                         Description                                              Page
--------                         -----------                                          ------------
<S>           <C>                                                                         <C>
3.1(a)        Amended and Restated  Certificate  of  Incorporation,  dated as of
              March 27, 1995.  (Filed as Exhibit 3.1(c) to the Company's  report
              on Form 10-K for the year  ended  December  31,  1995  (the  "1995
              10-K") and incorporated herein by reference.)

3.1(b)        Certificate  of Amendment to the Amended and Restated  Certificate
              of  Incorporation  of the  Company,  dated as of  October 6, 1995,
              authorizing new Series A Convertible  Preferred  Stock.  (Filed as
              Exhibit  3.1(d)  to the  1995  10-K  and  incorporated  herein  by
              reference.)

3.1(c)        Certificate  of Amendment to the Amended and Restated  Certificate
              of  Incorporation  of the  Company,  dated as of October 18, 1995,
              amending  the  rights,  preferences  and  limitations  of Series A
              Convertible  Preferred Stock. (Filed as Exhibit 3.1(e) to the 1995
              10-K and incorporated herein by reference.)

3.2           Copy of  By-Laws  of the  Company.  (Filed as  Exhibit  3.2 to the
              Company's  report on Form  10-K for the year  ended  December  31,
              1992.)

4.1           Registration  Rights  Agreement  dated  as of  February  22,  1993
              between the Company and Jeffry M. Picower. (Filed as Exhibit 15 to
              Amendment No. 7 to Schedule 13D by Jeffry M. Picower).

4.2           Copy of Warrant Purchase  Agreement between the Company and Jeffry
              M. Picower,  together with  conformed  copy of warrant to purchase
              350,000 shares of Common Stock issued pursuant thereto.  (Filed as
              Exhibit 10.11 to the Company's  Registration Statement on Form S-1
              (Reg. No. 33-42935) and incorporated herein by reference.)

4.3           Copy of Amended and Restated Warrant  Purchase  Agreement dated as
              of February  22, 1993  between the Company and Jeffry M.  Picower,
              together  with copy of Amended  and  Restated  Warrant to purchase
              350,000 shares issued pursuant thereto. (Filed as Exhibit 3 to the
              Company's  report on Form 8-K dated March 8, 1993 and incorporated
              herein by reference.)

4.4           Copy of Amended and Restated Warrant  Purchase  Agreement dated as
              of February  22, 1993  between the Company and Jeffry M.  Picower,
              together  with copy of
</TABLE>


                                      -43-
<PAGE>



<TABLE>
<CAPTION>
                                                                                      Sequentially
                                                                                        Numbered
Exhibits                         Description                                              Page
--------                         -----------                                          ------------
<S>           <C>                                                                         <C>
              Amended and Restated  Warrant to purchase  633,462  shares  issued
              pursuant  thereto.  (Filed as Exhibit 4 to the Company's report on
              Form  8-K  dated  March  8,  1993  and   incorporated   herein  by
              reference.)

4.5           Copy of Second  Amended and Restated  Warrant  Purchase  Agreement
              dated as of February  22,  1993  between the Company and Jeffry M.
              Picower,  together  with copy of Amended and  Restated  Warrant to
              purchase 436,538 shares issued pursuant thereto. (Filed as Exhibit
              5 to the  Company's  report  on Form 8-K  dated  March 8, 1993 and
              incorporated herein by reference.)

4.6           Copy of Convertible  Subordinated Note Purchase  Agreement,  dated
              January 25, 1995,  between  Equifax Inc. and the Company (filed as
              Exhibit 2 to the  Company's  report on Form 8-K dated  January 26,
              1995 and incorporated herein by reference).

4.7           Form of Convertible  Subordinated  Promissory Note, dated February
              15, 1995 (Filed as Exhibit 1 to the  Company's  report on Form 8-K
              dated February 28, 1995 and incorporated herein by reference.)

4.8           Form  of  Promissory   Note,  dated  April  24,  1995,  from  PMSI
              Acquisition  Corp.  to Practice  Management  Systems,  Inc. in the
              amount of $2,000,000.  (Filed as Exhibit 2 to the Company's report
              on  Form  8-K  dated  May  1,  1995  and  incorporated  herein  by
              reference.)

4.9           Copy of Common Stock Purchase  Warrant,  dated September 13, 1995.
              (Filed  as  Exhibit  3 to the  Company's  report on Form 8-K dated
              September 18, 1995 and incorporated herein by reference.)

4.10          Copy of  Promissory  Note,  dated  October 27, 1995,  from VERSYSS
              Incorporated  to  VERSYSS  Liquidating  Trust  in  the  amount  of
              $11,750,000.  (Filed as Exhibit 1 to the Company's  report on Form
              8-K dated November 8, 1995 and incorporated herein by reference.)

10.1          Copy of the Company's 1989 Stock Option Plan,  including  forms of
              option agreements. (Filed as Exhibit 10.1 to the 1991 Form S-1 and
              incorporated herein by reference.)

10.2          Copy of the Company's 1990 Stock Option Plan,  including  forms of
              option agreements. (Filed as Exhibit 10.2 to the 1991 Form S-1 and
              incorporated herein by reference.)

10.3          Copy of Letter Agreement between the Company and Jeffry
</TABLE>


                                      -44-
<PAGE>



<TABLE>
<CAPTION>
                                                                                      Sequentially
                                                                                        Numbered
Exhibits                         Description                                              Page
--------                         -----------                                          ------------
<S>           <C>                                                                         <C>
              M. Picower  dated April 14, 1993.  (Filed as Exhibit  10.38 to the
              1992 10-K and incorporated herein by reference.)

10.4          Letter  Agreement  between the Company and Jeffry M. Picower dated
              December 31, 1993.  (Filed as Exhibit 10.7 to the Company's report
              on Form 8-K dated  January  13,  1994 and  incorporated  herein by
              reference.)

10.5          Agreement  dated  December  30,  1993  between the Company and IBM
              Credit Corporation. (Filed as Exhibit 10.9 to the Company's report
              on Form 8-K dated  January  13,  1994 and  incorporated  herein by
              reference.)

10.6          The   Company's   Amended  and   Restated   1993   Incentive   and
              Non-Incentive  Stock Option Plan.  (Filed as Exhibit  10.30 to the
              1995 S-1 and incorporated herein by reference).

10.7          The  Company's  Amended and Restated 1993  Non-Employee  Directors
              Non-Incentive  Stock Option Plan.  (Filed as Exhibit  10.31 to the
              1995 S-1 and incorporated herein by reference).

10.8          Employment  Letter dated April, 1994 between the Company and James
              R.  Bailey.   (Filed  as  Exhibit   10.32  to  the  1995  S-1  and
              incorporated herein by reference).

10.9          Employment Letter dated September 1, 1994, between the Company and
              Steven  E.  Kelsky.  (Filed as  Exhibit  10.33 to the 1995 S-1 and
              incorporated herein by reference).

10.10         Lease  Agreement for the Company's  headquarters in Morris Plains,
              New  Jersey.   (Filed  as  Exhibit  10.34  to  the  1995  S-1  and
              incorporated herein by reference).

10.11         Exclusive  Marketing  Agreement,  dated  January 25, 1995,  by and
              between  Equifax  Healthcare  EDI  Services,  Inc. and the Company
              (filed  as  Exhibit  1 to the  Company's  report on Form 8-K dated
              January 26, 1995 and incorporated herein by reference).

10.12         Amended and Restated Exclusive  Marketing  Agreement,  dated as of
              January  12,  1996,   by  and  between  the  Company  and  Equifax
              Healthcare EDI Services, Inc. (Filed as Exhibit 1 to the Company's
              report on Form 8-K dated February 2, 1995 and incorporated  herein
              by reference.)

10.13         Guaranty,  dated  October 27,  1995,  by the Company and V Holding
              Corp.  to VERSYSS  Liquidating  Trust.  (Filed as Exhibit 2 to the
              Company's   report  on  Form  8-K  dated   November  8,  1995  and
              incorporated herein by reference.)
</TABLE>


                                      -45-
<PAGE>



<TABLE>
<CAPTION>
                                                                                      Sequentially
                                                                                        Numbered
Exhibits                         Description                                              Page
--------                         -----------                                          ------------
<S>           <C>                                                                         <C>
10.14         Pledge  Agreement,  dated  October  27,  1995,  by and  among  the
              Company, V Holding Corp. and VERSYSS  Liquidating Trust. (Filed as
              Exhibit 3 to the  Company's  report on Form 8-K dated  November 8,
              1995 and incorporated herein by reference.)

10.15         Employment  Letter,  dated  August 17,  1995  between  VERSYSS and
              Kenneth W. Ernsting.  (Filed as Exhibit 10.42 to the 1995 10-K and
              incorporated herein by reference.)

10.16         Employment  Letter,  dated  August 17,  1995  between  VERSYSS and
              William S.  Edwards.  (Filed as Exhibit 10.43 to the 1995 10-K and
              incorporated herein by reference.)

10.17         Partnership  Agreement,  dated as of January 25, 1996, between PCN
              HP Venture Corp. and Intelligent  Medical Systems,  Inc. (Filed as
              Exhibit  10.44  to  the  1995  10-K  and  incorporated  herein  by
              reference.)

10.18         Transaction  Agreement,  dated as of January 25, 1996, between the
              Company, Glaxo Wellcome Inc., and HealthPoint G.P.

10.19         Copy of Physician  Computer  Network,  Amended and Restated  Value
              Added Reseller Stock Option Plan, dated as of January 1996. (Filed
              as  Exhibit  10.46 to the 1995  10-K and  incorporated  herein  by
              reference.)

10.20         Copy of Employment  Agreement,  dated as of March 29, 1996 between
              the Company and John Mortell.  (Filed as Exhibit 10-47 to the 1995
              10-K and incorporated herein by reference.)

10.21         Copy of Employment  Agreement,  dated as of March 29, 1996 between
              the Company and Hank  Green.  (Filed as Exhibit  10.48 to the 1995
              10-K and incorporated herein by reference.)

10.22         Agreement  and Plan of Merger,  dated June 20, 1996,  by and among
              Physician  Computer  Network,   Inc.,   Wismer-Martin,   Inc.  and
              Northwest   Acquisition   Corp.   (Filed  as   Exhibit  1  to  the
              Registrant's  Current  Report on Form 8-K dated June 25,  1996 and
              incorporated herein by reference.)

10.23         Asset Purchase Agreement,  dated as of July 2, 1996, by and among,
              CUSA Technologies, Inc. and certain of its subsidiaries, Physician
              Computer Network,  Inc. and PCN Services Corp. (Filed as Exhibit 1
              to the  Company's
</TABLE>


                                      -46-
<PAGE>



<TABLE>
<CAPTION>
                                                                                      Sequentially
                                                                                        Numbered
Exhibits                         Description                                              Page
--------                         -----------                                          ------------
<S>           <C>                                                                         <C>
              Current  Report on Form 8-K dated July 10,  1996 and  incorporated
              herein by reference).

11*           Statement Regarding Computation of Earnings Per Share.

21*           List of Subsidiaries of Registrant.

24*           Consent of KPMG Peat Marwick LLP.
</TABLE>


------------
* Filed herewith



                                      -47-
<PAGE>



                                   SIGNATURES

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

                                             PHYSICIAN COMPUTER NETWORK, INC.


                                             By:/s/ Henry Green
                                                ---------------------------
                                                Henry Green, President and
                                                Chief Executive Officer

Dated:  March 31, 1997

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

Name                              Capacity                       Date
----                              --------                       ----
/s/ Jeffry M. Picower             Chairman and Director          March 31, 1997
------------------------
Jeffry M. Picower

/s/ Henry Green                   President and Chief            March 31, 1997
-------------------------         Executive Officer and
Henry Green                       Director


/s/ John F. Mortell               Executive Vice President and   March 31, 1997
-------------------------         Chief Operating Officer and
John F. Mortell                   Director

/s/ Jerry Brager                  Director                       March 31, 1997
-------------------------
Jerry Brager

/s/ Frederick Frank               Director                       March 31, 1997
-------------------------
Frederick Frank

/s/ Richard B. Kelsky             Director                       March 31, 1997
-------------------------
Richard B. Kelsky, Esq.

/s/ Frederic Greenberg            Director                       March 31, 1997
-------------------------
Frederic Greenberg

/s/ Russell J. Ricci              Director                       March 31, 1997
-------------------------
Russell J. Ricci, M.D.

/s/ Thomas Wraback                Senior Vice President and      March 31, 1997
-------------------------         Chief Financial Officer
Thomas Wraback



                                      -48-
<PAGE>




                        PHYSICIAN COMPUTER NETWORK, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




<TABLE>
<CAPTION>
                                                                                                             Page Number
                                                                                                           in This Report
                                                                                                           --------------
<S>                                                                                                                <C>
Independent Auditors' Report...........................................................................          F-2

Consolidated Financial Statements:
  Consolidated Balance Sheets as of December 31, 1996 and
  December 31, 1995....................................................................................          F-3

  Consolidated Statements of Operations for the years ended December 31, 1996, 1995
  and 1994.............................................................................................          F-4

  Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for
  the years ended December 31, 1994, 1995 and 1996.....................................................          F-5

  Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
  and 1994.............................................................................................          F-6

Notes to Consolidated Financial Statements.............................................................      F-7 to F-35

Financial Statements Schedule:
   Schedule II-Valuation and Qualifying
   Accounts............................................................................................          S-1

   All other schedules are omitted because they are not required, inapplicable or the information is
   otherwise shown in the Consolidated Financial Statements or notes thereto.
</TABLE>





                                      F-1
<PAGE>



                          Independent Auditors' Report



The Board of Directors and Stockholders
Physician Computer Network, Inc.:

We have audited the  consolidated  financial  statements  of Physician  Computer
Network,  Inc.  and  subsidiaries  as  listed  in  the  accompanying  index.  In
connection with our audits of the  consolidated  financial  statements,  we also
have  audited the  financial  statement  schedule as listed in the  accompanying
index. These consolidated  financial statements and financial statement schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these  consolidated  financial  statements  and  financial
statement 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 financial position of Physician Computer
Network, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.



                                                     KPMG Peat Marwick LLP



Short Hills, New Jersey
February 18, 1997



                                      F-2
<PAGE>



PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                        PHYSICIAN COMPUTER NETWORK, INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                          December 31,
                                   ASSETS                                                          1996                   1995
                                                                                               -------------          -------------
<S>                                                                                            <C>                    <C>
CURRENT ASSETS:

Cash and cash equivalents ............................................................         $  34,291,166          $  15,516,883
Accounts receivable, net of allowance for doubtful
  accounts of $3,428,000 at December 31, 1996, and
  $764,000 at December 31, 1995 ......................................................            21,102,878             19,466,446
Inventories ..........................................................................             5,798,153              4,598,954
Prepaid expenses and other ...........................................................             2,974,490              1,093,306
Deferred tax asset ...................................................................             2,933,000              1,650,000
                                                                                               -------------          -------------
    Total current assets .............................................................            67,099,687             42,325,589

Intangible assets, net of accumulated amortization
  of $14,826,000 at December 31, 1996
  and $6,840,000 at December 31, 1995 ................................................            69,076,020             53,701,055
Property and equipment, net ..........................................................             6,234,295              3,976,195
Investment in joint venture ..........................................................             2,015,888                   --
Other assets .........................................................................             5,739,428                256,998
                                                                                               -------------          -------------
    Total assets .....................................................................         $ 150,165,318          $ 100,259,837
                                                                                               =============          =============

                    LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Notes payable:
  Other ..............................................................................         $   7,934,518          $   9,080,000
  Related party ......................................................................                  --                  750,000
Current portion of long term-debt ....................................................             1,153,413                100,160
Current portion of obligations under capital leases ..................................               289,229                327,770
Accounts payable .....................................................................             6,183,103              4,935,601
Accrued expenses and other liabilities ...............................................             6,301,576             17,024,828
Customer deposits ....................................................................             1,043,072              3,504,980
Unearned income ......................................................................            13,068,726             15,608,705
                                                                                               -------------          -------------
             Total current liabilities ...............................................            35,973,637             51,332,044


Long-term debt, net of current portion ...............................................             4,672,118             18,924,000
Obligations under capital leases, net of
  current portion ....................................................................               612,650                806,255
                                                                                               -------------          -------------
    Total liabilities ................................................................            41,258,405             71,062,299

Commitments and contingencies

SHAREHOLDERS' EQUITY:

Preferred Stock, $0.01 par value, 1,000,000 shares authorized:
  Series A convertible preferred stock, 1,000 shares outstanding
  at December 31,1996 and 15,750 shares outstanding at December 31,1995 ..............                    10                    157
Common stock, $.01 par value, 75,000,000 shares authorized,
  52,982,484 shares issued and outstanding at
  December 31,1996 and 42,937,147 shares issued
  and outstanding at December 31, 1995 ...............................................               529,825                429,371
Additional paid-in capital ...........................................................           193,281,643            129,728,821
Accumulated deficit ..................................................................           (84,904,565)          (100,960,811)
                                                                                               -------------          -------------

Shareholders' equity .................................................................           108,906,913             29,197,538
                                                                                               -------------          -------------
    Total liabilities and shareholders' equity .......................................         $ 150,165,318          $ 100,259,837
                                                                                               =============          =============
</TABLE>

        See accompanying notes to the consolidated financial statements.



                                      F-3
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                       1996              1995              1994
                                                                                   ------------      ------------      ------------
<S>                                                                                <C>               <C>               <C>
Revenues:
Software license fees ........................................................     $ 29,396,612      $ 15,450,897      $  6,302,181
Hardware revenue .............................................................       25,301,761         9,721,559         2,592,713
Maintenance, communication fees and other ....................................       41,099,119        16,632,886        11,608,912
                                                                                   ------------      ------------      ------------
                                                                                     95,797,492        41,805,342        20,503,806
Cost of Revenues:
Hardware .....................................................................       15,213,697         7,336,196         2,057,763
Software, maintenance, communication fees
  and other ..................................................................       23,347,900         8,952,757         4,018,189
                                                                                   ------------      ------------      ------------
                                                                                     38,561,597        16,288,953         6,075,952
                                                                                   ------------      ------------      ------------
Gross margin .................................................................       57,235,895        25,516,389        14,427,854

Operating expenses:
Research and development .....................................................        5,739,518         2,219,223         1,838,823
Selling and marketing ........................................................        9,115,683         3,038,069         2,144,464
General and administrative ...................................................       10,990,028        10,354,611         5,528,738
Amortization of acquired intangible assets ...................................        7,192,551         2,883,658         1,857,054
Acquired technology in process ...............................................             --          14,516,000              --
Restructuring ................................................................             --           3,072,450              --
Write-down of assets and other charges .......................................             --           1,477,000              --
                                                                                   ------------      ------------      ------------
                                                                                     33,037,780        37,561,011        11,369,079
                                                                                   ------------      ------------      ------------
Interest (income) expense:
    Interest income ..........................................................         (678,401)         (577,039)          (88,817)
    Interest expense .........................................................        1,835,091         1,451,604         1,798,053
                                                                                   ------------      ------------      ------------
                                                                                      1,156,690           874,565         1,709,236
                                                                                   ------------      ------------      ------------
Income (loss) before income tax expense (benefit),
     loss on equity investment and extraordinary item ........................       23,041,425       (12,919,187)        1,349,539

Income tax expense (benefit) .................................................        4,817,999        (1,419,000)          102,320
                                                                                   ------------      ------------      ------------
Income (loss) before loss on equity investment and extraordinary item ........       18,223,426       (11,500,187)        1,247,219

Loss on equity investment, net of income tax benefit .........................       (2,167,180)
                                                                                   ------------      ------------      ------------
Income (loss) before extraordinary item ......................................       16,056,246       (11,500,187)        1,247,219

Extraordinary  item - loss on extinguishment of debt .........................             --            (180,000)             --
                                                                                   ------------      ------------      ------------
Net income (loss) available to common shareholders ...........................     $ 16,056,246      $(11,680,187)     $  1,247,219
                                                                                   ============      ============      ============

Primary and fully diluted earnings (loss) per common share:
Before extraordinary item ....................................................     $       0.30      $      (0.29)     $       0.04
Extraordinary item ...........................................................             --                --                --
                                                                                   ------------      ------------      ------------
Net earnings (loss) ..........................................................     $       0.30      $      (0.29)     $       0.04
                                                                                   ============      ============      ============

Weighted average number
  of common shares outstanding ...............................................       54,308,147        40,068,406        35,634,106
                                                                                   ============      ============      ============
</TABLE>


              See accompanying notes to the consolidated financial statements.



                                      F-4
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.
           STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
              FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996


<TABLE>
<CAPTION>
                                                                    Preferred  Stock                    Common Stock
                                                                 Shares           Amount           Shares           Amount
                                                             -------------    -------------    -------------    -------------
<S>                                                                <C>        <C>                 <C>           <C>
Balance, December 31, 1993 ...............................            --      $        --         34,115,660    $     341,156

     Exercise of stock options ...........................            --               --             63,460              635

     Net Income ..........................................            --               --               --               --
                                                             -------------    -------------    -------------    -------------

Balance, December 31, 1994 ...............................            --               --         34,179,120          341,791

     Common Stock issued .................................            --               --          6,250,000           62,500

     Preferred Stock issued ..............................          18,500              185             --               --

     Issue of warrants to purchase Common Stock ..........            --               --               --               --

     Common Stock issued .................................            --               --          1,902,748           19,027

     Exercise of stock options ...........................            --               --            203,380            2,034

     Compensatory value added reseller options ...........            --               --               --               --

     Conversion of Preferred Stock into Common Stock .....          (2,750)             (28)         401,899            4,019

     Net Loss ............................................            --               --               --               --
                                                             -------------    -------------    -------------    -------------

Balance, December 31, 1995 ...............................          15,750              157       42,937,147          429,371

     Common Stock issued: public offering ................            --               --          4,507,783           45,078

     Conversion of Equifax convertible note ..............            --               --          1,932,217           19,322

     Common Stock issued: Wismer-Martin ..................            --               --            935,000            9,350

     Exercise of stock options ...........................            --               --            563,201            5,632

     Tax benefit of stock options exercised ..............            --               --               --               --

     Exercise of value added reseller options ............            --               --            133,452            1,335

     Purchase of value added reseller shares into treasury
      stock and subsequent retirement ....................            --               --           (133,452)          (1,335)

     Conversion of Preferred Stock into Common Stock .....         (14,750)            (147)       2,107,136           21,072

      Net income .........................................            --               --               --               --

                                                             =============    =============    =============    =============
Balance, December 31, 1996 ...............................           1,000    $          10       52,982,484    $     529,825
                                                             =============    =============    =============    =============
</TABLE>


                        PHYSICIAN COMPUTER NETWORK, INC.
     STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) (Continued)
              FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996


<TABLE>
<CAPTION>

                                                               Additional                       Shareholders'
                                                                Paid-in        Accumulated         Equity
                                                                Capital          Deficit        (Deficiency)
                                                             -------------    -------------    -------------
<S>                                                          <C>              <C>              <C>
Balance, December 31, 1993 ...............................   $  80,318,757    $ (90,527,843)   $  (9,867,930)

     Exercise of stock options ...........................          45,701             --             46,336

     Net Income ..........................................            --          1,247,219        1,247,219
                                                             -------------    -------------    -------------

Balance, December 31, 1994 ...............................      80,364,458      (89,280,624)      (8,574,375)

     Common Stock issued .................................      22,277,458             --         22,339,958

     Preferred Stock issued ..............................      18,499,815             --         18,500,000

     Issue of warrants to purchase Common Stock ..........       1,482,500             --          1,482,500

     Common Stock issued .................................       6,170,299             --          6,189,326

     Exercise of stock options ...........................         808,282             --            810,316

     Compensatory value added reseller options ...........         130,000             --            130,000

     Conversion of Preferred Stock into Common Stock .....          (3,991)            --               --

     Net Loss ............................................            --        (11,680,187)     (11,680,187)
                                                             -------------    -------------    -------------

Balance, December 31, 1995 ...............................     129,728,821     (100,960,811)      29,197,538

     Common Stock issued: public offering ................      41,203,121             --         41,248,199

     Conversion of Equifax convertible note ..............       9,980,678             --         10,000,000

     Common Stock issued: Wismer-Martin ..................       9,356,545             --          9,365,895

     Exercise of stock options ...........................       2,365,991             --          2,371,623

     Tax benefit of stock options exercised ..............       1,463,000             --          1,463,000

     Exercise of value added reseller options ............         782,696             --            784,031

     Purchase of value added reseller shares into treasury
      stock and subsequent retirement ....................      (1,578,284)            --         (1,579,619)

     Conversion of Preferred Stock into Common Stock .....         (20,925)            --               --

      Net income .........................................            --         16,056,246       16,056,246

                                                             =============    =============    =============
Balance, December 31, 1996 ...............................   $ 193,281,643    $ (84,904,565)   $ 108,906,913
                                                             =============    =============    =============
</TABLE>



        See accompanying notes to the consolidated financial statements.



                                      F-5
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                            Years Ended December 31,
                                                                                 1996                 1995                 1994
                                                                             ------------         ------------         ------------
<S>                                                                          <C>                  <C>                  <C>
Cash flows provided by (used in) operating activities:
  Net income (loss) .................................................        $ 16,056,246         $(11,680,187)        $  1,247,219
  Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
    Acquired technology in process ..................................                --             14,516,000                 --
    Depreciation and amortization ...................................           9,663,594            4,121,992            2,988,766
    Write-down of assets and other charges ..........................                --              1,477,000                 --
    Amortization of loan discount ...................................                --                 60,000              480,000
    Amortization of deferred charges ................................                --                 33,333                 --
    Compensatory value added reseller options .......................                --                130,000                 --
    Restructuring ...................................................                --              3,072,450                 --
    Provision for inventory obsolescence ............................           1,478,238              162,000                 --
    Gain on sale of assets ..........................................            (146,334)             (54,083)            (168,558)
    Provision for doubtful accounts .................................           3,725,000              225,703              376,487
    Non-cash compensation expense ...................................              15,000               15,000               30,000
    Non-cash provision for income tax ...............................           4,284,494                 --                   --
    Loss on equity investment .......................................           2,167,180                 --                   --
    Extraordinary loss on extinguishment of capital
        lease obligations and long-term debt ........................                --                180,000                 --
    (Increase) decrease in assets:
         Restricted cash ............................................                --                   --                206,500
         Accounts receivable ........................................          (4,158,304)          (5,659,700)          (4,343,847)
         Inventories ................................................          (2,527,838)             378,441              (62,163)
         Prepaid expenses and other assets ..........................          (2,223,288)          (1,258,227)              77,221
    Increase (decrease) in liabilities, net
         Accounts payable ...........................................            (818,608)          (2,009,162)             303,541
         Accrued expenses and
             other liabilities ......................................         (14,251,476)          (1,776,793)          (1,804,759)
         Customer deposits and unearned income ......................          (5,622,368)            (118,612)             205,492
                                                                             ------------         ------------         ------------
    Net cash provided by (used in) operating activities: ............           7,641,536            1,815,155             (464,101)
                                                                             ------------         ------------         ------------

Cash flows used in investing activities:
  Purchase of equipment .............................................          (1,589,908)          (1,481,548)            (280,694)
  Disposal of equipment .............................................            (392,551)              54,083              168,558
  Acquisition of licensing rights
    and other intangible assets .....................................          (1,910,905)            (575,885)             (17,033)
  Purchase of businesses, net of cash acquired ......................         (11,670,082)         (19,383,616)          (1,674,601)
  Investment in joint venture and related costs .....................          (4,759,154)                --                   --
                                                                             ------------         ------------         ------------
    Net cash used in investing activities: ..........................         (20,322,600)         (21,386,966)          (1,803,770)
                                                                             ------------         ------------         ------------

Cash flows provided by (used in) financing activities:
  Principal payments of
    long-term debt ..................................................         (11,052,247)         (26,349,000)          (5,060,577)
  Net proceeds from issuance of
    notes payable and long-term debt ................................                --              9,852,649              176,250
  Principal payments under
    capital lease obligations .......................................            (316,640)            (249,102)             (52,761)
  Net proceeds from issuance
    of common stock, preferred stock and
  warrants and purchase of treasury stock ...........................          42,824,234           49,322,100               46,336
                                                                             ------------         ------------         ------------
    Net cash provided by (used in) financing activities .............          31,455,347           32,576,647           (4,890,752)
                                                                             ------------         ------------         ------------

Net increase (decrease) in
  cash and cash equivalents .........................................          18,774,283           13,004,836           (7,158,623)

Cash and cash equivalents,
  beginning of year .................................................          15,516,883            2,512,047            9,670,670
                                                                             ------------         ------------         ------------
Cash and cash equivalents,
  end of year .......................................................        $ 34,291,166         $ 15,516,883         $  2,512,047
                                                                             ============         ============         ============
</TABLE>

See Note 17 for supplemental disclosure of cash flow information.


        See accompanying notes to the consolidated financial statements.



                                      F-6
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       Organization and Business


         Physician  Computer Network,  Inc. ("PCN" or the "Company") was founded
in August 1983. The Company develops,  markets and supports practice  management
software products for physician  practices designed to link such practices using
the  Company's   practice   management   software   products   with   hospitals,
Medicare/Medicaid    carriers,    commercial    insurance    carriers,    claims
clearinghouses, clinical laboratories and HMOs ("Connecting Service Providers"),
among others, who establish electronic communication links under agreements with
the Company.  In September  1994, the Company  introduced its PCN Health Network
Information  Systems  product which is designed to serve as the common  practice
management  software platform used by the Company's physician practice customers
and to provide enhanced communication link capabilities.  In order to supplement
its practice management product offerings with knowledge-based clinical products
and services,  in January 1996,  the Company and Glaxo  Wellcome,  Inc.  ("Glaxo
Wellcome")  formed  a  joint  venture.  The  joint  venture,   HealthPoint  G.P.
("HealthPoint"),  released  its first  product  offering,  HealthPoint  ACS,  in
December 1996.

         Beginning in 1993, the Company  instituted a strategy of developing and
expanding  its business by acquiring  practice  management  software  businesses
having an installed  base of physician  practice  customers and of acquiring and
developing a common software platform to which such customers could migrate over
time.  In  execution  of this new  strategy,  the Company  acquired two practice
management  software  entities,   Calyx  Corporation  ("Calyx")  of  Brookfield,
Wisconsin on September 23, 1993 and Wallaby Software Corporation  ("Wallaby") of
Mahwah,  New Jersey on December 31, 1993,  pursuant to separate  stock  purchase
agreements.  On March 11, 1994, the Company  purchased  substantially all of the
assets of the  practice  management  business  (the  "DOM/2  Business")  of IBAX
Healthcare  Systems.  On November 15, 1994,  the Company  purchased  the Acclaim
software maintenance and support business (the "Acclaim Business") from Sentient
Systems, Inc. On April 24, 1995, the Company, through a wholly-owned subsidiary,
Practice Management Systems Corp.  ("PMSC"),  acquired  substantially all of the
assets of Practice Management Systems, Inc., a business which developed and sold
practice  management  software products and related  equipment,  maintenance and
support to physician  practices (the "PMS  Business").  On October 27, 1995, the
Company  acquired  VERSYSS  Incorporated  ("Versyss")  which  developed and sold
practice management software products and related equipment, service and support
and provided  integrated  information  systems to certain  industries other than
health care, through the merger of a wholly-owned subsidiary of the Company with
and into Versyss,  with Versyss as the surviving  corporation of such merger. On
July 2,  1996,  the  Company  acquired  substantially  all of the  assets of the
medical  practice  management  software  business  and  certain  other  software
businesses of CUSA  Technologies,  Inc. (the "CTI  Business").  On September 10,
1996, the Company acquired Wismer-Martin, Inc. ("Wismer-Martin"),  a provider of
practice management systems and hospital information  systems,  through a merger
of a wholly-owned  subsidiary of the Company with and into  Wismer-Martin,  with
Wismer-Martin as the surviving corporation of such merger (See Note 3).


2.       Summary of Significant Accounting Policies

  Basis of Presentation:

         The consolidated financial statements include the consolidated accounts
of PCN for the years ended  December 31, 1996,  1995,  and 1994 inclusive of the
results of the DOM/2  Business  from March 11, 1994,  the Acclaim  Business from
November 15, 1994, PMSC from April 24, 1995,  Versyss from October 27, 1995, the
CTI Business from July 2, 1996 and  Wismer-Martin  from  September 10, 1996. All
significant   intercompany   transactions   have   been   eliminated.    Certain
reclassifications  have  been made to the 1994 and 1995  consolidated  financial
statements to conform with the December 31, 1996 presentation.



                                      F-7
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


  Revenue Recognition:

         The Company's revenue stream includes:  (i) license fees for internally
developed practice management software products; (ii) support and update service
agreements on the practice  management  software products;  (iii) hardware sales
and the sale of hardware  service  agreements  and (iv)  customer  training  and
consulting  services.  Sales  of  licenses  for  internally  developed  software
products  are  made  to  independent  resellers  and  directly  to  office-based
physician  practices  and to hospitals  over a wide  national  geographic  area.
Revenues from sales of such  software  packages are  primarily  recognized  upon
shipment of the product, as no significant vendor and/or  post-contract  support
obligations  remain outstanding at the time of revenue  recognition.  In certain
cases,  independent resellers are sold, for a single fixed-price  non-refundable
fee, multi-copy licenses which permit resale of the Company's software. In these
cases, the software license fee is recognized as revenue when the master copy of
the  software  is  delivered  to the  independent  reseller  customer as the fee
charged,  and payment thereof,  is not contractually tied to subsequent sales by
the  licensee.  The cost to  distribute  additional  copies of the  software  is
insignificant.  Revenue from  software  support and update and hardware  service
agreements  is deferred at the time the  agreement  is executed  and  recognized
ratably  over the term of the  agreement,  which  typically  does not exceed one
year.  Revenue  from  peripheral  hardware  sales is  recognized  at the time of
shipment.  Revenue from customer training and consulting  services is recognized
when the earnings process is substantially completed,  which generally coincides
with  performance.  All costs  associated  with licensing of software  products,
support and update services,  and training and consulting  services are expensed
as incurred (see Note 10).

         Fees from  health  care  institutions  and  clinical  laboratories  for
communications  link access to the Company's  systems and  physicians are billed
monthly or annually  and  recognized  as  revenues  over the term of the related
agreements, generally one year.


  Research and Development Costs:

         Research and  development  costs are  expensed as incurred.  Such costs
generally include software development costs of new products and enhancements up
to the date upon which technological  feasibility is achieved. Costs incurred to
develop new software  products after  technological  feasibility is achieved are
capitalized.  Capitalized  software  development  costs are amortized  using the
straight-line  method  over the  estimated  product  lives of three  years.  Net
capitalized  software at December 31, 1996 and 1995 was  $876,000 and  $469,000,
respectively. Capitalized software amortization expense was $170,000 and $43,000
for the years  ended  December  31,  1996 and 1995,  respectively.  There was no
capitalized  software  amortization expense for the year ended December 31, 1994
as there were no software development costs capitalized in 1994 as technological
feasibility  of new  software  products  developed  prior  to that  date had not
occurred until after substantially all of the costs were incurred. In 1995, with
the help of an appraiser,  the Company allocated a portion of the purchase price
of the Versyss  acquisition  to acquired  technology  in process which amount of
$14,516,000 was recorded as an expense in the year ended December 31, 1995.


  Cash and Cash Equivalents:

         The Company  considers  all highly  liquid  investments  with  original
maturities of three months or less to be cash equivalents.



                                      F-8
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

  Inventories:

         Inventories, consisting principally of computer hardware for resale and
computer  maintenance  parts held to repair  customers'  hardware under hardware
maintenance  contracts  between the Company  and certain of its  customers,  are
stated at lower of cost or estimated market with costs determined by the average
cost method.


  Prepaid Expenses and Other Current Assets:

         Prepaid  expenses  and other  current  assets as of  December  31, 1996
consist  primarily  of the current  unamortized  portion of a prepaid  marketing
agreement between the Company and National Data Corporation ("NDC") as successor
to Equifax  Healthcare EDI Services,  Inc. ("Equifax EDI") (See Note 12) and the
current portion of notes  receivable from resellers.  Prepaid expenses and other
current  assets as of  December  31,  1995  consisted  primarily  of the current
unamortized portion of five-year maintenance contracts on computer equipment.


  Intangible Assets:

         Intangible  assets  consist  primarily  of software  licensing  rights,
capitalized  software  development  costs and other intangible assets related to
the Company's acquisitions (See Note 3). Software licensing rights in the amount
of $2,720,000 and $1,624,000 as of December 31, 1996 and 1995 respectively,  are
recorded  at  cost  of   acquisition.   Amortization   is  computed   using  the
straight-line  method  over a  period  of  four to five  years.  The  associated
amortization  expense was  $495,000,  $274,000  and $206,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.

         Intangible  assets  related to the excess  purchase  price of  acquired
businesses  were  $79,262,000  and  $57,912,000 as of December 31, 1996 and 1995
respectively,  with total amortization  expense of $7,193,000,  $2,884,000,  and
$1,858,000 for the years ended December 31, 1996,  1995 and 1994,  respectively.
Amortization  of the  acquisition-related  intangible  assets  is based on their
useful  lives  and is  computed  using the  straight-line  method  over  periods
currently ranging from one to fifteen years (See Note 3).


  Equipment:

         Equipment  is recorded  at cost.  Depreciation  is  computed  using the
straight-line method over the estimated useful lives of the assets, ranging from
three  to five  years.  Equipment  under  capital  leases  is  amortized  on the
straight-line  method over the shorter of the useful lives of the leased  assets
or the term of the related lease,  ranging from three to five years.  Repair and
maintenance  costs are  expensed  as  incurred.  Gains or losses on  disposal of
property and equipment are reflected in operations.


  Accounting for the Impairment of Long-Lived and Intangible Assets:

         In March 1995, the Financial Accounting Standards Board issued SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed  Of." The adoption of this  statement,  which did not have
any  impact on the  Company's  financial  position  or  results  of  operations,
requires that long-lived  assets,  certain  identifiable  intangible  assets and
goodwill  related



                                      F-9
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

to those  assets be  reviewed  for  impairment  whenever  events or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  Consistent with SFAS No. 121, the Company's  policy is to evaluate
the realizability of acquisition-related intangible assets at each balance sheet
date based upon the  expectations  of  non-discounted  cash flows and  operating
income   for  each   subsidiary   or   acquired   business   having  a  material
acquisition-related  intangible asset balance.  Based upon its analyses in 1996,
the Company  concluded  that no impairment  to  acquisition  related  assets had
occurred as of December 31,  1996.  For the year ended  December  31, 1995,  the
Company recorded a charge to write-down acquisition-related intangible assets by
$500,000  which is included in the write-down of assets and other charges in the
1995 Consolidated Statement of Operations.


Fair Value of  Financial Instruments:

         Statement of Financial  Accounting  Standards SFAS No. 107  "Disclosure
About  Fair  Value  of  Financial  Instruments",  defines  the  fair  value of a
financial  instrument as the amount at which the  instrument  could be exchanged
into a current transaction  between willing parties.  Cash and cash equivalents,
accounts receivable,  notes payable, debt, obligations under capital leases, and
accounts  payable,   reported  in  the  Consolidated  Balance  Sheets  equal  or
approximate fair values.


  Income Taxes:

         The Company  follows the asset and liability  method of accounting  for
income  taxes in  accordance  with the  provisions  of  Statement  of  Financial
Accounting  Standards No. 109 "Accounting  for Income Taxes" ("SFAS 109").  SFAS
No. 109  requires  recognition  of deferred tax  liabilities  and assets for the
expected  future  tax  consequences  of events  that have been  included  in the
financial  statements  or the tax returns.  Significantly  for the Company,  the
standard  requires that the benefit of certain loss  carryforwards  be estimated
and recorded as an asset unless it is more likely than not that the benefit will
not be realized.  From January 1, 1994 through  September 30, 1995,  the Company
recorded a full valuation  allowance against the net deferred tax assets related
primarily to net operating loss  carryforwards  due to the  uncertainty of their
realization.  Since the fourth quarter of 1995, the  acquisitions  completed and
the  earnings  generated  from  operations  have given the  Company the basis to
believe it is more likely than not that the  results of future  operations  have
generated,  and will continue to generate,  sufficient taxable income to realize
the deferred tax asset. As a result, the Company reduced the valuation allowance
recorded against previous years' net operating loss carryforwards and recorded a
net deferred tax asset of  $2,933,000  and  $1,650,000  at December 31, 1996 and
1995,  respectively,  with a  corresponding  deferred  tax  benefit  realized of
$1,283,000  and  $1,650,000  for the years  ended  December  31,  1996 and 1995,
respectively (See Note 7).


  Accounting for Stock Based Compensation:

         In October 1995, the Financial  Accounting  Standards Board issued SFAS
No. 123,  "Accounting for  Stock-based  Compensation."  This statement  requires
companies  to make pro forma  disclosures  in a footnote of net income as if the
fair value  based  method of  accounting  for stock  options,  as defined in the
statement,  had been applied. The accounting  requirements of this statement are
effective for transactions entered into during 1995 and ensuing years. (See Note
13).



                                      F-10
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (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  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.


  Earnings/(Loss) Per Share:

         Earnings/(loss) per share is determined by dividing  earnings/(loss) by
the weighted  average  number of shares of Common Stock  outstanding  during the
periods. For the year ended December 31, 1995 common stock equivalents and other
dilutive   securities  were  not  included  in  the  calculation  as  they  were
anti-dilutive  on the loss per share.  For the years ended December 31, 1996 and
1994,  the assumed  exercise of dilutive  stock  options and warrants  have been
included in the calculation of earnings per share.


3.       Acquisitions, Restructuring and Other Charges

         On September 10, 1996, the Company acquired  Wismer-Martin,  a provider
of practice  management  systems and healthcare  information  systems located in
Mead, Washington,  pursuant to a merger agreement,  for: (i) $1,980,000 in cash;
(ii)  935,000  shares of PCN Common Stock  valued at  $9,365,895;  and (iii) the
assumption of $4,733,154 in liabilities.

         On July 2, 1996, pursuant to an asset purchase agreement,  the Company,
through a wholly-owned subsidiary,  purchased substantially all of the assets of
the medical  practice  management  software  business and certain other software
businesses of CUSA Technologies,  Inc. for: (i) $9,200,000 in cash; and (ii) the
assumption of $4,130,526 in liabilities and  cancellation of debt owed by CTI to
PCN.

         On  October  27,  1995,  the  Company  acquired  all of the  issued and
outstanding  capital stock of Versyss,  a private company,  pursuant to a merger
agreement,  for  $12,333,000  in cash and  $11,750,000 in the form of a two year
promissory note bearing interest at the rate of 11% per annum issued by Versyss,
as the surviving  corporation of the merger, to the Versyss Liquidating Trust, a
liquidating trust formed for the benefit of the former  shareholders of Versyss.
In addition,  the Company assumed Versyss  liabilities  aggregating  $45,797,000
consisting of $14,367,000 in debt,  $14,169,000 in deferred maintenance revenue,
and $17,261,000 in accrued expenses derived from operations.  Versyss,  based in
Needham Heights,  MA, develops and sells practice  management  software products
and  related  equipment,  service  and  support as well as  provides  integrated
information systems to certain industries other than health care.

         On April 24, 1995, PMSC, a newly formed, wholly-owned subsidiary of the
Company,  acquired  substantially  all of the  assets  of the PMS  Business  for
$2,861,003 in cash and $2,000,000 in the form of a one year promissory note from
PMSC to  Practice  Management  Systems,  Inc.  ("PMSI"),  the sellers of the PMS
Business,  bearing interest at a rate of 10% per annum. In addition, the Company
assumed certain  liabilities of the PMS Business,  primarily related to software
support  and  hardware  maintenance  agreements,  in  the  aggregate  amount  of
$3,009,163.  The PMS Business, founded in 1983 in Needham, MA, provides practice
management software and systems support services to physicians,  medical clinics
and other medical service providers.



                                      F-11
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

         On November  15,  1994,  the  Company  acquired  the Acclaim  software,
maintenance and support business from Sentient,  a private company, for $600,000
in cash and a one year  promissory  note in the  aggregate  principal  amount of
$600,000,  bearing interest at a rate of 8% per annum. In addition,  the Company
assumed certain  liabilities  related to performance  obligations under software
maintenance and support  agreements entered into with, and prepaid by, physician
users of the  Acclaim  system.  The fair value of the  liabilities  assumed  was
$563,000. Due to the nature of the assets acquired, $1,500,000 of the $1,763,000
purchase  price was allocated to intangible  assets,  consisting of the customer
list, the software  products,  and goodwill and is being amortized over a period
of one to fifteen years.

         On March 11, 1994, the Company acquired substantially all of the assets
of the DOM/2 Business from IBAX Healthcare  Systems,  a partnership owned by IBM
Corporation and Baxter  Healthcare  Corporation,  for $1,024,000 in cash and the
assumption of $976,000 of certain liabilities related to performance obligations
under prepaid software maintenance and support agreements. Such assets included,
without  limitation,  the customer list, the maintenance and support  agreements
and the software utilized in the DOM/2 Business (the "DOM/2  Software").  Due to
the nature of the assets acquired,  the purchase price was allocated entirely to
intangible  assets,  primarily for the customer list and goodwill,  and is being
amortized over a useful life of seven years.

         Had both the Acclaim  Business  and DOM/2  Business  acquisitions  been
consummated  on January 1, 1994, the Company's  results of operations  would not
have been materially affected for the purpose of pro forma disclosures.

         The  Wismer-Martin,  CTI Business,  Versyss,  PMS,  Acclaim,  and DOM/2
transactions  were  accounted  for by the  purchase  method of  accounting  and,
consistent with the requirements of APB No. 16, the tangible assets acquired and
liabilities  assumed have been  recorded at their fair values at the  respective
acquisition dates.



                                      F-12
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

         The  specific  intangible  assets  acquired  in the PMS,  Versyss,  CTI
Business and  Wismer-Martin  transactions  have been identified by and valued at
their fair  values,  in  certain  cases  with the help of an  appraiser,  at the
acquisition  dates.  The  consideration  (including  acquisition  costs) and the
allocations  of purchase  price are  summarized by  significant  asset  category
below:

<TABLE>
<CAPTION>
                                                                                                            CTI            Wismer-
                                                                          PMS            Versyss          Business         Martin
                                                                      -----------      -----------      -----------      -----------
<S>                                                                   <C>              <C>              <C>              <C>
Consideration:
  Cash .........................................................      $ 2,861,003      $12,333,000      $ 9,200,000      $ 1,980,000
  PCN Common Stock ............................................             --               --               --          9,365,895
  Notes payable ................................................        2,000,000       11,750,000             --               --
  Liabilities assumed ..........................................        3,009,163       45,797,000        4,130,526        4,733,154
  Legal and accounting costs ...................................           79,371          702,629          254,274          611,558
                                                                      -----------      -----------      -----------      -----------
       Total purchase price ....................................      $ 7,949,537      $70,582,629      $13,584,800      $16,690,607
                                                                      ===========      ===========      ===========      ===========

Allocation of Purchase Price:
  Tangible assets including receivables, inventories,
  and equipment ................................................      $ 2,206,150      $13,985,000      $ 2,054,572      $ 3,340,148
  Acquired technology in process ...............................             --         14,516,000             --               --
  Physician supplier base (amortized over seven years) .........          483,151             --               --               --
  Profit on support and update agreements (amortized
  over one year) ...............................................          123,785          852,602          107,000           85,000
  Acquired software products (amortized over three to
  five years) ..................................................          179,089        3,101,000             --            494,000
  Profit on future support and update agreements
  (amortized over three years to five years) ...................          267,750          820,281          599,000          537,000
  Other intangible assets (includes non-compete
  agreements, trade name and goodwill) (amortized over
  seven years to fifteen years) ................................        4,689,612       37,307,746       10,824,228       12,234,459
                                                                      -----------      -----------      -----------      -----------
        Total purchase price ...................................      $ 7,949,537      $70,582,629      $13,584,800      $16,690,607
                                                                      ===========      ===========      ===========      ===========
</TABLE>

         The  Consolidated  Statement of Operations  for the year ended December
31, 1996,  includes the results of  operations  of the CTI Business from July 2,
1996 and  Wismer-Martin  from September 10, 1996. The Consolidated  Statement of
Operations  for the year  ended  December  31,  1995,  includes  the  results of
operations  of PMSC from April 24, 1995 and Versyss from  October 27, 1995.  The
Company charged  operations  $14,516,000 in 1995 for the acquired  technology in
process cost. The acquired technology in process cost consists of the fair value
of the  software  products  under  development  at Versyss that had not achieved
technological  feasibility  at the date of  acquisition  and had no  alternative
future  use and was  therefore  charged  against  operations  in the  period  of
incurrence.

         The following unaudited pro forma financial information  represents the
combined  results of  operations  of the Company,  Wismer-Martin,  CTI Business,
Versyss,  and PMSC as if the  Wismer-Martin  and CTI Business  acquisitions  had
occurred as of January 1, 1995 and as if the Versyss and PMSC  acquisitions  had
occurred  as of January  1,  1994,  after  giving  effect to  certain  financing
transactions  completed  in the second and third  quarters of 1996 and the first
and  third  quarters  of  1995  and  certain  other  adjustments  including  the
amortization of intangible assets and increased interest expense on debt related
to the  Versyss  and  PMSC  acquisitions.  The  unaudited  pro  forma  financial
information  does not  necessarily  reflect the results of operations that would
have occurred had the Company,  Wismer-Martin,



                                      F-13
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

CTI Business,  Versyss, and PMSC constituted a single entity during such periods
nor does it represent a basis for assessing future performance. With the help of
an appraiser,  the Company  allocated  $14,516,000  of the purchase price of the
Versyss  acquisition to Acquired  technology in the  Consolidated  Statements of
Operations  for the year ended December 31, 1995.  This charge is  non-recurring
and unusual and, as it relates directly to the acquisition, is excluded from the
unaudited pro forma consolidated results of operations.

<TABLE>
<CAPTION>
                                                                              1996                  1995                   1994
                                                                              ----                  ----                   ----
<S>                                                                      <C>                   <C>                    <C>
Operating revenues .............................................         $ 106,827,191         $ 109,092,618          $  99,458,962
Net income (loss) before extraordinary item ....................         $  13,932,841         $    (909,284)         $  (7,706,759)
Loss per common share before extraordinary item ................         $         .24         $        (.02)         $        (.18)
</TABLE>


         In the fourth  quarter of 1995,  after the  completion  of the  Versyss
acquisition,  management  completed  a review  of the  Company's  operations  in
conjunction with the newly acquired PMSC and Versyss  operations and announced a
restructuring  plan  (the  "1995  Restructuring  Plan")  designed  to  eliminate
duplicate   administrative   responsibilities,   consolidate   warehousing   and
distribution  of the Company's  products and  streamline  other core business in
order to improve  operating  efficiencies  and increase  shareholder  value. The
Company recorded a restructuring charge aggregating $3,922,450, for which no tax
benefit was available,  partially offset by a recovery of $850,000 from a change
in estimated  requirements  previously charged against operations as part of the
restructuring  accrual recorded in 1993 (see below). The 1995 Restructuring Plan
provision   included   $2,509,950  for  lease  termination  costs   (principally
commencing  in July  1996) and  $1,412,500  for  severance  and  other  employee
reduction-related   costs.  The  1995  Restructuring   charges  do  not  include
additional  costs  associated  with  the  consolidation  of  operations  such as
re-training,  consulting, purchases of equipment and relocation of employees and
equipment.   These  costs  were  charged  to  operations  or   capitalized,   as
appropriate,   when  incurred.   The   implementation  of  this  plan  commenced
immediately  and  was  substantially   completed  by  the  end  of  1996.  Since
implementation of the 1995 Restructuring Plan, the 1995 accrual has decreased by
$3,836,294  principally due to expenditures  related to headcount  reduction and
lease termination  costs from the consolidation and  centralization of financial
and administrative  functions at the Company's corporate  headquarters in Morris
Plains, NJ, the centralization of purchasing,  warehousing and order fulfillment
at the Company's Torrance, CA service center and other functional downsizings.

<TABLE>
<CAPTION>
1995 Restructuring Plan
-----------------------
<S>                                                                                                                       <C>
1995 Provision and Balance at December 31, 1995 ...........................................................               $3,922,450
Cash outflows from reduction in workforce and lease termination costs .....................................                3,836,294
                                                                                                                          ----------
Balance at December 31, 1996 ..............................................................................               $   86,156
                                                                                                                          ==========
</TABLE>

         In the fourth quarter of 1993,  after  completing the Calyx and Wallaby
acquisitions,   the  Company   implemented  a  restructuring   plan  (the  "1993
Restructuring  Plan") designed to reduce costs,  improve operating  efficiencies
and increase  shareholder  value.  The Company  recorded a restructuring  charge
aggregating  $3,165,000,  for  which  no tax  benefit  was  available,  for  the
consolidation of offices and facilities,  where appropriate,  the centralization
of   administrative   and  overhead   functions  and  certain   other   employee
reduction-related  costs. The charge included  $1,770,000 for lease  termination
costs,   $192,000  for  the   write-off  of  related   equipment  and  leasehold
improvements,  $210,000  for office  relocation  and  consolidation  costs,  and
$993,000 for severance and other employee-related costs. The Company anticipated
that efficiencies related to the restructuring, primarily in the form of reduced
facility and labor-related  costs,  would be phased in by the end of 1995. Since
implementation  of the  1993



                                      F-14
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Restructuring Plan, the 1993 accrual has been decreased fully by $3,165,000,  of
which  $2,315,000  was  principally  due to  expenditures  related  to the lease
termination and consolidation of the Company's corporate headquarters in Mahwah,
New Jersey in 1994 and the  resultant  centralization  of certain  financial and
sales administrative functions previously performed at the Brookfield, Wisconsin
location.  The table below  summarizes  the  activity of the 1993  Restructuring
Plan:

<TABLE>
<CAPTION>
1993 Restructuring Plan
-----------------------
<S>                                                                                                                       <C>
1993 Provision .............................................................................................              $3,165,000
1994 Activity:
  Reduction in workforce, lease termination costs and
   other cash outflows .....................................................................................                 975,000
  Write-off of equipment and leasehold improvements ........................................................                 165,000
                                                                                                                          ----------
Balance at December 31, 1994 ...............................................................................               2,025,000
1995 Activity:
 Reduction in workforce, lease termination costs and
   other cash outflows .....................................................................................                 572,000
  Additional write-off of equipment and leasehold improvements .............................................                  27,000
  Non-cash recovery from change in estimated requirements ..................................................                 850,000
                                                                                                                          ----------
Balance at December 31, 1995  ..............................................................................                 576,000
1996 Activity:
   Reduction in workforce, lease termination costs and other cash outflows .................................                 576,000
                                                                                                                          ----------
Balance at December 31, 1996 ...............................................................................              $     --
                                                                                                                          ==========
</TABLE>



                                      F-15
<PAGE>




                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


4.       Inventories

         Inventories were as follows:


                                                  December 31,     December 31,
                                                     1996             1995
                                                  ----------       ----------
Computer hardware and peripherals ............    $3,377,694       $3,120,969
Customer maintenance parts ...................     2,420,459        1,477,985
                                                  ----------       ----------
                                                  $5,798,153       $4,598,954
                                                  ==========       ==========


5.       Property and Equipment, Net


                                                  December 31,     December 31,
                                                     1996             1995
                                                  ----------       ----------
Land .......................................   $    146,000      $    266,000
Building and Building Improvements .........      1,337,059           585,000
Computer equipment .........................     18,072,525        15,761,541
Furniture and fixtures .....................        938,297           683,512
Leasehold improvements .....................        713,107           605,989
Equipment under capital lease ..............      1,098,362         1,072,857
                                               ------------      ------------
                                                 22,305,350        18,974,899
Less: accumulated depreciation and
  amortization .............................    (16,071,055)      (14,998,704)
                                               ============      ============
                                               $  6,234,295      $  3,976,195
                                               ============      ============

         Accumulated  amortization  in connection  with equipment  under capital
leases amounted to  approximately  $760,000 and $715,000 as of December 31, 1996
and 1995, respectively.



                                      F-16
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


6.       HealthPoint Joint Venture

         In January 1996, the Company and Glaxo Wellcome,  through wholly- owned
subsidiaries,  formed HealthPoint,  a joint venture  partnership,  to design and
market clinical information technology products and services. These products and
services  are  expected  to consist of  computerized  patient  records  software
products,  clinical  network  capabilities  and data analysis.  Healthpoint is a
general  partnership  owned equally by a wholly-owned  subsidiary of the Company
and a wholly-owned  subsidiary of Glaxo Wellcome and will operate  independently
of the parent companies.  A management  committee comprised of management of the
wholly-owned  subsidiaries  of  Glaxo  Wellcome  and the  Company,  as well as a
representative   of  HealthPoint's   management,   will  oversee  the  venture's
operations.  The  Company  has agreed  to,  generally,  use its best  efforts to
exclusively  distribute  HealthPoint's  products and  services to the  Company's
customers  on an  exclusive  basis.  Both the  Company and Glaxo  Wellcome  have
contributed product and development assets to HealthPoint and will contribute at
least  $50  million  in  cash to the  venture,  of  which  $43  million  will be
contributed by Glaxo Wellcome and $7 million will be contributed by the Company.
Of  such  amounts,  as  of  December  31,  1996,  the  Company  had  contributed
approximately $4.8 million, with the remainder to be contributed proportionately
by the partners in  semi-annual  installments  as needed by the venture  through
December 31, 1998. Any losses incurred by HealthPoint will be allocated  between
Glaxo  Wellcome  and  the  Company  in  proportion  to  their   respective  cash
contributions  (approximately  85% to Glaxo  Wellcome  and 15% to the  Company),
while profits will generally be allocated equally between the partners.

         Summarized  financial  information  for  the  Company's  investment  in
HealthPoint,  which is accounted for under the equity method of accounting,  for
the year ended and as of December 31, 1996 is as follows:


          HealthPoint G.P.
          ----------------
          Net sales ...............................      $    832,076
          Gross profit ............................           538,863
          Net loss ................................      $(17,903,303)
                                                         ============
          PCN's share of  net loss, net
          of income tax benefit ...................      $ (2,167,180)
                                                         ============

          Current assets ..........................      $  5,389,630
          Noncurrent assets .......................         2,832,602
                                                         ------------
          Total assets ............................      $  8,222,232
                                                         ============

          Current liabilities .....................      $  2,959,535
          Equity ..................................         5,262,697
                                                         ============
          Total liabilities and equity ............      $  8,222,232
                                                         ============

Purchases by the Company from  HealthPoint  were  considered  immaterial for the
year ended December 31, 1996.



                                      F-17
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


7.       Income Taxes

         Income tax expense (benefit) for each year is summarized as follows:

<TABLE>
<CAPTION>
                                                           1996           1995           1994
                                                       -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>
Current:
  Federal ..........................................   $ 4,638,000    $   150,000    $    53,000
  State ............................................     1,462,999         81,000         49,320
                                                       -----------    -----------    -----------
                                                         6,100,999        231,000        102,320
                                                       -----------    -----------    -----------
Deferred:
  Federal ..........................................    (1,091,000)    (1,450,000)          --
  State ............................................      (192,000)      (200,000)          --
                                                       -----------    -----------    -----------
                                                        (1,283,000)    (1,650,000)          --
                                                       -----------    -----------    -----------
Total income tax expense (benefit) .................   $ 4,817,999    $(1,419,000)   $   102,320
                                                       ===========    ===========    ===========
</TABLE>

         The income tax expense  (benefit)  differs  from  applying  the federal
income tax rate of 35% for fiscal years 1996 and 1995 (34% for fiscal year 1994)
to income (loss) before income tax expense (benefit),  loss on equity investment
and extraordinary item due to the following:

<TABLE>
<CAPTION>
                                                           1996           1995           1994
                                                       -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>
Tax expense (benefit) at statutory rate ............   $ 8,064,499    $(4,522,000)   $   459,000
Change in beginning-of-the-year balance of the
  valuation allowance for deferred tax assets
  allocated to income tax expense ..................    (6,377,660)    (2,607,000)    (1,042,680)
Amortization of goodwill and acquired  technology in
  process ..........................................     2,292,300      5,806,000        612,000
Adjustment for deferred tax assets and liabilities
  for enacted changes in tax laws and rates ........          --          614,000           --
State income tax, net of federal benefit ...........       838,860       (710,000)        74,000
                                                       -----------    -----------    -----------
                                                       $ 4,817,999    $(1,419,000)   $   102,320
                                                       ===========    ===========    ===========
</TABLE>



                                      F-18
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


         Temporary differences and carryforwards which give rise to deferred tax
assets and  liabilities  at  December  31,  1996 and  December  31,  1995 are as
follows:

                                                December 31,        December 31,
                                                    1996                1995
                                                ------------       ------------
Deferred Tax Assets:
   Net operating loss ....................      $ 26,411,000       $ 30,295,000
   Restructuring provisions ..............           983,000          7,320,000
  Operating accruals .....................         3,611,800          5,194,000
  Allowance for doubtful accounts ........         1,371,000          1,087,000
  Depreciation and amortization ..........         1,152,000          1,126,000
  Tax credits ............................           489,000            186,000
  Valuation allowance ....................       (31,085,000)       (42,538,000)
                                                ------------       ------------
                                                   2,933,000          2,670,000
Deferred Tax Liabilities:
  Software Maintenance Income ............              --               37,000
   Amortization ..........................              --              983,000
                                                ------------       ------------
Net Deferred Tax Asset ...................      $  2,933,000       $  1,650,000
                                                ============       ============

         A provision  for current  income taxes was recorded for the years ended
December 31, 1995 and 1994 of $231,000 and  $102,000,  respectively,  to satisfy
Federal Alternative Minimum Tax and certain state income tax obligations. During
1996, the deferred tax asset  valuation  allowance  decreased by $11,453,000 due
primarily  to payment  of  restructuring  costs,  operating  accruals  and other
temporary differences,  and the Company's estimate of its ability to utilize net
operating  losses  in the  future.  Any  reduction  of the  valuation  allowance
attributable to net operating loss  carryforwards from Versyss and Wismer-Martin
of $15,000,000 and $4,500,000,  respectively,  will be treated as a reduction of
intangible assets. In 1996, the reduction to intangible assets was $3,550,000.

         At December 31, 1996, the Company had net operating loss  carryforwards
for federal  income tax purposes of  approximately  $66,000,000  which expire in
1999 through 2009. This includes approximately $15,000,000 of net operating loss
carryforwards from Versyss and $4,500,000 from  Wismer-Martin  which are subject
to separate return  limitation year ("SRLY") rules.  The Company believes it has
previously  experienced ownership changes, which under the provisions of Section
382 of the Internal Revenue Code of 1986, as amended ("IRC"), have resulted in a
significant  annual  limitation  on the  Company's  ability to  utilize  its net
operating losses in the future. As a result, the Company is limited each year as
to the amount of pre-ownership change net operating losses that can be utilized.
However,  it is the opinion of management that the losses will be fully utilized
prior to expiration of the rollforward period.



                                      F-19
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


8.       Notes Payable and Long-Term Debt

<TABLE>
<CAPTION>
                                                                                  December 31,         December 31,
                                                                                     1996                 1995
                                                                                  -----------          -----------
<S>                                                                               <C>                  <C>
Term indebtedness payable to Versyss Liquidating Trust due annually in
October 1996 and 1997 at 11% (See Note 3) .....................................   $5,875,000           $11,750,000

Convertible subordinated note payable to Equifax, Inc. due February
2000  at 6% (see Notes 2, 12, and 13) .........................................          --             10,000,000

Subordinated term notes due monthly March 1995 through February 2001 at
8% assumed from Versyss acquisition (See Note 3) ..............................    1,611,747             2,004,000

Term indebtedness payable to PMSI due April 1996 at 10% (See Note 3) ..........          --              2,000,000

Term  indebtedness  payable to IBM due  October  1997 at prime plus 2.5%
(10.75% at December 31, 1996) assumed from Versyss acquisition (See Note 3) ...    1,500,000             1,500,000

Debt portion of Equifax Marketing Agreement (See Note 12) .....................    3,878,466                   --

Mortgage   payable  to  U.S.   Bancorp   Mortgage   Company  in  monthly
installments  of $4,536,  including  interest  at 3.0% over the  average
discount rate of 26-week U.S. Treasury bills adjusted  semi-annually (9%
at December 31, 1996), maturing in November, 1998
assumed from Wismer-Martin acquisition (See Note 3) ...........................      397,003                   --

Note payable to the Greater Spokane Business Development Association and
the Small Business  Administration  in monthly  installments  of $4,162,
including interest at 9.896%, maturing in October, 2008 assumed from
Wismer-Martin acquisition (See Note 3) ........................................      330,176                   --

Subordinated term notes due annually July 1998 at 9.0% assumed from
Wismer-Martin acquisition (See Note 3) ........................................       10,694                   --

Term indebtedness payable to non-employee Wallaby selling stockholders,
due January 1996 at 7% ........................................................          --                750,000

Other .........................................................................      156,963               100,160
                                                                                  ----------           -----------
                                                                                  13,760,049            28,104,160
Less: notes payable-current ...................................................    7,934,518             9,080,000
                                                                                  ----------           -----------
                                                                                   5,825,531            19,024,160
Less: current portion of long-term debt .......................................    1,153,413               100,160
                                                                                  ----------           -----------
Long-term debt ................................................................   $4,672,118           $18,924,000
                                                                                  ==========           ===========

Long-term debt, related party:
Term indebtedness payable to Wallaby selling stockholders employed at
the Company, due January 1996 at 7% ...........................................          --            $    750,000
                                                                                  ----------           -----------
                                                                                         --                 750,000

Less: current portion of long-term debt, related party ........................          --                 750,000
                                                                                  ----------           -----------
Long-term debt, related party .................................................          --            $        --
                                                                                  ==========           ===========
</TABLE>



                                      F-20
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


         In January 1996, the Company and Equifax EDI amended and restated their
exclusive  marketing  agreement  signed on January  25,  1995.  The  amended and
restated  agreement  obligated  the Company to pay $125,000 per month to Equifax
EDI (now NDC) over a period of four years.  The  obligation  was recorded at the
net present value of the payments discounted at 11.5% per annum (See Note 12).

          In September 1996,  from the  Wismer-Martin  acquisition,  the Company
assumed  $401,608 in mortgage  payable to U.S.  Bancorp  Mortgage  Company.  The
mortgage  payable  is  collateralized  by a deed  of  trust  on  Wismer-Martin's
headquarters,  land and building.  Also assumed from the  acquisition was a note
payable for $333,812 to the Greater Spokane Business Development Association and
the Small  Business  Administration.  This note  payable  is  collateralized  by
substantially all of Wismer-Martin's property, plant and equipment, subordinated
to the first position of U.S. Bancorp Mortgage Company.

        In conjunction  with the acquisition of Versyss on October 27, 1995, the
Company issued a two year  promissory  note for  $11,750,000  payable to Versyss
Liquidating  Trust,  a  liquidating  trust  formed for the benefit of the former
shareholders  of Versyss,  in equal annual  installments  at an interest rate of
11%.  The first  installment  of  $5,875,000  of term  indebtedness  to  Versyss
Liquidating  Trust was paid on October  29,  1996.  Also,  the  Company  assumed
subordinated  notes  payable to a former  landlord  that were part of settlement
claims for damages alleged in connection  with lease  defaults.  The notes which
are  secured by a second  security  interest  in  substantially  all of Versyss'
assets have an aggregate  outstanding  balance of  approximately  $1,611,747  at
December 31, 1996 and are being paid in equal monthly  installments of principal
and  interest (at 8% per year).  Along with the  subordinated  lease  settlement
notes,  the Company also assumed  $1,500,000  in notes payable to a supplier for
funds advanced to Versyss to finance inventory purchases.  The notes are secured
by a purchase  money  security  interest  in such  inventory  acquired  from the
supplier and by a second lien on such accounts  receivable derived from sales of
inventory purchased from the supplier. Principal is payable upon maturity of the
notes  in 1997 and  interest  is due  annually  at a rate of  prime  plus  2.5%.
Principal will be forgiven, and a credit against payments provided, according to
provisions  of the  supply  agreement  if the  Company  exceeds  certain  annual
purchase requirements with the supplier.

        On February 15, 1995, Equifax Inc. ("Equifax") made an investment in the
Company  through  the  purchase  of a  $10,000,000  principal  amount  five year
convertible subordinated promissory note (the "Equifax Note"). The Equifax Note,
which  bore  interest  at a  rate  of  6%  per  annum,  payable  quarterly,  was
convertible  into shares of the Company's  common stock at a conversion price of
$5.175 per share.  On May 10,  1996,  in  accordance  with the terms of the Note
Purchase  Agreement,  Equifax  converted the Equifax Note in full into 1,932,217
shares of  Common  Stock  and sold all such  shares  as part of the 1996  Public
Offering (See Note 13).

        As part of the terms of the acquisition of the PMS Business on April 24,
1995, the Company issued a $2,000,000 one year promissory note to the sellers of
the PMS Business which bore interest at 10% per year. The term  indebtedness  to
PMSI was paid in full on April 24, 1996.

         Three  of the  previous  Wallaby  stockholders  were  employees  of the
Company.  As such, a total of $750,000 of the  indebtedness  to Wallaby  selling
shareholders  referred  to in the table  above was due to these  individuals  at
December  31, 1995 and has been  included as related  party debt.  On January 2,
1996, the Company paid the $750,000 of indebtedness  outstanding at December 31,
1995.

         On January  3, 1995,  pursuant  to a debt  refinancing  (the "1995 Debt
Refinancing"), the Company issued Mr. Jeffry M. Picower, the largest shareholder
and  Chairman of the Board of  Directors  of the  Company  ("the  Investor"),  a
$16,050,000  principal  amount  promissory  note (the "1995  Investor  Note") in



                                      F-21
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



exchange for $3,210,000 in cash and the cancellation of a $12,000,000  principal
amount  promissory  note dated December 31, 1993,  together with all $840,000 of
interest  accrued  thereon  through  January  3,  1995.  The  Company  used  the
$3,210,000  of cash  proceeds it received from the Investor upon the issuance of
the 1995 Investor Note to repay all $3,210,000 in principal and accrued interest
due and payable on certain of the  promissory  notes  issued to Wallaby  selling
stockholders on January 3, 1995. The 1995 Investor Note which bore interest at a
rate of 12.5% per annum from January 3, 1995,  was due and payable on January 2,
1996 and was  mandatorily  prepayable  out of the  proceeds of the  February 15,
1995, offering (the "February 1995 Offering")  completed by the Company pursuant
to which the Company  sold  6,250,000  shares of its common  stock at a price of
$4.00 per share (see Note 13). Upon  completion  of the February 1995  Offering,
the  Company  received  net  proceeds  of  approximately  $22,300,000  of  which
$16,050,000  was used to repay the 1995 Investor  Note. As a result of the early
extinguishment  of the 1995 Investor Note, the Company recorded an extraordinary
loss of $180,000 for the year ended December 31, 1995.

         The annual aggregate  maturities of long-term debt at December 31, 1996
are as follows:

Fiscal year ending December 31,
  1997 ...................................................           $ 9,087,931
  1998 ...................................................             1,692,921
  1999 ...................................................             1,829,990
  2000 ...................................................               530,454
  2001 ...................................................                82,189
  Thereafter .............................................               536,564
                                                                     -----------
                                                                     $13,760,049
                                                                     ===========

9.       Leasing Transactions

         Future  minimum  lease  payments  under  all  leases  with  initial  or
remaining  non-cancelable  lease  terms,  in excess of one year at December  31,
1996, are as follows:

                                                         Capital      Operating
                                                          Leases        Leases
                                                       -----------   -----------
Fiscal year ending December 31,
  1997 .............................................   $   383,158   $ 3,660,418
  1998 .............................................       486,147     3,190,522
  1999 .............................................       154,632     3,094,931
  2000 .............................................        45,020     2,956,436
  2001 .............................................          --       3,008,418
  Thereafter .......................................          --       3,461,055
                                                       -----------   -----------
Total minimum lease payments .......................     1,068,957   $19,371,780
                                                                     ===========
Less: amount representing interest .................       167,078
                                                       -----------
Present value of future net minimum
  lease payments ...................................       901,879
Less: current portion of obligations
  under capital lease ..............................       289,229
                                                       -----------
Capital lease obligations, net of current portion ..   $   612,650
                                                       ===========

         Rent  expense,  net of certain  lease costs accrued as part of the 1995
Restructuring  charge (See Note 3), for the years ended December 31, 1996,  1995
and 1994 was approximately, $1,807,000, $1,209,000 and $554,000, respectively.



                                      F-22
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         On December 6, 1994, the Company  entered into an agreement with Monroe
Systems For Business,  Inc., a company wholly-owned by the Investor, to sublease
44,725  square  feet of  office  space,  for a term of ten  years,  at 1200  The
American Road, Morris Plains,  New Jersey,  to serve as the Company's  corporate
headquarters  and  executive  offices.  The monthly base rent for such space was
initially $44,352,  escalating to $59,260 in 2003. The Company believes that the
terms of such  lease  were no less  favorable  than a lease that could have been
obtained  by  the  Company  from  an  unrelated  third  party  in a  transaction
negotiated on an  arm's-length  basis. On September 1, 1996, the Company amended
its agreement with Monroe Systems For Business,  Inc., to sublease 14,170 square
feet of additional  office space at 1200 The American Road,  Morris Plains,  New
Jersey.  The  provisions of the amended lease requires the Company to make lease
payments of $73,257 per month increasing to $78,165 per month in March 1997, and
every other year thereafter an additional $1.00 per square foot per year.

         In June 1990,  the Company  entered into an operating  lease for office
space in Laurence Harbor,  New Jersey.  The provisions of the lease required the
Company to make lease  payments of $49,596 per month  increasing  to $52,351 per
month  in June  1994,  plus its  proportionate  share of  certain  other  costs.
Beginning in June 1992,  PCN's monthly lease payments  increased from $41,330 to
$49,596.  In April 1994,  following notice to its landlord,  the Company vacated
the space  subject to this lease.  On November 21, 1994,  an action was filed by
Aon Reinsurance,  Inc., the lessor of such space. The plaintiff alleged that the
Company had  defaulted  in its  obligations  under its lease of the  premises in
question  and sought  $1,600,000  of rent and  approximately  $700,000  of other
charges  and damages  through  the end of the term of the lease on December  29,
1996.  On  October  17,  1996,  the  Company  settled  its  litigation  with Aon
Reinsurance, Inc. for $1,500,000.

         In conjunction with the acquisitions of the PMS Business , Versyss, CTI
Business,   and  Wismer  -Martin,  the  Company  assumed  operating  leases  for
facilities and equipment.


10.      Revenues

         Revenues for the years ended December 31, 1996,  1995, and 1994 consist
of the following:

                                        December 31,  December 31,  December 31,
                                           1996           1995          1994
                                        -----------   -----------   -----------
Software license fees ...............   $29,396,612   $15,450,897   $ 6,302,181
Hardware revenue ....................    25,301,761     9,721,559     2,592,713
Maintenance, communication fees
  and other:
   Software support and
  maintenance fees ..................    21,015,952     8,823,507     4,507,388
   Hardware maintenance .............    15,461,911     3,508,552          --
   Communication fees and other .....     4,621,256     4,300,827     7,101,524
                                        -----------   -----------   -----------
Total maintenance,
  communication fees and other ......    41,099,119    16,632,886    11,608,912
                                        -----------   -----------   -----------
Total revenues ......................   $95,797,492   $41,805,342   $20,503,806
                                        ===========   ===========   ===========

        For the years ended December 31, 1996, 1995 and 1994,  multi-copy  sales
transactions  were entered into with  resellers of PCN Health  Network  software
products  for  aggregate  amounts of  $10,787,000,  $4,521,000  and  $1,000,000,
respectively.  Such  transactions are typically  characterized by granting these
resellers an inventory of software  licenses with initial credit terms extending
up to 12



                                      F-23
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



months. To the extent that payment terms are extended beyond 12 months,
significant business risk may arise.

        Communication  fees primarily include fees paid for communication  links
to the PCN Health Network Information System and to acquired practice management
software  systems  by  clinical   laboratories,   insurance  companies,   claims
clearinghouses and hospitals.


11.      Transactions with Related Parties

         On  August 2,  1995,  the  Company  entered  into a  binding  financing
agreement with the Investor, in order to guarantee the availability of financing
for the acquisition of Versyss (See Note 3). Subsequent to that time, management
determined it was likely that the Company  would be able to obtain  financing on
terms more favorable to the Company.  Therefore,  the Company asked the Investor
to  terminate  the  financing  agreement,  allowing  the  Company to pursue that
financing.  The  Investor  agreed  to  do so  and,  accordingly,  the  financing
agreement was terminated.  In connection therewith,  the Investor purchased from
the Company,  for $1,500,000,  a warrant to purchase,  in a single  transaction,
5,000,000 shares of common stock for an aggregate  exercise price of $25,000,000
(See Note 13). The proceeds  from such warrant were  determined to be within the
range of fair value, as determined by an investment banker, and thereby resulted
in no expense charge in the Consolidated Statement of Operations.

         On December 6, 1994, the Company  entered into an agreement with Monroe
Systems For Business,  Inc., a company wholly-owned by the Investor, to sublease
44,725  square  feet of  office  space,  for a term of ten  years,  at 1200  The
American Road, Morris Plains,  New Jersey,  to serve as the Company's  corporate
headquarters  and  executive  offices.  The monthly base rent for such space was
initially $44,352,  escalating to $59,260 in 2003. The Company believes that the
terms of such  lease  were no less  favorable  than a lease that could have been
obtained  by  the  Company  from  an  unrelated  third  party  in a  transaction
negotiated on an  arm's-length  basis. On September 1, 1996, the Company amended
its agreement with Monroe Systems For Business,  Inc., to sublease 14,170 square
feet of additional  office space at 1200 The American Road,  Morris Plains,  New
Jersey.  The  provisions of the amended lease requires the Company to make lease
payments of $73,257 per month increasing to $78,165 per month in March 1997, and
every other year thereafter an additional $1.00 per square foot per year.

         In September  1993, the Company  entered into an agreement with Richard
B. Kelsky,  a member of the Company's Board of Directors,  for Richard Kelsky to
provide  consulting  services to the  Company  for a monthly  fee of $2,500.  In
February 1994,  Richard Kelsky received  warrants to purchase  100,000 shares of
Common Stock at an exercise price of $2.50 share (See Note 13).


12.      Commitments and Contingencies


 Employment Agreements:

         As of December 31, 1996, the Company has employment  arrangements  with
several  employees  which  provide  for the  continuation  of  salary  and other
compensation   aggregating   approximately  $777,000.  Upon  certain  events  of
termination, varying amounts of severance would be due under these arrangements.



                                      F-24
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



 Access Agreements:

         The Company had a co-marketing agreement with a wholly-owned subsidiary
of a national  association of voluntary  hospitals (the "Association") to market
the Company's network to the Association's member hospitals and their respective
attending  physicians.  The Company  receives an annual fee of $10,000 from each
contracting member hospital plus an annual fee for each physician who enrolls in
the network.

         At December 31, 1996,  1995 and 1994, the Company had  agreements  with
certain  national  clinical  reference   laboratories  (the  "Laboratories")  to
establish  communication  links with  physicians to enable the  Laboratories  to
provide  clinical  laboratory  information to and receive such  information from
physicians  electronically,  and to  enable  the  Laboratories  to  print  their
requisition  forms  containing  patient  information  and insurance  information
(where applicable) in certain of the physician's offices.  Under the agreements,
the  Laboratories  will  pay  PCN a  variable  access  fee  per  year  for  each
physician's site at which the clinical laboratory software,  developed and owned
by PCN, has been installed and is operational.

         On January 25, 1995,  the Company  entered into an Exclusive  Marketing
Agreement  (the  "Marketing   Agreement")  with  Equifax  EDI,  an  "all  payer"
electronic  claims  clearinghouse  and a wholly owned subsidiary of Equifax,  to
establish "PCN Link", a communication  link between Equifax EDI and users of the
Company's  practice  management  software  products.  Pursuant to the  Marketing
Agreement,  the Company agreed to generally  promote Equifax EDI to users of the
Company's  practice  management  software products as the exclusive  provider of
electronic data interchange services, including claims processing and electronic
eligibility and credit and check authorization. During the term of the Marketing
Agreement,  Equifax EDI agreed to make its electronic data interchange  services
available  to  the  Company's  physician  practice  customers  and to pay to the
Company an agreed upon  percentage of the gross  revenues  earned by Equifax EDI
for  providing  such  services  to users of the  Company's  practice  management
software  products.  The  Marketing  Agreement  also  called for  Equifax EDI to
collect  and store the  clinical  data of the  Company's  customers  that  flows
through its system,  thereby  providing  the  Company  with a readily  available
source of data which it could retrieve.

         On January 12,  1996,  the Company and Equifax  entered into an amended
and  restated  Marketing  Agreement  which,  among  other  things,  limited  the
exclusive  coverage of the services provided by Equifax EDI to claims submission
and related  services,  on-line  eligibility and benefit inquiries for indemnity
plans, credit card and check guarantee and verification  services and electronic
remittance  services.  In connection with such  amendment,  which has an initial
term of four years,  the Company agreed to share with Equifax EDI certain of the
costs and expenses  associated  with the further  development and enhancement of
PCN  Link.  The  Company  will  reimburse  Equifax  for one  third of  Equifax's
development  costs  with  respect to PCN Link up to  $250,000  per year for four
years.  Further,  the  Company  will  pay to  Equifax  $125,000  per  month  for
forty-eight  months in order to offer,  as a marketing  incentive,  introductory
free service for one year, with certain limitations,  to physician practices who
subscribe to the services offered under the Marketing Agreement.

         During the third quarter of 1996,  NDC acquired all of the  outstanding
capital  stock of Equifax EDI. On September 3, 1996,  the Company,  Equifax EDI,
Equifax and NDC entered  into an  agreement  whereby,  among other  things,  the
Company waived its right to terminate the Marketing  Agreement,  pursuant to its
terms,  as a result of the change of control of Equifax EDI,  and received  cash
consideration.  The  acquisition  of  Equifax  EDI by NDC will not result in any
changes to the Marketing  Agreement  except that the Company and NDC agreed that
PCN may, in its sole unrestricted discretion, terminate the Marketing Agreement,
on not less than ninety  days  written  notice,  at any time on or after July 1,
1997.



                                      F-25
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



13.      Shareholders' Equity

 Public Offerings:

         The Company received net proceeds of approximately $22,339,958 from the
February  1995  Offering of which  $16,050,000  was used to repay the  principal
amount of outstanding indebtedness, a substantial majority of which indebtedness
was incurred to finance previous  acquisitions.  The balance of the net proceeds
of the  February  1995  Offering  were used to fund the  acquisition  of the PMS
Business  and  for  general  corporate  purposes.   Contemporaneously  with  the
completion  of the February  1995  Offering,  Equifax made an  investment in the
Company through the purchase of the $10,000,000 principal amount Equifax Note, a
five year  convertible  subordinated  promissory  note of the  Company,  bearing
interest at a rate of 6% per annum,  payable quarterly (See Note 8). The Equifax
Note was convertible into shares of Common Stock at a conversion price of $5.175
(subject to certain conditions and adjustment, including, without limitation, in
the event that shares of Common Stock are issued by the Company at a price which
is lower than the conversion price).

         On May 10, 1996, the Company completed the public offering of 5,600,000
shares of its Common  Stock for $10 per share and,  on May 24,  1996,  issued an
additional  840,000  shares for $10 per share upon the  exercise  in full of the
underwriters over-allotment option (the "1996 Public Offering"). Included within
the shares of Common  Stock sold  pursuant  to the 1996  Public  Offering,  were
1,932,217 shares issued by the Company to Equifax upon the conversion in full of
the  Equifax  Note.  As a result  of the sale by the  Company  of the  remaining
4,507,783 shares sold as part of the 1996 Public Offering,  the Company received
net proceeds of approximately $41 million.

 Placement of Securities:

         On October 20, 1995,  the Company  completed a placement of  securities
pursuant to Regulation S of the Securities Act of 1933. In connection  with such
placement, the Company received net proceeds of $24,689,326 through the issuance
of  1,902,748  shares of its  common  stock and  18,500  shares of its  Series A
non-dividend paying convertible  preferred stock. The preferred stock, which was
issued at $1,000 per share was, at the option of the holder,  convertible  after
60 days into shares of common stock at a conversion price of  approximately  85%
of the market price of the common stock on the date of  conversion.  The minimum
and  maximum  conversion  prices  are $3.00  and  $7.00,  respectively,  and are
automatically convertible in two years. During the years ended December 31, 1996
and 1995,  14,750 and 2,750 shares,  respectively,  of the Series A non-dividend
paying  convertible  preferred  stock  issued  pursuant  to such  offering  were
converted into 2,107,136 and 401,899 shares, respectively, of Common Stock.

         On September 10, 1996, as part of the acquisition of Wismer-Martin, the
Company  issued  935,000  shares of its Common  Stock at a price of $10.017 (See
Note 3).

  Other Significant Shareholders' Equity Transactions:

         Effective December 30, 1993, the Company entered into an agreement with
IBM Credit  Corporation  ("ICC") whereby ICC: (i) terminated the warrant it held
entitling ICC to purchase 674,280 shares of Common Stock at a price of $2.50 per
share;  (ii)  converted  the 15,000  shares of Series A  Cumulative  Convertible
Preferred Stock ("Series A Preferred  Stock") held by ICC into 2,083,333  shares
of Common Stock and surrendered its right to cash payment of previously  accrued
dividends of the Series A Preferred  Stock in  accordance  with the terms of the
Series A Preferred  Stock;  (iii)  terminated  the  financing  agreement  it had
entered into with the Company in 1989 (as modified,  the "Restructured



                                      F-26
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Lease"); (iv) released liens on the assets of the Company securing the
Restructured Lease created pursuant to a security agreement; (v) transferred
title to the Company for the equipment which was the subject of the Restructured
Lease; and (vi) released a lien on 1,306,000 shares of Common Stock owned by an
officer of the Company pursuant to a pledge agreement.

         In  consideration  for the above,  the  Company:  (x) issued to ICC (A)
1,716,667  shares  of  Common  Stock  and  (B)  a  warrant   convertible  at  no
consideration  into 775,000 shares of Common Stock;  and (y) paid ICC $4,000,000
in cash  and  assumed  certain  obligations.  Pursuant  to the  agreement  dated
December  30,  1993,  the  Company  has an  option  to  purchase  from ICC up to
2,325,000  shares of  Common  Stock at a price of $4.75 per share on or prior to
April 1, 1997. Further,  ICC agreed that, prior to the earlier to occur of March
31, 1995 or six months  following  the  consummation  by the Company of a public
offering  of the  Common  Stock,  ICC would not sell or  transfer  any shares of
Common Stock held by ICC. The Company has agreed to repurchase  2,325,000 shares
of its Common  Stock  from ICC at a price of $4.60 per share on or before  March
31, 1997.

 Stock Options:

         At December 31, 1996 and 1995, the Company had reserved,  7,172,930 and
6,194,865  shares of Common Stock,  respectively,  for issuance upon exercise of
stock options issued to Directors, officers, employees of the Company as well as
to  independent  value-added  resellers  of the  Company's  practice  management
software products.

         1989 Incentive and  Non-Incentive  Stock Option Plan (the "1989 Plan"):
Under the 1989 Plan, as amended, 167,000 shares of Common Stock are reserved for
issuance upon exercise of options  granted  thereunder.  Incentive stock options
may be granted to employees  and  non-incentive  stock options may be granted to
employees, directors and such other persons as the Compensation Committee of the
Company's  Board of Directors (the  "Compensation  Committee")  determines  will
assist the Company's  business  endeavors,  at exercise prices equal to at least
100% of the fair  market  value of the  Common  Stock on the date of grant  with
respect to  incentive  stock  options  (110% of fair market value in the case of
incentive  stock  options  granted to any person who, at the time the  incentive
stock option is granted,  owns (or is considered as owning within the meaning of
Section 425(d) of the IRC) stock  possessing more than 10% of the total combined
voting  powers of all  classes of stock of the Company or any  subsidiary  ("10%
Owner"),  and at least 85% of the fair market  value of the Common  Stock on the
date of grant with  respect to  non-incentive  stock  options.  In  addition  to
selecting the optionees,  the  Compensation  Committee  determines the number of
shares of Common Stock  subject to each option,  the term of each  non-incentive
stock  option,  the time or times when the  non-incentive  stock option  becomes
exercisable,  though, pursuant to resolution of the Company's Board of Directors
(the "Board"),  no option granted after April 7, 1992 may be exercisable  within
six  months of the date of  grant,  and  otherwise  administers  the 1989  Plan.
Incentive  stock  options are granted  for a term of five years;  those  granted
prior to April 30, 1989 may be exercised by their respective  holders two months
after the date of grant,  while incentive  stock options granted  thereafter are
exercisable  cumulatively  at the rate of 50% per year  commencing one year from
the date of grant. Generally, options granted under the 1989 Plan prior to April
1992 expire six months  after the  holder's  separation  from  service  with the
Company. The 1989 Plan terminates on March 31, 1999.

         1990 Incentive and  Non-Incentive  Stock Option Plan (the "1990 Plan"):
Under the 1990 Plan,  167,000  shares of Common  Stock are reserved for issuance
upon  exercise of options  granted  thereunder.  Incentive  stock options may be
granted  to  employees  and  non-incentive  stock  options  may  be  granted  to
employees,  directors  and such  other  persons  as the  Compensation  Committee
determines  will assist the Company's  business  endeavors,  at exercise  prices
equal to at least 100% of the fair market  value of the Common Stock on the date
of grant with respect to incentive  stock  options (110% of fair market value in
the case of incentive  stock options  granted to any person who, at the time the
incentive stock option is



                                      F-27
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



granted, is a 10% Owner), and at least 50% of the fair market value of the
Common Stock on the date of grant with respect to non-incentive stock options.
In addition to selecting the optionees, the Compensation Committee determines
the number of shares of Common Stock subject to each option, the term of each
non-incentive stock option, the time or times when the non-incentive stock
option becomes exercisable, though, pursuant to board resolution, no option
granted after April 7, 1992 may be exercisable within six months of the date of
grant, and otherwise administers the 1990 Plan. Incentive stock options are
granted for a term of five years and are exercisable cumulatively at the rate of
50% per year commencing one year from the date of grant. Options expire six
months from the date of the holder's termination of employment with the Company
by reason of retirement at age 65, disability or death, or on the date of
termination of employment for any other reason. The 1990 Plan terminates on
March 26, 2000.

         Amended and Restated 1993 Incentive and Non-Incentive Stock Option Plan
(the "Employee Plan"): The Employee Plan, as amended, reserves 3,300,000 shares
of Common Stock for issuance upon exercise of options to be granted thereunder.
Under the Employee Plan, incentive stock options qualifying under Section 422 of
the IRC, may be granted to employees of the Company and/or any of its
subsidiaries, and non-incentive stock options may be granted to employees,
officers and directors and such other persons as the Compensation Committee
appointed by the Board of Directors determines will assist the Company's
business endeavors. Options to purchase more than 250,000 shares of Common Stock
may not be awarded to any employee in any calendar year. The Compensation
Committee selects the optionees and determines: (i) whether the respective
option is to be a non-incentive stock option or an incentive stock option; (ii)
the number of shares of Common Stock purchasable under the option; (iii) the
exercise price, which cannot be less than 100% of the fair market value of the
Common Stock on the date of grant (110% of fair market value in the case of
incentive stock options granted to any person who, at the time the incentive
stock option is granted, is a 10% Owner); (iv) the time or times when the option
becomes exercisable; and (v) its duration, which may not exceed ten years from
the date of grant (or five years for any incentive stock option granted to a 10%
Owner). The Employee Plan terminates on July 13, 2003 (unless sooner terminated
by the Board).

         Amended and Restated 1993 Non-Employee  Directors  Non-Incentive  Stock
Option Plan (the  "Directors  Plan"):  The Directors  Plan, as amended  reserves
200,000  shares of Common  Stock for  issuance  upon  exercise  of options to be
granted  thereunder.  Under the Directors Plan, options can only be granted to a
director of the Company  who is not an employee  nor an officer of the  Company.
Such options are non-incentive  and are  non-qualified  under Section 422 of the
IRC. The Directors Plan is  administered  by a special  committee  consisting of
employee  directors  or  officers.  The  committee  has no  authority  to  grant
non-qualified  stock options,  as,  immediately  following the Directors  Plan's
effective  date,  options to purchase 10,000 shares of Common Stock were granted
automatically  to each  non-employee  director  and will be  granted on the next
succeeding  business day following a director's  election or  appointment to the
Board of  Directors.  In addition to the initial  option  grants,  non-qualified
stock  options  to  purchase  10,000  shares of Common  Stock  shall be  granted
automatically to each non-employee director on the third anniversary date of his
initial  option  grant and every three years  thereafter  during the term of the
Directors  Plan. The Directors  Plan  terminates on July 13, 2003 (unless sooner
terminated by the Board).

         Value Added Reseller  Stock Option Plan (the "VAR Plan"):  The VAR Plan
reserves an aggregate of 3,500,000  shares of Common Stock for issuance upon the
exercise of options to be granted  thereunder.  Under the VAR Plan,  options can
only be granted to independent  resellers of the PCN Health Network  Information
System  who are not  also  members  of the  Board  of  Directors,  officers,  or
employees  of the  Company.  The VAR Plan was  adopted  by the Board to  provide
incentives to the independent  resellers of the Company to market the PCN Health
Network  Information  System to current  users of the Company's  other  practice
management  software  products as well as others and became effective  September
30, 1994.  The VAR Plan is  administered  by a committee  appointed by the Board
consisting of no less than two  individuals,  and unless  otherwise  determined,
includes the chief executive officer and chief financial



                                      F-28
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



officer of the Company. Under the VAR Plan, independent resellers receive
options based upon the product of: (i) 300; and (ii) the number of existing
licensees of the Company's practice management software products in the
independent reseller's installed base; or, for an independent reseller first
becoming an independent reseller after September 30, 1994, the number of
licenses of the Company's practice management software products in the general
geographic region in which such new independent reseller conducts its business.
Options are granted in total to each independent reseller on September 30, 1994
or on the effective date such independent reseller executes an independent
reseller agreement with the Company. The exercise price of options granted under
the VAR Plan is the market value of a share of Common Stock on the business day
immediately preceding the date on which an option is granted. The terms of
options granted under the VAR Plan may not exceed 10 years. Options vest based
upon the number of licenses for the PCN Health Network Information System sold
to existing customers of the Company (200 shares) and to new customers (100
shares) during the periods from September 30, 1994 to December 31, 1994, from
January 1, 1995 to June 30, 1995 and from July 1, 1995 to December 31, 1995. In
addition, options vest for an additional 50 shares for each license sold by the
independent reseller during such periods in excess of the minimum performance
standard set forth in the independent reseller's agreement with the Company. No
option shall be granted pursuant to the VAR Plan after December 31, 1995, but
options theretofore granted may extend beyond that date. No options pursuant to
the VAR Plan were granted during 1996. All unvested options expired on January
1, 1996. Outstanding options under the VAR Plan were 1,193,400 at December 31,
1995 and 1994, respectively, of which 252,625 and 32,250 had vested,
respectively. The Company recorded compensation expense of $130,000 in the
fourth quarter of 1995 relating to options that vested for which the market
value of the options on the vesting date exceeded the exercise price.

         During the year ended  December  31,  1995,  the Company  canceled  and
replaced  666,000  stock  options  granted to  employees  of the Company and its
subsidiaries  under the Employee  Plan with new options  having the same vesting
dates as the canceled  options and having an exercise  price of $4.00 per share.
In addition,  such  replacement  options deleted the provision  contained in the
canceled  options  which  provided for an increase in the exercise  price of any
unexercised  option at a rate of 15% per year. In addition,  options to purchase
an additional  317,000  shares of Common Stock at an exercise price of $4.00 per
share were granted pursuant to the Employee Plan. The effect of this transaction
is not included in the table below.

         On October 27,  1995,  pursuant  to the  acquisition  of  Versyss,  the
Company  granted to employees of Versyss  options to purchase  483,000 shares at
$6.50 per share of which 20% vested on date of grant with the remainder  vesting
over the next four years.

         During 1996, options to purchase an additional 550,000 shares of Common
Stock at exercise prices ranging from $10.88 to $12.63 were granted  pursuant to
the Employee Plan. In addition,  options to purchase an additional 50,000 shares
of Common  Stock at exercise  prices  ranging  from $9.75 to $11.38 were granted
pursuant to the Directors Plan.



                                      F-29
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting  for  Stock-based  Compensation"  and  applies  APB  Opinion  25  in
accounting for its plans and, accordingly, cost for stock option plans and stock
purchase  plans  in  its  financial  statements.   Had  the  Company  determined
compensation  cost based on the fair value at the grant date consistent with the
provisions  of SFAS No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:

                                                    1996              1995
                                               --------------    --------------
Net income (loss) - as reported ...........    $   16,056,246    $  (11,680,187)
Net income (loss)  - pro forma ............        15,238,898       (12,244,048)

Earnings (loss) per share - reported ......    $         0.30    $        (0.29)
Earnings (loss) per share - pro forma .....              0.28             (0.31)

         The pro forma amounts as noted above may not be  representative  of the
effects on reported income for future years.  Pro forma net income reflects only
options  granted in 1996 and 1995.  Therefore,  the full  impact of  calculating
compensation  cost for stock  options under SFAS No. 123 is not reflected in the
pro forma net  income  amounts  presented  above  because  compensation  cost is
reflected over the options' vesting period of 5 years and compensation  cost for
options granted prior to January 1, 1995 is not considered.

        The  fair  value  of the  stock  options  granted  in 1996  and  1995 is
estimated at grant date using the  Black-Scholes  option  pricing model with the
following weighted average assumptions: for 1996 - expected dividend yield 0.0%,
risk free  interest  rate of 6.5%,  expected  volatility of 49%, and an expected
life of 7.5 years;  for 1995 - expected  dividend yield 0.0%, risk free interest
rate of 6.5%,  expected  volatility of 49%, and an expected life of 5 years. The
weighted  average grant date fair value of options  granted in 1996 and 1995 was
$7.52 and $2.81, respectively.

         Stock option activity is summarized as follows:

                                                                        Weighted
                                                                        Average
                                                         Number of      Exercise
                                                           Shares        Price
                                                         ---------     ---------
Balance outstanding, December 31, 1993 ..........          904,365        $ 4.30

  Granted .......................................        1,565,400          5.43
  Forfeited .....................................          (20,845)         6.24
  Exercised .....................................          (63,460)         0.93
                                                         ---------
Balance outstanding, December 31, 1994 ..........        2,385,460          5.11

  Granted .......................................          800,000          5.51
  Forfeited .....................................          (42,800)         4.00
  Exercised .....................................         (203,380)         3.78
                                                         ---------
Balance outstanding, December 31, 1995 ..........        2,939,280          5.33

  Granted .......................................          600,000         12.23
  Forfeited .....................................         (134,000)         6.61
  Exercised .....................................         (696,694)         4.53
                                                         ---------
Balance outstanding, December 31, 1996 ..........        2,708,586        $ 7.00
                                                         =========



                                      F-30
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         Options to purchase 679,252, 984,106 and 559,012 shares of Common Stock
were  exercisable  at December 31,  1996,  1995 and 1994,  respectively  and the
weighted  average  exercise  price of those options was $6.07,  $4.65 and $4.02,
respectively.

         At  December  31,  1996,  the range of  exercise  prices and  remaining
contractual life of outstanding options was as follows:

Range of                                           Weighted Average Remaining
Exercise Prices               Number Outstanding        Contractual Life
$2.50 - $6.50                      2,134,586                  8.2
$9.75 - $12.63                       574,000                  9.6
                              ------------------------------------------------
                                   2,708,586                  8.5

 Stock Warrants:

         The Company  reserved  7,295,000,  7,305,000,  and 2,305,000  shares of
Common Stock for issuance upon  exercise of warrants at December 31, 1996,  1995
and 1994, respectively.

        Pursuant to the terms of the agreement  reached with ICC at December 30,
1993, the Company issued warrants to purchase  775,000 shares of Common Stock to
ICC at no  consideration  (which  will be  exercised  as  part of the  Company's
agreement to repurchase all of the shares of the Company's Common Stock owned by
ICC  -  See  Other  Significant   Shareholders'  Equity  Transactions)  and  ICC
terminated its warrants to purchase 674,280 shares of Common Stock at a price of
$2.50 per share.

         On  August 2,  1995,  the  Company  entered  into a  binding  financing
agreement with the Investor in order to guarantee the  availability of financing
for the acquisition of Versyss (See Note 3). Subsequent to that time, management
determined it was likely that the Company  would be able to obtain  financing on
terms more favorable to the Company.  Therefore,  the Company asked the Investor
to  terminate  the  financing  agreement,  allowing  the  Company to pursue that
financing.  The  Investor  agreed  to  do so  and,  accordingly,  the  financing
agreement was terminated.  In connection therewith,  the Investor purchased from
the Company,  for $1,500,000,  a warrant to purchase,  in a single  transaction,
5,000,000 shares of common stock for an aggregate  exercise price of $25,000,000
exercisable  beginning  September 14, 1997. The proceeds from such warrants were
determined to be within the range of fair value,  as determined by an investment
banking firm, and therefore  resulted in no expense  charge in the  Consolidated
Statements of Operations.



                                      F-31
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         The table below details all warrants outstanding at December 31, 1996.

<TABLE>
<CAPTION>
                                                   Warrants
Date of                   Exercise     Warrants    Exercised/        Outstanding
Grant                      Price       Granted      Canceled          Warrants                 Expiration Date
-----                      -----       -------      --------          --------                 ---------------
<S>                       <C>         <C>             <C>             <C>                <C>
November 20, 1990....     $1.00(b)      417,500         --              417,500                 February 22, 1998
June 11, 1991........     $1.00(b)       19,038         --               19,038                 February 22, 1998
July 1, 1991.........     $9.00(a)       10,000      (10,000)               --           Terminated June 30, 1996
September 17, 1991...     $1.00(b)      983,462         --              983,462                 February 22, 1998
December 30, 1993....     $  --(c)      775,000         --              775,000                 December 30, 2003
February 1, 1994.....     $2.50(a)      100,000         --              100,000(d)               February 1, 2004
September 13, 1995...     $5.00(a)    5,000,000         --            5,000,000(e)             September 13, 2002
                                   ------------  -----------       ------------
                                      7,305,000      (10,000)         7,295,000
                                   ============  ===========       ============
</TABLE>

         The number of warrants exercisable at December 31, 1996, 1995 and 1994
were 2,275,000, 2,265,000 and 2,245,000, respectively.

(a)      Represents original exercise price at the date of grant.

(b)      Represents adjusted exercise price as the result of a credit
         restructuring.

(c)      The warrants issued on December 30,1993 were valued as part of the
         overall transaction with ICC as discussed in other significant stock
         transactions.

(d)      In February 1994, Richard Kelsky, a member of the Company's Board of
         Directors, received warrants to purchase 100,000 shares of Common Stock
         at an exercise price of $2.50 per share, of which 40,000 warrants
         vested immediately with the balance vesting in increments of 20,000
         over three years. The Company recorded total compensation expense
         related to these warrants of $15,000, $15,000 and $30,000 for the years
         ended December 31, 1996, 1995 and 1994, respectively.

(e)      The Investor warrants, granted on September 13, 1995, are not
         considered exercisable as they vest two years from the date they were
         granted. Vesting is triggered, however, upon a change in ownership of
         the Company.



                                      F-32
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



14.      Other Financial Information

         Accrued  expenses and other  liabilities  at December 31, 1996 and 1995
includes  salaries and  benefits and payroll  taxes  payable of  $1,657,000  and
$2,632,000,  respectively. Included within accrued expenses at December 31, 1996
and at December 31,  1995,  are $494,000 of accrued  costs  associated  with the
Wismer Martin  acquisition  and $3,130,000 of accrued costs  associated with the
Versyss  acquisition,  respectively.  Also included within accrued  expenses and
other liabilities at December 31, 1996 and 1995 is a liability for restructuring
costs of $86,000 and $4,500,000 (See Note 3). During the fourth quarter of 1996,
the Company  provided $2.8 million to its allowance for doubtful  accounts which
was partially offset by adjustments to liabilities.


         Unearned income primarily represents the obligation to perform services
related to system support and software maintenance agreements billed in advance.
As  discussed  in Note 1,  revenue  is  deferred  at the time the  agreement  is
executed and recognized ratably over the term of the agreement,  which typically
does not exceed  beyond one year.  At December  31,  1996 and 1995,  the amounts
outstanding for software maintenance,  software support and hardware maintenance
agreements were $13,068,726 and $15,608,705, respectively.

15.      Employee Benefit Plan

         In April 1988,  the Company  initiated a 401(k)  Savings and Investment
Plan (the "401K  Plan").  Under the  provisions  of the 401K Plan,  the  Company
matches a portion of the employees' contribution.  All employees over the age of
21 with at least six months of continuous service are eligible to participate in
the 401K Plan. The Company's  contributions are fully vested after five years of
continuous service. Employee contributions are immediately vested. Contributions
by the Company amounted to $571,000,  $149,000,  and $86,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.


16.      Industry Segment Data

         The Company's operations are conducted within one business segment.
There are no material revenues attributable to foreign customers.



                                      F-33
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



17.      Supplemental Disclosures of Cash Flow Information

                                      Year Ended     Year Ended     Year Ended
                                      December 31,   December 31,   December 31,
                                         1996           1995           1994
                                      -----------    -----------    -----------
Supplemental disclosure of
  cash flow information:
  Cash paid for interest ........     $2,391,000     $  822,000     $  150,000
  Cash paid for income taxes ....        261,000        142,000         19,000

         Supplemental non-cash operating, investing and financing activities
were as follows:

         o In January 1996, the Company and Equifax EDI amended and restated the
Marketing  Agreement.  Pursuant to the amended and restated Marketing Agreement,
the Company was obligated to pay $125,000 per month to Equifax EDI over a period
of four years.  As a result,  the Company  recorded an asset and  obligation  of
$4,791,290,  equal to the net present value of the payments  discounted at 11.5%
per annum.  The  acquisition of Equifax EDI by NDC,  during the third quarter of
1996, will not result in any changes to the Marketing  Agreement except that the
Company  and NDC  agreed  that PCN may,  in its  sole  unrestricted  discretion,
terminate the Marketing Agreement,  on not less than ninety days written notice,
at any time on or after July 1, 1997 (See Notes 8 and 13).

         o On May 10, 1996,  in  accordance  with the terms of the Note Purchase
Agreement,  Equifax  converted the Equifax Note in full into 1,932,217 shares of
Common Stock and sold all such shares as part of the 1996 Public  Offering  (See
Note 8).

         o In connection  with the CTI Business  acquisition  in July 1996,  the
Company assumed liabilities in the aggregate of $4,130,526 (See Note 3).

         o On September  10, 1996,  the Company  pursuant to a merger  agreement
with  Wismer  Martin,  issued  935,000  shares  of PCN  Common  Stock  valued at
$9,365,895 and assumed liabilities in the aggregate of $4,733,154. (See Note 3).

         o Capital lease obligations of $453,000 were incurred during the year
ended December 31, 1995. None were incurred for the years ended December 31,
1996 and 1994.

         o In connection  with the purchase of the DOM/2 Business in March 1994,
the Company  assumed  liabilities in the aggregate of $976,000 in recognition of
the  obligation  to honor and perform  under certain  software  maintenance  and
support agreements (See Note 3).

         o In connection  with the purchase of the Acclaim  Business in November
1994,  the Company issued  $600,000 in notes payable and assumed  liabilities in
the aggregate of $563,000 (See Note 3).

         o In connection  with the PMS  acquisition  in April 1995,  the Company
issued  $2,000,000 in notes payable and assumed  liabilities in the aggregate of
$3,009,163 (See Note 3).



                                      F-34
<PAGE>



                        PHYSICIAN COMPUTER NETWORK, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         o In  connection  with the Versyss  acquisition  in October  1995,  the
Company  issued  $11,750,000  in notes  payable and assumed  liabilities  in the
aggregate of $45,797,000 (See Note 3).

18.      Concentration of Credit Risk

         The Company's  customers,  in general, are primarily dependent upon the
healthcare  economic  sector.  The Company's  concentration  of credit risk with
customers was largely  dependent on its revenue mix which,  at December 31, 1996
and 1995, was primarily from independent resellers,  who are under contract with
the Company (See Note 10 with respect to  information  pertaining to revenue and
credit terms).

         Financial   instruments  which  potentially   subject  the  Company  to
concentrations  of credit risk consist  principally of cash  investments.  As of
December 31, 1996,  the Company  holds  approximately  $5,650,000 in an investor
account and  $19,788,000 in a money market account with two different  financial
institutions.




                                      F-35
<PAGE>


                                                                     Schedule II
                        PHYSICIAN COMPUTER NETWORK, INC.
                        VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>

                                              Balance at                                Balance at
                                              Beginning    Charged                        End of
                                               of Year   To Expenses   Deductions          Year
                                             ----------  -----------   ----------       ----------
<S>                                          <C>          <C>          <C>              <C>
For the year ended December 31, 1996
   Allowance for doubtful accounts .......   $  764,000   $3,725,000   $1,061,000 (a)   $3,428,000


For the year ended December 31, 1995
   Allowance for doubtful accounts .......   $  577,000   $  225,703   $38,703 (a)      $  764,000


For the year ended December 31, 1994
   Allowance for doubtful accounts .......   $  275,000   $  376,487   $74,487 (a)      $  577,000
</TABLE>

------------
(a)  Represents direct write-offs of accounts balances.













                                      S-1