================================================================================
   
                                   FORM 10-K/A
    

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)
   [X]      ANNUAL  REPORT UNDER  SECTION 13 OR 15(d) OF THE  SECURITIES
            EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the fiscal year ended December 31, 1996

                                       OR

   [ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission file number 0-19283

                           OMEGA HEALTH SYSTEMS, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

       Delaware                                         13-3220466
-------------------------                         -------------------------
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                      Identification No.)

                        5100 Poplar Avenue, Suite 2100
                           Memphis, Tennessee 38137
             -----------------------------------------------------
             (Address of principal executive offices and Zip Code)

         Issuer's telephone number, including area code: (901) 683-7868

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

                              Title of each class
                         ----------------------------
                         Common Stock, $.06 par value

      Check  whether  the issuer (1) filed all  reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes  X  No  
                                                                       ---   ---
      Check if there is no disclosure  of delinquent  filers in response to Item
405 of  Regulation  S-K  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

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



<PAGE>


      The  registrant's  revenues for the twelve months ended  December 31, 1996
were $42,737,193.

            The  aggregate  market  value of the shares of Common  Stock held by
nonaffiliates   of  the  registrant  as  of  March  1,  1997  is   approximately
$41,181,000.  (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)

                  (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

      Indicate  the  number of shares  outstanding  of each of the  registrant's
classes of common stock, as of the latest practicable date.

                     CLASS                   OUTSTANDING AT MARCH 1, 1997
          ----------------------------       ---------------------------- 
          Common Stock, $.06 par value                6,877,312


                       DOCUMENTS INCORPORATED BY REFERENCE

      Documents  incorporated  by reference and the part of Form 10-K into which
the document is incorporated:

 Portions  of the Proxy  Statement  relating  to the 1997  Annual  Meeting  of
Registrant's Shareholders...........................................  Part III.


























                                       2


<PAGE>
                                    PART I

ITEM 1.  BUSINESS

THE COMPANY

      Omega Health Systems,  Inc.  ("Omega" or the "Company") was incorporated
in the State of  Delaware  in 1984 as  OcuSystems,  Inc.  In 1988 the  Company
merged with Omega Health  Services,  Inc. and changed its name to Omega Health
Systems,  Inc.  Effective March 31, 1994 the Company acquired all of the stock
of Eye Health  Network,  Inc.  ("EHN"),  in  exchange  for  787,500  shares of
Company  common  stock,  in  a  transaction  accounted  for  as a  pooling  of
interests.  Prior period  financial  information  has been restated to reflect
this consolidation.

      The Company is an integrated  eye care services  company  providing a full
range of services to optometry and ophthalmology practices, including management
services, managed care programs,  purchasing and marketing services and practice
acquisition opportunities.

      The  Company  or a  wholly-owned  subsidiary  currently  owns 14 eye  care
centers and provides management services to one independent  ophthalmic practice
pursuant to  management  agreement  (collectively,  the  "Centers"),  from which
ophthalmologists  provide medical and surgical care to patients having disorders
of the eye, including four ambulatory surgical centers adjacent to Centers owned
by the Company. The Centers have 25 full-time locations and provides services in
44 satellite  locations for a total of 69 locations in 10 states.  The Company's
Centers emphasize professional  interrelationships  between ophthalmologists and
optometrists for the co-management of patient care. Each of the Centers provides
medical and  surgical  support  services  for one or more  ophthalmic  practices
pursuant  to  management  agreements.  A  total  of 33  ophthalmologists  and 26
optometrists  are  associated  with the Centers.  The Company's  activities  are
restricted to providing support to medical  professionals.  The Company does not
provide medical care to patients.

      EHN, with principal offices in Denver, Colorado,  develops and administers
managed care networks of optometrists,  ophthalmologists and surgical facilities
for health maintenance  organizations and other third-party  payors. At March 1,
1997, EHN had managed care contracts  covering  approximately 2.0 million lives,
with provider networks or other arrangements in all fifty states.

MERGERS, ACQUISITIONS AND DIVESTITURES

      See "The Company" above for information about the Company's acquisition of
EHN in March 1994. In December 1994 thirteen  ophthalmology  practices  that are
members of Windsor National  Associates,  Inc.  ("Windsor")  paid  approximately
$725,000  for Company  common  stock and  warrants.  The  proceeds  were used to
support the expansion of EHN's managed care activities.  In addition,  eleven of
these  practices  entered  into  management  services  agreements  with  EHN and
underwrote $550,000 of initial fees to EHN under these service agreements.

      On January 2, 1996, the Company completed the acquisition of the assets of
an ophthalmology practice located in Nashville, Tennessee. The consideration for
the  acquisition  consisted  of $50,000 in cash and a  $600,000  7%  convertible
subordinated note due in 60 monthly installments.

      On March 13, 1996,  the Company  acquired  the assets of an  ophthalmology
practice known as Capital Eye Center located in Tallahassee, Florida and entered
into a long-term management agreement with the selling physician's  professional
corporation. In addition, the Company acquired all of the stock of an ambulatory
surgery center associated with the practice known as Capital Eye Surgery Center.
The total consideration for these transactions included cash of $2 million and a
$1.4 million 7% convertible subordinated note due in 60 monthly installments.





                                       3

<PAGE>
      On  September  10,  1996,  the  Company   completed  the   acquisition  of
substantially all of the net assets of EyeCare and SurgeryCenter of North Texas,
P.A. and ECSC Retina,  P.A., two Dallas,  Texas professional  associations which
practice ophthalmology,  in exchange for 771,429 shares of Company common stock.
Omega Health  Systems of North Texas,  Inc.  manages the  practices  pursuant to
long-term management agreements. Also on September 10, 1996, a subsidiary of the
Company and  SurgEyeCare,  Inc.  entered  into a  partnership  agreement to form
SurgEyeCare  General  Partnership  (the  "Partnership").  Under the terms of the
partnership   agreement,   the  Company  contributed   $4,550,000  cash  to  the
Partnership and  SurgEyeCare,  Inc.  contributed  assets with an agreed value of
$6,100,000. After the initial capital contributions, the Partnership distributed
$4,476,438 in cash to SurgEyeCare,  Inc. After these  transactions,  the Company
owns  a 75%  interest  in  the  Partnership  and  SurgEyeCare,  Inc.  owns a 25%
interest.  Under the terms of the partnership  agreement,  the subsidiary of the
Company is designated as managing partner. The Company financed the contribution
to the Partnership,  in part, with the proceeds of a $3,280,000 acquisition term
loan from a commercial bank, which was refinanced in February 1997.

RECENT DEVELOPMENTS

      On March 5, 1997 the Company  completed the  acquisition  of the assets of
the  ophthalmology  practice  of Sarah J. Hays,  M.D.  of  Birmingham,  Alabama.
Simultaneously  with the  acquisition,  the  Company  entered  into a  long-term
management  agreement with Dr. Hays' professional  corporation.  The assets were
acquired  in exchange  for  108,081  shares of the  Company's  common  stock and
$859,500 in cash.

EYE CARE CENTERS

      The Company owns Centers in which ophthalmologists conduct their practice.
In the case of one managed practices, the ophthalmologist owns both the practice
and the  Center.  Each  Center  is  operated  through  the joint  efforts  of an
ophthalmologist  ("Medical Director") and an optometrist ("Center Director") who
coordinates the respective  skills of the two professions.  The Medical Director
is responsible for all medical decisions  affecting patient care.  Additionally,
the Medical  Director,  in coordination  with the Center  Director,  establishes
ongoing continuing  education  programs,  patient support and other programs for
the  benefit  of  the   participating   optometrists   and  other   health  care
professionals.  The Center Director manages the Center's  day-to-day  operations
and coordinates  patient care provided by the Center with input provided by, and
in a fashion  consistent  with,  the  continuing  patient  relationship  held by
primary health care providers.  The Center  Director  generally does not provide
optometry  services such as primary care, a category that includes eye exams and
the sale of spectacles  and contact  lenses.  Because each Center  provides only
secondary and tertiary  patient eye care,  any needed primary care including eye
exams, prescriptions,  and the preparation of corrective lenses and contacts are
provided by primary eye care providers.

      Typically,  the  Company's  Centers  are in 3,000 to 4,000  square feet of
leased space,  containing  approximately four examination rooms, specialty areas
for lasers,  fundus photography and administrative  offices.  In addition to the
Medical  Director and Center Director,  the Center's staff typically  includes a
business office manager and both  administrative  and medical support personnel.
Depending upon the medical procedure  required,  many surgeries are conducted at
nearby hospitals and ambulatory surgical centers. Among the more common surgical
procedures are: cataract surgery, glaucoma surgery, laser procedures for retinal
and glaucomatous conditions, eye lid surgery, cosmetic surgery, corneal surgery,
strabismus surgery, retina surgery and refractive surgery.

      Each of the  Company's  Centers has  entered  into an  agreement  with its
Medical  Director.  The agreement  includes a term of three to ten years initial
duration with  extensions  thereafter.  Pursuant to the  agreement,  the Company
provides support to the Medical Director,  which typically includes the physical
facility,  ophthalmic  equipment,  administrative and medical personnel,  center
working  capital,  insurance,   continuing  education,  billing  and  collection
systems, accounting, administration, and marketing support. The Medical Director
pays the Company a fee from his/her medical  practice,  out of which the Company
pays all expenses of the Center's  operations.  The Company is  responsible  for
billing  and  collection  on  behalf  of the  Medical  Director,  including  the
administration of third party  reimbursement  claims. The Company's revenues and
the  receipt of  revenues  from the  Medical  Director  are  subject to numerous
                                       4

<PAGE>

factors  beyond  the  Company's  control,   including  the  timing  of  Medicare
reimbursements,  the  number and type of  procedures  performed  by the  Medical
Director,  and the amount of reimbursement  permitted by Medicare for procedures
performed. Conversely, while the receipt of revenues cannot be controlled by the
Company,  the  expenses of  operating  the Center and  providing  support to the
Medical Director remain relatively constant.

      The table  below  lists the name and  location of each Center and the date
the Center was opened or acquired.

================================================================================
           NAME AND LOCATION OF EYE CARE CENTER             DATE OPENED
                                                            OR ACQUIRED
================================================================================

Omega Eye Care Center; Albuquerque, NM                         11/87

Capital Eye Consultants; Fairfax, VA                            4/88

Omaha Eye Institute[1];Omaha, NE                                4/88

Omega Eye Center; Jackson, TN                                   5/88

Omega Eye Care Center; Birmingham, AL                           6/89

Omega Eye Center [2] ; El Paso, Texas                           8/89

Southern Eye Associates; Memphis, TN                            1/90

VisionAmerica; Nashville, TN                                    9/90

Eye Associates of Houston; Houston, TX                          5/91

Omega Eye Associates [1]; Clearwater, FL                       01/92

Missouri Eye Institute; Springfield, MO                        01/92

Missouri Eye Institute; St. Louis, MO                          01/92

Capital Eye Center [1]; Tallahassee, FL                        03/96

EyeCare and SurgeryCenter of North Texas[1]; Dallas, TX         9/96

Omega Eye Associates of Birmingham; Birmingham, AL              3/97
================================================================================

[1]   The Center maintains an ambulatory surgical unit at this location.
[2]   This Center is a managed practice.

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

MANAGED CARE

      The Company's wholly-owned subsidiary,  EHN, is involved in various phases
of eye care managed care  programs.  EHN develops and  administers  managed care
networks of eye care providers, including optometrists and ophthalmologists, and
surgical  facilities.  EHN provides  medical and  surgical  vision care plans to
self-insured groups (corporations,  trust funds and association groups), insured
groups  (insurance  companies  and HMO's) and  third-party  entities  (preferred
provider  organizations,  exclusive provider  organizations,  physician hospital
organizations, benefit consultants, and brokers). Currently covering 2.0 million
lives, EHN is now providing eye care through its networks or other  arrangements
in all 50 states.

                                       5


<PAGE>

OPHTHALMIC SUPPLIES AND EQUIPMENT SALES

      Omega  Medical  Services,  Inc.  ("OMS"),  incorporated  in the  State  of
Tennessee  in  1991  and a  wholly-owned  subsidiary  of  the  Company,  is  the
purchasing  and supply arm of the Company.  OMS offers high  quality  ophthalmic
supplies  and  equipment  at a  reasonable  cost  to  participating  physicians,
patients and facility partners. This service leverages the collective purchasing
strengths of all Omega participants with a national panel of over 150 vendors to
secure products and services.  OMS also operates a mobile surgical service which
provides  ophthalmic  surgical  equipment  and supplies to surgical  facilities,
including  hospitals  and  ambulatory  surgery  centers  on  a  per-case  basis.
Optometrists and  ophthalmologists  affiliated with Omega's other divisions,  as
well as 22 hospitals and 23 ambulatory  surgery  centers in 20 states  currently
have access to the benefits  provided by OMS. OMS allows the Company to maintain
quality  control over the equipment  and products  used in patient  care,  while
controlling costs for providers and payors.  Revenues of OMS for the years ended
December 31, 1996 and 1995 were $2,607,000 and $1,845,000, respectively.

DEVELOPMENT PLANS

      The  Company  proposes  to expand  through  the  purchase of the assets of
ophthalmology practices, primarily in locations that complement existing Company
operations.  The Company currently has seven letters of intent covering proposed
practice asset acquisition  transactions,  which are expected to be completed in
the first half of 1997. The Company plans to develop  surgical suites to support
existing  or new  Centers  where  permitted  by state  law,  and  where,  in its
judgment,  the  characteristics  of the surgical component of the practice would
provide the potential for increased return on investment. These surgical centers
would  generally  be  located  within  the  confines  of the  Center's  physical
facilities.  The Company anticipates that it may open satellite surgical centers
and  clinics  in the  general  vicinity  of one or more  Centers  based upon the
geographical  and market  conditions  surrounding  the  Centers as well as other
factors.

      The Company also  intends to expand  through  additional  managed eye care
contracts  and networks  developed by EHN (See  discussion of EHN on page 5) and
through the  continued  expansion  of OMS's mobile  surgical  service in markets
served by  Centers.  In  addition,  the Company  plans to expand the  management
services offered to independent optometry practices.

EXCIMER LASER SUPPORT

      The Company has organized a subsidiary,  VisionAmerica Laser Centers, Inc.
("VisionAmerica")  for the purpose of developing  and  supporting  excimer laser
programs for doctors  affiliated with the Company.  The excimer laser is used to
perform a surgical procedure known as  photorefractive  keratectomy (PRK). Laser
technology is an important  element in a total eye health care delivery  system,
as over 100 million  Americans are suffering from some form of refractive  error
(nearsightedness,  farsightedness,  astigmatism).  About 70% of these people are
currently  under the care of an  optometrist.  Refractive  surgery  can  provide
sufficiently improved vision for most people, reducing or even eliminating their
need for glasses or contact lenses.  However,  the cost of this technology makes
it  prohibitive  for  doctors and their  patients  without  the  cooperation  of
doctors,  facilities and managers.  VisionAmerica  has as its goal ensuring that
doctors  affiliated with the Company have cost effective access to excimer laser
equipment. In this role,  VisionAmerica assists in negotiating access to excimer
laser technology from facility partners,  including  hospitals,  surgery centers
and laser center companies.  In addition,  VisionAmerica  provides  comanagement
education  programs for PRK  emphasizing the Company's  corporate  philosophy of
cooperation between optometry and ophthalmology.  VisionAmerica has a management
agreement with Birmingham Refractive Associates, L.L.C.






                                       6

<PAGE>

COMPETITION

      There are other enterprises, both public and private, including well-known
for-profit and not-for-profit  companies and other organizations  engaged in the
management of medical and surgical  services for diagnostic and  therapeutic eye
care treatment and the  development  and marketing of managed eye care programs,
and acquisition programs related to physician practice management. Many of these
enterprises  have  substantially  greater  capital,  research  and  development,
marketing, and human resources than the Company.

      Additionally,  the  Company,  in its efforts to  establish  or acquire and
operate  Centers  and  Managed  Practices,  as well as expand its  managed  care
operations, will be competing with existing practices and groups of practices of
both  ophthalmologists  and  optometrists  as well as with  formal and  informal
organizations  of eye care  professionals.  The development of new treatments or
procedures available to eye care professionals may constitute an additional form
of  competition,  including the  association  of various eye care  professionals
through licensing or other forms of relationships.

GOVERNMENTAL REGULATION

      The Company is involved in the  medical  services  industry,  which is the
subject of intense  governmental  regulation by both federal and state agencies.
Complying  with  governmental  regulations  increases  the expense and  directly
affects the way the Company is permitted to conduct its business. With regard to
federal  regulation,  the Company is subject to the laws,  rules and regulations
which create and regulate federal Medicare and Medicaid  programs (the "Medicare
Laws").  The Medicare Laws regulate the medical services  industry as it relates
to federal government reimbursements for patient services,  including ophthalmic
services.  The Medicare  laws prohibit the offering,  payment,  solicitation  or
receipt of remuneration, directly or indirectly, for the referral of patients to
receive  services for which payment may be made under  Medicare,  Medicaid,  and
other federal programs.  It is unlawful for health care providers to offer, pay,
or accept any  "remuneration" in return for the referral of a person for medical
services  covered  under the Medicare or Medicaid  programs,  if the payment was
intended to induce the referral.

      The Company  monitors  its  business  activity to assure  compliance  with
applicable  Medicare  Laws.  Medicare Laws and  regulations  thereunder  are the
subject of ongoing  revisions,  both through new laws, new regulations,  and new
interpretations  of existing laws or  regulations.  The Department of Health and
Human  Services  of the United  States has  enacted  regulations  pertaining  to
Medicare  and Medicaid  fraud and abuse,  which  regulations  promulgate a "safe
harbor"  for  certain  activities  and  relationships  of persons  and  entities
providing health care services. The safe harbor provisions pertain to investment
interests in large, publicly-traded companies,  investment interests in smaller,
privately-held  entities,  space rental, equipment rental, personal services and
management  contracts,  sale of professional  practice from one  practitioner to
another,  referral  services,   warranties,   discounts,  bona  fide  employment
arrangements,  group purchasing organizations, and waiver of certain beneficiary
co-insurance and deductible amounts.  The Company does not believe that it is in
violation of the Medicare Laws relating to fraud and abuse or otherwise.  In the
event that the Company or any of its subsidiaries  were found to be in violation
of such  regulations,  it could have a material  adverse effect on the Company's
business  operations,  income,  and  financial  condition,  which could  involve
criminal  penalties and fines,  exclusion  from the Medicare  system,  and civil
claims of third parties.

      A substantial  portion of the revenues  received by the Company's  Centers
and  is  dependent  upon  reimbursement  from  Medicare,  Medicaid,  or  private
insurance  companies.  The  estimated  percentages  of  revenues  received  from
Medicare,  Medicaid and private insurance  reimbursements  are 63%, 5%, and 26%,
respectively.  Medicare  and  Medicaid  reimbursement  is subject to  guidelines
established by the Health Care Financing Administration and, accordingly, may be
subject to  reduction  or other  changes not related to the actual  costs of eye
care  procedures  performed.  Management  believes  that  the  current  trend of
reductions  in  allowance  for various  procedures  performed  in the  Company's
Centers may continue.  Additionally,  administrative  expenses and reimbursement
delays may, from time to time, be associated with third-party reimbursements.

                                       7

<PAGE>

      Medicare  reimbursement rates for certain procedures  performed by doctors
associated  with the Company were  decreased in various  amounts in January 1996
and again in January 1997. The reductions in 1997 are expected to be more modest
than  in  1996,  however,   additional   reductions  are  expected  in  Medicare
reimbursement  in the  future.  If the  Company  is not  able  to  offset  these
reductions  by a  combination  of increases in volume and decreases in operating
costs,  these  reductions  will have a negative  impact on the results of Center
operations.

EXECUTIVE OFFICERS OF THE REGISTRANT

      The following is a list of the Company's executive  officers,  their ages,
positions with the Company and year each became an officer of the Company.

                                                                 Served as
Name                  Age   Capacities in which Served          Officer Since
----                  ---   --------------------------          -------------

Andrew W. Miller       53   Chairman                                  1990
Thomas P. Lewis        42   President and Chief Executive             1985
                            Officer
Ronald L. Edmonds      41   Executive Vice President and Chief        1992
                            Financial Officer
Donald A. Hood,        52   President and Chief Executive             1994
O.D.                        Officer of EHN;  Senior Vice
                            President - Managed Care of Omega
Randall N.             44   National Optometric Director and          1986
Reichle, O.D.               Vice President
Cassandra T. Speier    38   Senior Vice President - Center            1994
                            Operations
                   
Set forth below is biographical information concerning the executive officers of
the Company:

      ANDREW W. MILLER has served as the Company's  Chairman since September 30,
1990 and has been a principal  stockholder of the Company since 1986. Mr. Miller
served as the Company's  Chief  Executive  Officer from September 30, 1990 until
March 1,  1991.  Since  1989,  Mr.  Miller has served as  Chairman  of  American
Healthmark,  Inc., a hospital ownership and management  corporation.  Mr. Miller
has also served as a director of Surgical  Care  Affiliates,  Inc.  ("SCA"),  an
owner and operator of  outpatient  health care  facilities,  from 1987 until its
recent  acquisition  by  HealthSouth.  Mr.  Miller served as President and Chief
Executive  Officer of SCA from its  founding in 1982 until May 1987 and from May
1987  until 1990  served as its Vice  Chairman  and  Chairman  of the  Executive
Committee.  Mr. Miller was a Senior Vice  President of Hospital  Corporation  of
America ("HCA") and President of HCA Management  Company ("HMC"),  a division of
HCA,  prior to leaving HCA and founding SCA in 1982. Mr. Miller was with HCA for
12 years starting in 1970. Mr. Miller is a certified public accountant and prior
to his association with HCA was employed by a national accounting firm.

      THOMAS P. LEWIS has served as the Company's  President  since January 1990
and its Chief Executive  Officer since March 1, 1991. From June 1988 to December
1989, he served as Executive Vice President and Chief  Operating  Officer.  From
June 1986 until the merger with Omega  Health  Services,  Inc. in June 1988,  he
served as the Company's  President and Chief  Executive  Officer.  He has been a
Director  since June 1986.  From June 1985 to June 1986, Mr. Lewis served as the
Company's  Vice  President.  A graduate of Rice  University,  Mr.  Lewis holds a
Masters degree in Health Care Administration from Trinity University.

      RONALD L. EDMONDS has served as the  Company's  Executive  Vice  President
since January 1997 and its Chief  Financial  Officer since  September 1992. From
September 1992 until December 1996, he served as Senior Vice  President.  He was
elected a director in February  1993 and  Secretary in October  1994.  From 1978
until 1992,  he served in various  positions  with KPMG Peat Marwick in Memphis,
Tennessee, Oklahoma City, Oklahoma and New York City, New York. Mr. Edmonds is a
certified  public  accountant and holds B.S. and M.S. degrees in accounting from
Oklahoma State University.

                                       8


<PAGE>


      DONALD A. HOOD,  O.D. was one of the founders of The Eye Health Network,
Inc.  in 1988 and  presently  serves  as its  President  and  Chief  Executive
Officer and as Senior Vice  President - Managed  Care of the  Company.  He was
elected to the  Company's  board of  directors  in April  1994.  Dr.  Hood has
maintained a private  optometry  practice in the Denver,  Colorado  area since
1972. Dr. Hood graduated from the Pacific  University  College of Optometry in
1968.

      RANDALL  N.  REICHLE,  O.D.,  F.A.A.O.,  has  served  as  a  Company  Vice
President,  since July 1986 and is currently National Optometric Director of the
Company.  Dr. Reichle has maintained a private  optometric  practice in Houston,
Texas since July 1976.  He has also served as Center  Director for the Company's
Eye Center in Houston,  Texas since July 1986. Dr. Reichle is a 1976 graduate of
the University of Houston College of Optometry.

      CASSANDRA  T.  SPEIER  has  served as Senior  Vice  President  -- Center
Operations  for the  Company  since July 1994.  From 1990 to 1994,  Ms. Speier
served in various management positions with MedCath, Inc. of Charlotte,  North
Carolina.  She was  previously  employed as regional  director of  Medivision,
Inc.  Ms.  Speier  has a Masters  Degree  from  Loma  Linda  University  and a
Bachelor's Degree from the University of Colorado.

      There  are  no  family  relationships  between  any of  the  officers  and
directors of the Company.

EMPLOYEES

      At December 31, 1996, the Company had a total of 329 employees with 275 of
those employed on a full-time basis.

ITEM 2.  PROPERTIES

      The Company's  principal  offices  situated at 5100 Poplar  Avenue,  Suite
2100, Memphis,  Tennessee 38137,  consisting of approximately 5,600 square feet,
are leased from an independent third party, pursuant to a lease which expires in
May 1998. Additionally,  the Company, through wholly-owned subsidiaries,  leases
an aggregate of  approximately  82,563 square feet, used for the headquarters of
The Eye Health  Network in Denver,  Colorado,  and Centers owned by the Company.
Monthly lease payments for these facilities aggregate approximately $108,158.

ITEM 3.  LEGAL PROCEEDINGS

      The Company is involved from time to time in litigation  incidental to its
business.  The Company is not involved in any material  litigation at this time,
and  management  is not  aware  of any  legal  claim or  matter  that may have a
material adverse effect upon the results of operations or financial condition of
the Company.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None.














                                       9



<PAGE>
                                   PART II

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

      The Company's  common stock is traded on The Nasdaq Small-Cap Market under
the symbol OHSI. The following table sets forth the quarterly high and low sales
price  information for the Company's common stock during the period from January
1, 1995 through  December 31, 1996. Such prices represent prices between dealers
and do not include retail mark-ups, mark-downs or commissions.

                           1996                         1995
                --------------------------- ------------------------------
                    High          Low            High           Low
                    ----          ---            ----           ---

First Quarter       $6.00        $5.00          $5.50          $4.50
Second Quarter       6.63         5.25           5.50           4.75
Third Quarter        6.83         5.75           6.00           4.63
Fourth Quarter       7.00         6.00           6.00           5.25

      There were 406 holders of record of the Common  Stock as of March 1, 1997.
The Company believes it had in excess of 1,000 beneficial owners of Common Stock
as of March 1, 1997.  The Company has not paid any cash  dividends  and does not
anticipate paying cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

On May 17, 1996, the Registrant completed the sale of 729 shares of its Series A
convertible  preferred  stock.  The  placement  agent for the  issue was  Swartz
Investments,  LLC. The preferred stock was issued to qualified foreign investors
pursuant to Regulation S under the Securities Act . The aggregate offering price
was $7,290,000.  The placement  agent fee was $729,000.  Each share of preferred
stock was issued at a purchase price of $10,000 and is  convertible  into common
stock at an  exercise  price  equal to the lesser of $5.75 or 85% of the average
bid price of the common stock at the time of  conversion.  The  preferred  stock
automatically converts at the end of three years if not already converted. Until
conversion,  the  preferred  stock  has  a 8%  dividend,  payable  in  kind.  In
connection  with the  placement,  the  purchasers  of the  preferred  stock were
granted options to acquire 633,913 additional shares of the Registrant's  common
stock at an exercise price of $5.75, which options are exercisable until May 17,
2001. The placement agent was issued warrants to purchase an additional  126,782
shares of common stock with the same exercise price and term. As of December 31,
1996, 670 of the 729 shares of convertible preferred stock have been converted.

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                            Years ended December 31,
                                                            ------------------------
                                          1992         1993          1994          1995         1996
                                          ----         ----          ----          ----         ----
<S>                                     <C>           <C>           <C>           <C>          <C>       
Net revenues                            $19,109,687   21,761,449    27,636,067    32,395,471   42,737,193
Net earnings (loss)                     (5,397,871)      359,357       112,407       480,874    1,303,126
Earnings (loss)  available to common
shareholders (1)                        (5,397,871)    (359,357)       112,407       480,874    (170,597)
Net earnings (loss) per common
share (1)                                    (1.38)         0.09          0.02          0.10        (.03)

                                                                 December 31,
                                          1992         1993          1994          1995         1996
                                          ----         ----          ----          ----         ----
Total assets                              8,096,701    7,935,321     9,352,369    11,740,395   27,439,557
Long-term obligations, net                1,875,853    1,262,929     1,122,994     1,597,904    7,205,174
Stockholders' equity                      1,159,337    2,534,484     3,400,724     3,961,247   15,043,163

(1) after  adjustment  in 1996 for imputed  dividends on  convertible  preferred  stock as required by a
Securities  and  Exchnage  Commission  announcement  on  March  28,  1997.  Absent  the  impact  of this
announcement, the Company would have reported earnings per share of $.20 for the year ended December 31,
1996. See note 1 to the consolidated financial statements included elsewhere herein.
</TABLE>

                                       10


<PAGE>


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

      The following  discussion and analysis should be read in conjunction  with
the  consolidated  financial  statements  and notes thereto  included  elsewhere
herein.

RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995

      Total revenues for the year ended  December 31, 1996 increased  $9,677,000
or 30% over total  revenues for the year ended  December  31, 1995.  Each of the
Company's three major divisions experienced significant growth.

      Center net revenues increased $5,824,000 or 29%.  Approximately 6% of this
increase  resulted  from  significant  volume growth in existing  centers.  This
increase in revenue from  existing  Centers was achieved  despite a reduction in
Medicare  reimbursement  effective January 1, 1996 estimated to be approximately
8% of Center net  revenues.  The remainder of the increase  (approximately  23%)
resulted  from  the  acquisition  of the  assets  of  three  practices  and  two
ambulatory  surgery  centers.  The  practices  and  ambulatory  surgery  centers
acquired included an additional practice in Nashville, a practice and associated
ambulatory  surgery  center in  Tallahassee,  Florida,  and a practice and a 75%
interest in an ambulatory surgery center in Dallas, Texas.

      Managed  care  revenues  increased  approximately  $4,097,000  or 39%. EHN
continued  to  experience  significant  increase  in covered  members,  reaching
approximately 2,000,000 at December 31, 1996.

      Supply and equipment  sales increased  $239,000,  or 13%, over 1995 supply
and equipment sales in the prior year, reflecting the continued expansion of the
mobile surgical service and a decrease in lower margin capital equipment sales.

      Management and other revenues decreased  $358,000,  reflecting a reduction
in fees earned by VisionAmerica Laser Centers and a reduction in management fees
from managed centers in which the Company does not have an ownership interest as
the Company focuses on centers in which it has an equity interest.

      Center  operating  expenses  increased  at a lower  rate than  Center  net
revenues, reflecting the overall growth and development of existing Centers. The
margin  improvement was significant in Clearwater and St. Louis, which have been
problem locations. Eye care claims increased at a greater rate than managed care
revenues,  reaching  81% of managed  care  revenues in 1996,  compared to 72% in
1995.  This reduced  margin is the result of higher than  expected  utilization,
especially  late in the year and a  decreased  level of fees from  participating
providers and networks.  Selling,  general and administrative expenses increased
16% due to  costs  associated  with  the  growth  in  managed  care  operations,
equipment and supply operations and corporate support services.

      The Company had earnings from  operations of $1,753,000 in 1996,  compared
to $763,000 in 1995.

      Interest expense  increased by $338,000 or 116% due to higher debt levels,
primarily incurred in connection with the Tallahassee and Dallas acquisitions.

      The Company  reported no Federal income tax expense for 1996 as it is in a
net operating loss carryforward  position.  As of December 31, 1996, the Company
had available net operating loss carryforwards, subject to Internal Revenue Code
Section 382 limitations, of $8,000,000 expiring from the year 2000 to 2007.

      Net  earnings  increased  from  $481,000  in 1995 to  $1,303,000  in 1996,
reflecting the Company's growth and improved margins in its Center operations.


                                       11


<PAGE>


YEARS ENDED DECEMBER 31, 1995 AND 1994

      Total revenues for the year ended  December 31, 1995 increased  $5,299,000
or 19% over total  revenues for the year ended  December  31,  1994.  All of the
Company's  operations  experienced  significant  growth  during  1995,  with the
exception of management and other revenues.

      Managed care  revenues  increased  approximately  $2,486,000,  or 31%. EHN
continued  to  experience  significant  growth  in  covered  members,   reaching
approximately 1,500,000 at December 31, 1995.

      Center net revenues  increased  $2,154,000 or 12%. This increase  resulted
from  significant  growth in two Center  locations and modest  revenue growth in
most other  Centers,  partially  offset by  problems  experienced  in two Center
locations.  The 1995 results continued to be significantly affected by operating
problems  experienced in two Center locations,  Clearwater and St. Louis.  These
two centers  had losses  aggregating  $840,000 in 1995,  compared to $637,000 in
1994. In August 1995, a new principal surgeon began practice in St. Louis.

      Supply and equipment  sales  increased  $751,000,  or 69%, over supply and
equipment sales for the prior year. This growth resulted from the development of
a mobile  surgical  program  and the  expansion  of  marketing  to  optometrists
affiliated with various Omega networks.

      Management and other revenues decreased $92,000, reflecting a reduction in
management fees earned from managed practices in which the Company does not have
an  ownership  position,  partially  offset by  development  fees  generated  by
VisionAmerica Laser Centers, the Company's excimer laser development subsidiary.

      Center  operating  expenses  increased at a rate  slightly  lower than the
increase in center net  revenues.  Eye care claims  increased at a rate slightly
lower  than  the  increase   managed  care   revenues.   Selling,   general  and
administrative  expenses  increased  approximately  21% primarily as a result of
increased costs associated with the Company's managed eye care operations.

      The Company had earnings  from  operations  of $763,000 in 1995 compared
to $270,000 in 1994.

      Interest expense  increased $57,000  reflecting higher debt levels.  Total
debt and capital  lease  obligations  increased  approximately  43%, as a result
primarily of capital expenditures and capital lease obligations incurred in 1995
related largely to relocating and enlarging the Nashville  center and relocating
and adding an ambulatory surgery center to the Omaha center.

      Net earnings increased from $112,000 in 1994 to $481,000 in 1995.

YEARS ENDED DECEMBER 31, 1994 AND 1993

      Total revenues for the year ended December 31, 1994 increased  $5,875,000,
or 27%, over total  revenues for the year ended  December 31, 1993.  This growth
was  led by a 156%  increase  in  managed  care  revenues  as EHN  continued  to
experience significant growth in covered members.  Center net revenues increased
$411,000,  or 2.4%,  resulting  from  revenue  growth  in a number  of  Centers,
partially offset by problems  experienced in three Center locations.  Management
and  other  revenues  increased  $140,000,  or 19%,  primarily  due to growth in
management  fees from  independent  ophthalmic  practices.  Supply and equipment
sales  increased  $416,000,  or 58% due to  expansion  of  marketing  to surgery
facilities associated with various Omega networks. The Company had earnings from
operations of $270,000 in 1994 compared to a loss from  operations of $29,000 in
1993.





                                       12


<PAGE>

      The 1994 results were also  significantly  affected by operating  problems
experienced in three locations,  Clearwater, Portland and St. Louis. These three
centers had losses aggregating  $907,000 in 1994,  compared to $367,000 in 1993.
Earnings were also negatively impacted by legal costs and other expenses related
to the pooling-of-interests with EHN.

      Interest expense decreased $84,000 or 26% reflecting lower debt levels and
interest rates. Total debt and capital lease obligations decreased approximately
14%.

      Net earnings decreased from $359,000 in 1993 to $112,000 in 1994. The 1993
earnings included  non-recurring gains of $642,000 from the sale of unprofitable
eye care centers in Jackson,  Mississippi and Knoxville,  Tennessee,  as well as
the sale of  certain  surgical  assets  of the  ambulatory  surgical  center  in
Nashville,  Tennessee.  In 1994,  a loss of $51,000 was recorded for the planned
closure of the Portland center.

LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES

      At December  31,  1996,  the Company  had working  capital of  $4,773,000,
compared to $1,226,000 in 1995.  Cash totaled $2.9 million at December 31, 1996,
compared to $2.7 million in 1995.  Long-term debt and capital lease  obligations
increased from  $3,153,000 in 1995 to $8,411,000 in 1996,  reflecting  primarily
borrowings associated with acquisitions.

      For the year ended  December 31, 1996, the Company used $50,000 in cash in
operating  activities  and used  $8,430,000 in investing  activities.  Financing
activities generated cash of $8,688,000.  The decrease in cash flow generated by
operations is the result of the working capital requirements associated with the
Company's   acquisitions.   Cash  flows  from  operations  included  significant
adjustments for depreciation and amortization ($1,232,000) and the provision for
doubtful accounts  ($367,000).  The investing cash flows are directly attributed
to the  acquisition  program and capital  expenditures  of  $721,000.  Financing
activities included the sale of $7.29 million in Series A Convertible  Preferred
Stock and borrowings associated with the acquisition program.

      For the year ended  December  31,  1995,  the  Company  generated  cash of
$1,871,000 in operating activities and used $1,000,000 in investing  activities.
Financing  activities  used  $374,000.   Cash  flows  from  operations  included
significant  adjustments for depreciation and amortization  ($1,130,000) and the
provision for doubtful accounts ($445,000). Cash flows from investing activities
consisted principally of capital expenditures.  Significant financing activities
included  $946,000 in  principal  payments on debt and leases,  and  $572,000 in
proceeds of new debt.

      For the year ended  December  31,  1994,  the  Company  generated  cash of
$1,425,000 in operating  activities  and used $794,000 in investing  activities.
Financing  activities  generated  $427,000.  Cash flows from operations included
significant  adjustments for depreciation and amortization  ($1,213,000) and the
provision for doubtful accounts ($505,000). Cash flows from investing activities
consisted principally of capital expenditures.  Significant financing activities
included $941,000 in principal payments on debt and leases, $628,000 in proceeds
of new debt and $740,000 in net proceeds from sale of stock.

      On May  17,  1996,  the  Company  completed  the  sale  of  $7,290,000  in
convertible preferred stock. Subject to certain limitations, the preferred stock
is  convertible  into common  stock at an exercise  price equal to the lesser of
$5.75  or 85% of the  average  bid  price  of the  common  stock  at the time of
conversion. The preferred stock automatically converts at the end of three years
if not already  converted.  The  preferred  stock has a 8% dividend,  payable in
kind, until conversion. In addition, the investors received warrants to purchase
approximately  634,000  additional shares at an exercise price of $5.75. The net
proceeds  were  approximately  $6.49  million  and were used to repay the bridge
financing incurred in the Tallahassee practice acquisition, to finance a portion
of the cost of the Dallas transaction and for working capital. Of the 729 shares
of preferred stock issued,  670 shares had been converted into 1,370,097  shares
of common stock at December 31, 1996.

                                       13


<PAGE>

      In February, 1997, the Company entered into a $15,000,000 revolving credit
agreement  with  Nations  Credit  Commercial  Corporation  for  the  purpose  of
refinancing  certain  existing  debt,  providing  working  capital and financing
acquisitions.  This  facility and the proceeds of the 1996  preferred  stock are
expected to meet the Company's  financing needs to support the Company's  normal
operations  for the next  twelve  months and to support the  Company's  proposed
acquisition  program  through  the third  quarter of 1997.  The Company may seek
additional  debt or equity  financing  to allow it to  sustain  its  acquisition
program.

CAPITAL EXPENDITURES

      The Company used  $720,000 for capital  expenditures  in 1996  compared to
$914,000 in 1995 and $779,000 in 1994. In addition, the Company incurred capital
lease  obligations of $981,000 in 1996,  $1,275,000 in 1995 and $76,000 in 1994.
These capital  expenditures  consisted primarily of ophthalmic equipment for use
in the  Company's  centers and  satellite  locations.  The higher levels in 1995
reflect the relocation and expansion of the Nashville and Omaha centers. Capital
expenditures in 1997 are estimated at  approximately $1.2 million, exclusive  of
the assets of additional practice locations.

RECENT DEVELOPMENTS

      On March 5, 1997 the Company  completed the  acquisition  of the assets of
the  ophthalmology  practice  of Sarah J. Hays,  M.D.  of  Birmingham,  Alabama.
Simultaneously  with the  acquisition,  the  Company  entered  into a  long-term
management  agreement with Dr. Hays' professional  corporation.  The assets were
acquired  in exchange  for  108,081  shares of the  Company's  common  stock and
$859,500 in cash.  The cash portion of the  transaction  was financed  under the
Company's revolving credit facility .

IMPACT OF INFLATION AND CHANGING PRICES

      To date,  the Company's  business has not been  significantly  affected by
inflation.  A  substantial  portion of the  Company's  revenues are dependent on
reimbursement from Medicare,  Medicaid or private insurance companies (estimated
to be 63%, 5% and 26% of Center net revenues,  respectively)  and may be subject
to  reduction  or other  changes  not  related to the  actual  costs of eye care
procedures performed.  Effective January 1, 1996 and again in January, 1997, the
Medicare  reimbursement  rates for certain  procedures  performed by  physicians
associated with the Company were decreased in various amounts. If the Company is
not able to offset these  reductions by a combination of increases in volume and
decreases in operating  costs,  these  reductions will have a negative impact on
the results of Center operations.

      The  Company's   managed  care   operations  are  also  subject  to  price
competition.  Many of these  contracts  may be based on  Medicare  reimbursement
rates or similar payment  methodologies  and, as such, may be subject to payment
reduction.  Based on the structure of the Company's managed care contracts, most
of any such reductions are born by participating providers.

NEW ACCOUNTING STANDARDS

      Effective  January 1, 1996,  the Company  adopted  Statement  of Financial
Accounting   Standards  (SFAS)  No.  121,  "Accounting  for  the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed  Of." SFAS No. 121
requires that long-lived assets and certain identifiable  intangibles to be held
and used by the Company be reviewed for impairment whenever events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  This statement requires that the majority of long-lived assets and
certain  identifiable  intangibles to be disposed of be reported at the lower of
carrying  amount  or fair  value  less  cost  to  sell.  Implementation  of this
statement did not have a material impact on the Company's financial statements.

                                       14


<PAGE>

      In  October  1995 the Board  adopted  Statement  of  Financial  Accounting
Standards No. 123, "Accounting for Stock-Based  Compensation" ("FAS 123"), which
provides  that  companies  adopt a method of accounting  for stock  compensation
awards based on estimated fair value at the date the awards are granted using an
accepted  pricing model.  The resulting  charge to income is recognized over the
period during which the options or awards vest. The Board encourages recognition
of such  expense in the  statement of income but does not require it. If expense
is not  recorded  in the  financial  statements,  FAS  123  requires  pro  forma
disclosures  regarding  the  effects on net income  per share had  expense  been
recognized.

      The Financial  Accounting  Standards Board has issued SFAS 128,  "Earnings
per Share," and SFAS 129,  "Disclosure of Information about Capital  Structure."
SFAS 128 establishes  standards for computing and presenting  earnings per share
and applies to entities with publicly  held common stock.  SFAS 129  establishes
standards for disclosing  information  about an entity's  capital  structure and
applies to all entities.  Management  believes  that the  Company's  adoption of
these  standards,  when  effective,  will not have a  significant  impact on the
Company's consolidated financial statements.

      The Financial  Accounting  Standards Board has issued SFAS 128,  "Earnings
per Share," and SFAS 129,  "Disclosure of Information about Capital  Structure."
SFAS 128 establishes  standards for computing and presenting  earnings per share
and applies to entities with publicly  held common stock.  SFAS 129  establishes
standards for disclosing  information  about an entity's  capital  structure and
applies to all entities.  Management  believes  that the  Company's  adoption of
these  standards,  when  effective,  will not have a  significant  impact on the
Company's consolidated financial statements.

      ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(A)    FINANCIAL STATEMENTS

      Index to Consolidated Financial Statements:                        Page
                                                                         ----

      Independent Auditors' Report                                        19

      Consolidated Balance Sheets as of
            December 31, 1996 and 1995                                    20

      Consolidated Statements of Operations
            for the Years Ended December 31, 1996, 1995 and 1994          22

      Consolidated Statements of Stockholders' Equity
            for the Years Ended December 31, 1996, 1995 and 1994          23

      Consolidated Statements of Cash Flows
            for the Years Ended December 31, 1996, 1995 and 1994          24

      Notes to Consolidated Financial Statements                          25










                                       15

<PAGE>



(b) Supplementary Data - Selected quarterly financial data (unaudited):


                                                  1996

                                First        Second       Third        Fourth
                               Quarter      Quarter      Quarter      Quarter
                             --------------------------------------------------
Total  revenues              $ 8,897,727   10,462,495   11,105,924   12,271,047
Earnings from operations         180,956      420,577      478,334      673,090
Net earnings                     122,129      297,330      410,369      473,298
Earnings (loss) available to
common shareholders  (1)         122,129   (1,062,041)     303,484      460,831
Earnings (loss) per  common
share (1)                    $      0.03        (0.22)        0.06         0.07
                                        



                                                  1995

                                First        Second       Third        Fourth
                               Quarter      Quarter      Quarter      Quarter
                             --------------------------------------------------
Total  revenues              $  7,873,728   8,410,478    8,381,017    8,270,248
Earnings from operations          153,727     220,224      107,243      281,347
Net earnings                      108,833     200,256      164,278        7,507
Earnings per common share    $       0.02        0.04         0.06            -
                                        


(1) after  adjustment  in the second  quarter of 1996 for imputed  dividends  on
convertible  preferred stock as required by a Securities and Exchnage Commission
announcement  on March 28,  1997.  Absent the impact of this  announcement,  the
Company  would have reported  earnings per share of $.05 for the second  quarter
ended  June  30,  1996.  See  note 1 to the  consolidated  financial  statements
included elsewhere herein.

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

         None.











                                       16


<PAGE>

   
                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE  OFFICERS OF THE  REGISTRANT,  COMPLIANCE  WITH
SECTION  16(A)  OF THE  ACT

Set forth below is  biographical  information  concerning  the  directors of the
Company:

      RONALD  L.  EDMONDS  (41)  has  served  as the  Company's  Executive  Vice
President since January 1997 and Chief  Financial  Officer since September 1992.
From September 1992 until December 1996, he served as Senior Vice President.  He
was elected a director in February 1993 and Secretary in October 1994. From 1978
until 1992,  he served in various  positions  with KPMG Peat Marwick in Memphis,
Tennessee, Oklahoma City, Oklahoma and New York City, New York. Mr. Edmonds is a
certified  public  accountant and holds B.S. and M.S. degrees in accounting from
Oklahoma State University.

      DONALD  A.  HOOD,  O.D.  (52) was one of the  founders  of The Eye  Health
Network,  Inc. in 1988 and presently serves as its President and Chief Executive
Officer.  He was elected to the Company's  board of directors in April 1994. Dr.
Hood has maintained a private  optometry  practice in the Denver,  Colorado area
since 1972. Dr. Hood graduated from the Pacific  University College of Optometry
in 1968.

      THOMAS P. LEWIS (42) has served as the Company's  President  since January
1990 and as its Chief  Executive  Officer since March 1, 1991. From June 1988 to
December  1989,  he served as  Executive  Vice  President,  and Chief  Operating
Officer.  Mr. Lewis has been the Company's  Secretary since June 1986. From June
1986, until the merger with Omega Health Services, Inc., in June 1988, he served
as the Company's  President and Chief Executive Officer.  He has been a director
since June 1986.  From June 1985 to June 1986, Mr. Lewis served as the Company's
Vice President.

      ANDREW W. MILLER (53) has served as the Company's Chairman since September
1990 and has been a principal  shareholder of the Company since 1986. Mr. Miller
served as the Company's  Chief  Executive  Officer from September 30, 1990 until
March 1,  1991.  Since  1989,  Mr.  Miller has served as  Chairman  of  American
HealthMark, Inc., a hospital ownership and management corporation and since 1996
has served as chairman and chief executive officer of Women's Health Partners, a
physician practice management company focused on obstetrics and gynecology.  Mr.
Miller also served as a director of Surgical Care Affiliates,  Inc. ("SCA"),  an
owner and operator of  outpatient  health care  facilities,  from 1987 until its
merger with HealthSouth,  Inc. in 1996. Mr. Miller served as President and Chief
Executive  Officer of SCA from its  founding in 1982 until May 1987 and from May
1987  until 1990  served as its Vice  Chairman  and  Chairman  of the  Executive
Committee.  Mr.  Miller is also a director of  Healthwise  of America,  Inc.,  a
former affiliate of SCA until its acquisition by United  Healthcare in 1996. Mr.
Miller was a Senior Vice President of Hospital  Corporation  of America  ("HCA")
and President of HCA  Management  Company  ("HMC"),  a division of HCA, prior to
leaving  HCA and  founding  SCA in 1982.  Mr.  Miller  was with HCA for 12 years
starting in 1970. Mr. Miller is a certified  public  accountant and prior to his
association with HCA, he was employed by a national accounting firm.

      HERMAN L. TACKER,  O.D. (58) has served as a director of the Company since
May 1989.  Previously,  he was a director of Omega Health  Services,  Inc.  from
October  1985,  until it merged with the Company in June 1988.  From 1972 to the
present,  Dr.  Tacker has  conducted a private  optometric  practice in Memphis,
Tennessee,  and has served as a Professor at the Southern  College of Optometry.
He  graduated  from  Southern  College of Optometry in 1965 and in 1969 earned a
M.S. Degree in Education from Indiana University.

                                       17

<PAGE>

                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

      The federal securities laws require the Company's  directors and officers,
and persons who own more than ten percent of a registered class of the Company's
equity securities,  to file with the Securities and Exchange  Commission initial
reports of ownership  and reports of changes in ownership of any  securities  of
the Company. To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and representations  that no other reports
were  required,  during the fiscal  year ended  December  31,  1996,  all of the
Company's  officers and directors  made all required  filings,  except that each
director and officer filed one late annual report on Form 5.

ITEM 10.  EXECUTIVE COMPENSATION

      The following  table shows the  aggregate  cash  compensation  paid by the
Company to (i) the chief executive  officer,  and (ii) the executive officers of
the Company for the years ended December 31, 1996, 1995, and 1994.

<TABLE>
<CAPTION>

                                                         Annual Compensation
                                                         -------------------
                                                                                      Long Term
                                                                    Other Annual      Compensation
Name and Position                  Year    Salary ($)    Bonus ($)  Compensation ($)  Options (#)
-----------------                  ----    ----------    ---------  ----------------  -----------
<S>                                <C>       <C>          <C>              <C>              <C>
Thomas P. Lewis                    1996      104,000      14,426          -0-              -0-
President and Chief Executive      1995      104,000       6,000        8,335(1)           -0-
Officer                            1994       96,000       8,500        8,335(1)           -0-

Ronald L. Edmonds                  1996       92,000       9,617          -0-            25,000
Executive Vice President and       1995       92,000       4,000          -0-              -0-
Chief Financial Officer            1994       85,000       7,000          -0-              -0-

Cassandra T. Speier                1996       89,000        -0-           -0-            25,000
Senior Vice President -            1995       86,833       1,250          -0-              -0-
Center Operations                  1994       38,958        -0-           -0-            15,000

Randall N. Reichle, O.D.           1996       84,000      52,115          -0-             5,000
Vice President and                 1995       84,000      46,333          -0-              -0-
National Optometric Director       1994       82,500      37,765          -0-              -0-

Donald A. Hood, O.D.               1996       85,000      54,959          -0-              -0-
The Eye Health Network             1995       85,000      25,000          -0-              -0-
President and  Chief Executive     1994       85,000      39,654          -0-            50,000
Officer

(1) In January 1990, the Company entered into a stock bonus arrangement with Mr. Lewis,  pursuant
to which Mr. Lewis was issued 1,667 shares on each January 1, for five years,  commencing January
1, 1991,  provided  Mr.  Lewis was an  employee  of the  Company on such  dates.  The stock bonus
arrangement was partial compensation for Mr. Lewis' relocation to Memphis, Tennessee.

</TABLE>








                                       18

<PAGE>

<TABLE>
<CAPTION>

                            Option Grants in 1996(1)
                            ------------------------
                                                                                    Potential Realizable
                                                                                 Value at Assumed Rates of
                                  % of Total Options   Exercise                    Stock Appreciation for
                        Options       Granted to         Price                          Option Term
Name                    Granted    Employees in 1996    ($/Sh)   Expiration Date     5%($)       10%($)
----                    -------    -----------------    ------   ---------------     -----       ------
<S>                     <C>               <C>            <C>      <C>               <C>          <C>    
Ronald L. Edmonds       25,000            20%            $5.75    August, 2002      48,889       110,912
Cassandra T. Speier     25,000            20%            $5.75    August, 2002      48,889       110,912
Randall N. Reichle       5,000            4%             $5.75    August, 2002       9,778       22,182


                       Aggregated Option Exercises in 1996(1) and Year end Option Values(2)
                       --------------------------------------------------------------------


                               Number of Unexercised Options    Value of Unexercised In-The-Money Options
                                        at Year End                          at Year End ($)
Name                             Exercisable/Unexercisable            Exercisable/Unexercisable (2)
----                             -------------------------            -----------------------------
<S>                                    <C>                                  <C>        
Thomas P. Lewis                        21,667/18,333                        $78,650/$66,550
Ronald L. Edmonds                      12,667/35,333                        $45,980/$59,510
Randall N. Reichle, O.D.                3,667/12,333                        $13,310/$31,020
Donald A. Hood, O.D.                        0/50,000                             $0/$140,000
Cassandra T. Speier                         0/40,000                            $0/$53,950

(1)  During 1996, no options were exercised by any executive officer.

(2)  Option values are based on a December 31, 1996 market price per share of $6.63.

</TABLE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      As of March 1, 1997,  the Company's  records  indicated that the following
number of shares were beneficially owned by (i) each person known by the Company
to  beneficially  own more than 5% of the Company's  shares;  (ii) directors and
persons nominated to become directors of the Company and executive officers; and
(iii) directors and officers of the Company as a group.

<TABLE>
<CAPTION>
                 Name of Beneficial Owner            Amount and Nature of     Percent of Class(1)
                 ------------------------           Beneficial Ownership (1)  -------------------
                                                    ------------------------   
<S>                                                             <C>               <C>    
(i)   The Dreyfus Corporation
      c/o Mellon Bank Corporation
      One                         
      Mellon Bank Center
      Pittsburgh,  PA  15258                                    650,000            8.20%

(ii)  Andrew W. Miller(2)                                       324,992            4.10%

      Herman L. Tacker, O.D.(3)                                 133,553            1.68%

      Thomas P. Lewis(4)                                        152,689            1.93%

      Ronald L. Edmonds(5)                                       15,516            0.20%

      Donald A. Hood, O.D.                                       80,038            1.01%

      Randall N. Reichle, O.D.(6)                                10,393            0.18%

      Cassandra T. Speier                                           -0-             -0-

(iii) Directors and Executive Officers as a group               720,949            9.09%
      (7 persons)(7)
</TABLE>
                                       19

<PAGE>


(1)   Unless otherwise  indicated,  beneficial ownership consists of sole voting
and investing power based on 7,926,935 shares issued and outstanding,  including
options and  warrants to purchase  1,049,623  shares  which are  exercisable  or
become exercisable within 60 days.

(2)   Included in Mr. Miller's shares are options to purchase 10,000 shares.

(3)   Of the total of  133,553  shares  shown,  16,875  are held  jointly by Dr.
Tacker  and his wife,  Wilma R.  Tacker.  Included  in Dr.  Tacker's  shares are
options to purchase 11,667 shares.

(4)   Included in Mr. Lewis' shares are options to purchase 21,667 shares.

(5)   Included in Mr. Edmond's shares are options to purchase 12,667 shares.

(6)   Included in Mr. Reichle's shares are options to purchase 3,667 shares.

(7)   Included in the ownership of directors  and executive  officers as a group
are  options  to  purchase  59,667  shares,  which  are  exercisable  or  become
exercisable within 60 days.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The Company has, and expects to have,  transactions in the ordinary course
of its business with directors and officers of the Company and their affiliates,
including  members of their  families  or  corporations,  partnerships  or other
organizations  in which such officers or directors have a controlling  interest,
on  substantially  the same  terms  (including  price,  or  interest  rates  and
collateral)  as those  prevailing at the time for comparable  transactions  with
unrelated parties.  The Company has an agreement to perform management  services
for Cathleen M. Schanzer,  M.D., the Medical Director for the Company's  Memphis
Center.  Dr. Schanzer is the wife of the Company's  president,  Thomas P. Lewis.
The management  agreement  includes payments to Dr. Schanzer equal to 35% of the
cash  receipts  of the  practice,  but with  minimum  payments  to her  totaling
$200,400 per year. Dr. Schanzer received approximately $389,000 in 1996 pursuant
to the management agreement.

      On March 13, 1996,  the Company  acquired  the assets of an  ophthalmology
practice known as Capital Eye Center located in Tallahassee, Florida and entered
into a long-term management agreement with the selling physician's  professional
corporation. In addition, the Company acquired all of the stock of an ambulatory
surgery center associated with the practice known as Capital Eye Surgery Center.
The total consideration for these transactions included cash of $2 million and a
$1.4 million 7% convertible subordinated note due in 60 monthly installments. In
connection with this  transaction,  the Company obtained bridge financing in the
form of a 12% $2.5 million subordinated note. The financing was obtained from an
affiliate of the Company's chairman of the board, Andrew W. Miller. The note was
repaid June 12, 1996 with the proceeds of the sale of preferred stock.
    















                                       20

<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(1)  Exhibits
     --------
Exhibit
Number            Description
------            -----------

3.1   Articles of Incorporation*
3.2   Amendment to Articles of Incorporation**
3.3   Bylaws*
4.1   Form of Common Stock Certificate*
4.2   Certificate of Designation of Series A Preferred Stock **
11    Statement Re:  Computation of Per Share Earnings
22    Subsidiaries of the Registrant
23    Consent of Independent Public Accountants
27    Financial Data Schedule (Electronic filing only)

*     Incorporated  by  reference  to  exhibits  filed  with the  Registrant's
      Registration Statement on Form S-18, Registration No. 33-35262-A.

**    To be filed by  amendment.


(2)  Reports on  Form 8-K
     --------------------
        
The Company filed a current  report on Form 8-KA on November 25, 1996.  The Form
8-KA  included  the  financial   statements  required  in  connection  with  the
acquisition of substantially  all of the assets of EyeCare and  SurgeryCenter of
North Texas, P.A. and the formation of SurgEyeCare General Partnership.
































                                       21


<PAGE>


                                   SIGNATURES

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

   
                                          OMEGA HEALTH SYSTEMS, INC.
                                          By s/s Thomas P. Lewis
                                             -----------------------------
                                          Ronald L. Edmonds 
                                          Executive Vice President
                                          and Chief Financial Officer 

                                          Date    April 29, 1997
                                               ----------------------------
    















































                                       22


<PAGE>




                         Independent Auditors' Report
                         ----------------------------



The Board of Directors
Omega Health Systems, Inc.

We have audited the  accompanying  consolidated  balance  sheets of Omega Health
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the years in the  three-year  period  ended  December  31,  1996.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position  of Omega  Health
Systems, Inc. and subsidiaries at 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.



                              KPMG Peat Marwick LLP


Memphis, Tennessee
March 13, 1997

























                                       23


<PAGE>


                  OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                          December 31, 1996 and 1995



                   
                   
                   Assets                               1996            1995
                   ------                               ----            ----
                   
Current assets:
      Cash                                          $2,943,617        2,735,556
      Patient accounts receivable, net of
         allowances for contractualadjustments
         and doubtful accounts of $1,760,000 and
         $1,674,000 in 1996 and 1995, respectively   5,990,723        3,785,063
      Other receivables                                484,460          617,585
      Prepaid expenses and other assets                534,661          268,964
                                                    ----------       ----------
                                                
            Total current assets                    9,953,461        7,407,168

Equipment, furniture and fixtures (notes 3 and 4):
      Owned                                          9,254,482        7,211,780
      Held under capital lease                       2,542,029        1,542,439
                                                    ----------       ----------
                                                    11,796,511        8,754,219
      Less accumulated depreciation                 (5,965,932)      (5,145,756)
                                                    ----------       ----------

            Net equipment, furniture and fixtures    5,830,579        3,608,463

Intangible assets, net of amortization of $411,536
   and $114,709 in 1996 and 1995, respectively
   (note 2)                                         10,513,937          452,532
Other assets (note 5)                                1,141,580          272,232
                                                    ----------       ----------
                                              
                                                   $27,439,557       11,740,395
                                                   ===========       ==========
















See accompanying notes to consolidated financial statements.
  
                                     24




<PAGE>


                  OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                    Consolidated Balance Sheets, Continued


      Liabilities and Stockholders' Equity             1996             1995
      ------------------------------------             ----             ----

Current liabilities:
      Accounts payable                            $  1,407,647        1,884,968
      Accrued expenses                               1,391,549        1,421,235
      Eye care claims payable                        1,176,068        1,319,635
      Current installments of obligations under
         capital leases and long-term debt (notes
         3 and 4)                                    1,205,060        1,555,406
                                                  ------------      -----------

            Total current liabilities                5,180,324        6,181,244

Obligations under capital leases, excluding
    current installments (note 3)                    1,367,718        1,136,413
Long-term debt, excluding current installments
    (note 4)                                         5,837,456          461,491
                                                  ------------      -----------

            Total liabilities                       12,385,498        7,779,148

Minority interest in partnership                        10,896                -

   
Stockholders' equity (note 7):
      Preferred stock; no par value, 1,000,000
         shares authorized; issued 59 shares                 
           in 1996                                     485,049               -
      Common stock, par value of $0.06;
         authorized 25,000,000 shares; issued
         6,865,787 shares in 1996 and 4,706,175        411,946         282,369
         shares in 1995
      Additional paid-in capital                    22,685,778      12,047,891
      Accumulated deficit                           (8,539,610)     (8,369,013)
                                                 -------------    ------------

            Total stockholders' equity              15,043,163       3,961,247

Commitments and contingencies (notes 3 and 9)
                                                 -------------    ------------
 
                                                   $27,439,557     11,740,395
                                                 =============    ============
    













See accompanying notes to consolidated financial statements.

                                       25




<PAGE>

                  OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                        1996            1995            1994
                                                        ----            ----            ----
<S>                                                 <C>               <C>             <C>       
Center net revenues                                 $ 25,576,743      19,752,926      17,598,777
Managed care revenues                                 14,642,992      10,546,467       8,060,841
Supply and equipment sales                             2,084,878       1,845,744       1,094,250
Management and other revenues                            432,580         790,334         882,199
                                                    ------------    ------------    ------------
         Total revenues                               42,737,193      32,935,471      27,636,067

Center operating expenses                             21,675,900      17,814,960      15,992,923
Eye care claims                                       11,932,085       7,589,390       5,977,117
Selling, general, and administrative expenses          5,593,414       4,835,891       3,986,001
Cost of sales                                          1,415,800       1,487,879         904,795
Provision for doubtful accounts                          367,037         444,810         505,421
                                                    ------------    ------------    ------------
         Earnings  from operations                     1,752,957         762,541         269,810

Non-operating revenue (expense):
      Interest income                                     60,010          59,045          29,402
      Interest expense                                  (628,730)       (290,978)       (234,365)
      Loss on disposal of eye centers                       --          (209,290)        (50,840)
      Other                                              168,197         159,556          98,400
                                                    ------------    ------------    ------------
            Earnings before minority interest          1,352,434         480,874         112,407

Minority interest in income of partnerships              (49,308)           --              --
                                                    ------------    ------------    ------------
         Net earnings                                  1,303,126         480,874         112,407
Preferred dividends, principally those 
           imputed as described in note 1 (l)         (1,473,723)           --              --
                                                    ------------    ------------    ------------
Earnings (loss) available to common
           shareholders                             $   (170,597)        480,874         112,407
                                                    ============    ============    ============

Earnings (loss) per common share                    $      (0.03)           0.10            0.02
                                                    ============    ============    ============

</TABLE>












See accompanying notes to consolidated financial statements.

                                       26



<PAGE>

<TABLE>
<CAPTION>
                                          OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                                        Consolidated Statements of Stockholders' Equity

                                         Years ended December 31, 1996, 1995 and 1994


                                                        Additional     Unamortized                 Total
                                  Preferred  Common       paid-in      Accumulated   financing   stockholders'
                                     Stock   stock        capital        deficit        cost         equity
                                     -----   -----        -------        -------        ----         ------
<S>                             <C>        <C>          <C>           <C>             <C>          <C>
Balances at December 31,                   
    1993                       $       -     268,811    11,305,830     (8,962,294)    (77,863)      2,534,484
                                           
Issuance of 197,461 shares                 
     of common stock                   -      11,848       664,122             -           -          675,970
                                                                                               
Net earnings                           -          -             -         112,407          -          112,407
                                                                                               
Amortization of financing                  
     costs                             -          -             -              -       77,863          77,863
                               ----------  --------     ----------     ----------    --------      ----------
                                           
Balances at December 31,                   
     1994                              -     280,659    11,969,952     (8,849,887)         -        3,400,724
                                                                                               
Issuance of 28,496 shares                  
     of common stock                   -       1,710        77,939             -           -           79,649
                                           
Net earnings                           -          -            -          480,874          -          480,874
                               ----------  --------     ----------     ----------    --------      ----------
                                           
Balances at December 31,                   
     1995                              -     282,369    12,047,891     (8,369,013)         -        3,961,247
                                           
Issuance of 729 shares                     
     of preferred stock         6,494,292         -             -              -           -        6,494,292
                                                                                               
Issuance of 1,370,097                      
     shares of common stock                
     with conversion of 670                
     shares of preferred stock (6,009,243)    82,206     5,927,037             -           -               -
                                                                                               
Issuance of 789,515 shares                 
     in common stock                   -      47,371     3,237,127             -           -        3,248,498

In-kind dividends on 
     preferred stock                   -          -        187,252       (187,252)         -               -

Imputed dividends on
     preferred stock                   -          -      1,286,471     (1,286,471)         -               - 
Net earnings                           -          -             -       1,303,126          -        1,303,126
                               ----------  --------     ----------     ----------    --------      ---------- 
                                           
Balances at December 31,
     1996                      $  485,049   411,946     22,685,778     (8,539,610)         -       15,043,163
                               ==========  ========     ==========     ==========    ========      ==========  
</TABLE>                       















See accompanying notes to consolidated financial statements.

                                                             27


<PAGE>
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
                                                                             1996           1995           1994
                                                                             ----           ----           ----
<S>                                                                      <C>              <C>           <C>    
Cash flows from operating activities:
    Net earnings                                                         $ 1,303,126        480,874        112,407
    Adjustments  to  reconcile  net  earnings to net
      cash  provided by (used in) operating activities:
         Depreciation and amortization                                     1,232,204      1,129,606      1,212,674
         Provision for doubtful accounts                                     367,037        444,810        505,421
         Minority interest in partnership                                     49,308           --             --
         Loss on disposal of eye care centers                                   --             --           50,840
         Decrease (increase), net of acquisition effects, in:
             Accounts receivable                                          (1,724,405)      (900,173)    (1,183,448)
             Other receivables                                               133,125       (197,356)       (38,259)
             Prepaid expenses and other current assets                      (683,631)         8,199        145,789
         Increase (decrease), net of acquisition effects, in:
              Accounts payable and accrued expenses                         (572,920)       582,308        157,014
              Eye care claims payable                                       (143,567)       322,236        462,534
                                                                         -----------    -----------    -----------

                  Net cash provided by (used in)  operating activities       (49,723)     1,870,504      1,424,972
                                                                         -----------    -----------    -----------

Cash flows from investing activities:
    Capital expenditures                                                    (720,790)      (914,287)      (779,345)
    Acquisition of assets of physician practices (note 2)                 (7,128,466)          --             --   
    Investment in Clearvision, Inc.                                         (500,000)          --             --
    Other                                                                    (81,180)       (85,525)       (14,445)
                                                                         -----------    -----------    -----------

                  Net cash used in investing activities                   (8,430,436)      (999,812)      (793,790)
                                                                         -----------    -----------    -----------

Cash flows from financing activities:
    Financing costs incurred                                                 (50,400)          --             --
    Principal payments on long-term debt                                  (5,405,542)      (718,200)      (708,342)
    Principal payments on obligations under capital leases                  (497,889)      (228,158)      (232,504)
    Principal payments on subordinated debt                                 (307,043)          --             --
    Principal payments on bridge financing                                (2,500,000)          --             --
    Proceeds from issuance of bridge financing                             2,500,000           --             --
    Proceeds from issuance of debt                                         8,486,715        572,440        627,619
    Proceeds from issuance of common stock                                     6,499           --          740,136
    Proceeds from issuance of preferred stock                              6,494,292           --             --
    Distributions to minority interest                                       (38,412)          --             --
                                                                         -----------    -----------    -----------

                  Net cash provided by (used in) financing activities      8,688,220       (373,918)       426,909
                                                                         -----------    -----------    -----------

                  Net increase in cash                                       208,061        496,774      1,058,091

Cash at beginning of year                                                  2,735,556      2,238,782      1,180,691
                                                                         -----------    -----------    -----------

Cash at end of year                                                      $ 2,943,617      2,735,556      2,238,782
                                                                         ===========    ===========    ===========
</TABLE>












See accompanying notes to consolidated financial statements.

                                                                28


<PAGE>


--------------------------------------------------------------------------------
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994




(1)   Summary of Significant Accounting Policies
      ------------------------------------------
        
      (a)   Nature of Operations
            --------------------

            The Company's  significant  operations  involve the  development  of
            regional eye care delivery systems, which may include (1) developing
            and managing  ophthalmological  centers  owned by the  Company,  (2)
            developing  networks  of  ophthalmologists  and  optometrists,   (3)
            enhancing and managing  pre-existing  practices of ophthalmologists,
            and (4) negotiating and administering managed care contracts.

      (b)   Principles of Consolidation
            ---------------------------
 
            The consolidated  financial  statements  include the accounts of the
            Company  and  its   wholly-owned   subsidiaries.   All   significant
            intercompany accounts and transactions have been eliminated.

      (c)   Restricted Cash Balances
            ------------------------

            Under certain  managed care  agreements,  the Company is required to
            maintain cash reserves of approximately $1.3 million.  However, such
            reserves are not limited as to use by the related agreements.

      (d)   Equipment, Furniture and Fixtures
            ---------------------------------

            Equipment,  furniture,  and fixtures are stated at cost.  Equipment,
            furniture and fixtures  under capital leases are stated at the lower
            of the present value of minimum  lease  payments at the beginning of
            the lease term or fair value at the inception of the lease.

            Depreciation  on equipment,  furniture and fixtures is calculated on
            the  straight-line  method over the  estimated  useful  lives of the
            assets ranging from five to ten years.  Leasehold  improvements  are
            amortized  on the  straight-line  method over the  respective  lease
            term.

      (e)   Business and Credit Concentrations
            ----------------------------------
 
            The  Company  provides  health  care  services  through its eye care
            centers. The Company grants credit to patients, substantially all of
            whom are local residents to each center.  The Company generally does
            not require  collateral  or other  security in  extending  credit to
            patients;  however,  it  routinely  obtains  assignment  of  (or  is
            otherwise  entitled to receive)  patients'  benefits  payable  under
            their health insurance programs,  plans or policies (e.g.  Medicare,
            Medicaid, Blue Cross and commercial insurance policies).




                                       29

<PAGE>
--------------------------------------------------------------------------------
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994



            The mix of receivables  from patients and  third-party  payors as of
            December 31, 1996 and 1995 follows:

                                                 1996     1995
                                                 ----     ----
                     Medicare                     46%      50%
                     Medicaid                      8%       9%
                     Other third-party payors     38%      32%
                     Patients                      8%       9%
                                                 ----     ----

                                                 100%     100%
                                                 ====     ==== 

            Contracts with two managed care organizations comprised 61%, 69% and
            72% of managed care  revenues in the years ended  December 31, 1996,
            1995 and 1994, respectively.  No other single managed care  contract
            comprised more than 9% of such revenues during any of the respective
            years.

      (f)   Center Net Revenues
            -------------------

            Center net revenues are gross charges for patient services  rendered
            recorded net of estimated third-party payor contractual adjustments.
            The  physicians  associated  with the Company have  agreements  with
            governmental and other third-party  payors that provide for payments
            at amounts  different  from  their  established  rates.  Contractual
            adjustments under third-party  reimbursement  programs represent the
            difference  between the billings at  established  rates for services
            and amounts  reimbursed by  third-party  payors.  Services  rendered
            under the  Medicare  program,  the largest  third-party  payor,  are
            reimbursed   based  upon  a  predetermined   fee  schedule  for  the
            procedures performed.

      (g)   Managed Care Revenues
            ---------------------

            Managed  care  revenues  consist of  capitated  and  fee-for-service
            amounts  received from health  maintenance  organizations  and other
            third-party  payors for eye care  managed care  programs.  Under its
            agreements  with  participating  eye  care  providers,  the  Company
            retains a percentage of such payments as an  administrative  fee and
            distributes  the balance to the  providers for eye care claims under
            the programs. Managed care revenues also include fees for developing
            and administering managed care networks.

      (h)   Supply and Equipment Sales
            --------------------------

            Supply  and  equipment  sales are  comprised  primarily  of sales of
            ophthalmic supplies and equipment to hospitals,  ambulatory surgical
            centers and eye care providers.  OMS also operates a mobile surgical
            service which provides ophthalmic surgical equipment and supplies to
            surgical  facilities,  including  hospitals and  ambulatory  surgery
            centers on a per-case  basis.  The costs  related to these sales are
            included in cost of sales.


                                       30

<PAGE>
--------------------------------------------------------------------------------
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994

      (i)   Management and Other Revenues
 .            -----------------------------

            Management and other revenues are comprised primarily of fees earned
            for management of ophthalmologists'  practices.  The management fees
            are  monthly  charges  fixed by  contractual  arrangements  with the
            respective ophthalmologists.  Receivables related to management fees
            are included in other receivables.

      (j)   Intangible Assets
            -----------------
 
            Intangible  assets  arise  from  business  acquisitions  made by the
            Company.  The excess of cost of purchased assets over the fair value
            of net assets acquired is amortized straight-line over terms ranging
            from  ten  to  forty  years,  generally  the  term  of  the  related
            management  agreement.  The  recoverability  of intangible assets is
            reevaluated when warranted by business events and circumstances. The
            Company  believes that no impairment of such assets has occurred and
            that no revisions of estimated useful lives are currently necessary.

      (k)   Income Taxes
            ------------

            The  asset  and  liability  method is used in  accounting for income
            taxes.  Under this method, deferred  tax  assets and liabilities are
            determined based on  differences between financial reporting and tax
            bases of assets and liabilities and are  measured  using the enacted
            tax rates and laws  that  will be in effect when the differences are
            expected to reverse.

      (l)   Earnings  (Loss) Per Share
            --------------------------
 
            The earnings (loss) per  common  share  for 1996, 1995 and 1994 were
            computed by dividing  earnings, after  giving  effect to in-kind and
            imputed  preferred  dividends,  by the  weighted  average number  of
            shares of common stock  and  common  stock  equivalents  outstanding
            during  the  year  (5,598,926,  4,804,858   and   4,590,991  shares,
            respectively).
   
            On March  28,  1997,  a formal  announcement  from the  staff of the
            United States Securities and Exchange  Commission was made available
            which impacted the Company's  calculation of earnings per share with
            respect to the May 1996  issuance  of  convertible  preferred  stock
            described in note 7. This Announcement  generally  required that the
            Company impute and reognize a preferred  dividend for the difference
            between the conversion  price to preferred  shareholders at issuance
            and the value of the related  common stock solely as measured in the
            public market at that date.
    
            The Company has  followed the  guidance in the  announcement  in the
            calculation  of  earnings  (loss)  per  share  in  the  accompanying
            consoldiated  financial  statements.   Absent  the  impact  of  this
            Announcement, the Company would have reported earnings per share for
            1996 of $0.20.

      (m)   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
                                           31

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                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994

            liabilities  and disclosure of contingent  assets and liabilities at
            the date of the  financial  statements  and the reported  amounts of
            revenue and expenses  during the reporting  period.  Actual  results
            could differ from these estimates. In particular,  the liability for
            eye care claims payable is necessarily  based on such estimates and,
            accordingly,  amounts ultimately paid will be more or less than such
            estimates.

      (n)   Financial Instruments
            ---------------------

            Statement of Financial  Accounting  Standards No. 107,  "Disclosures
            about  Fair  Value  of  Financial  Instruments,"  requires  that the
            Company disclose estimated fair values for its financial instruments
            (as  defined).  The  Company's  financial  instruments   principally
            consist  of  cash,  net  receivables, accounts  payable  and various
            debt  instruments.   Due  to  their  short-term   nature,  the  fair
            values  of  net receivables and accounts payable  approximate  their
            carrying values.  The  fair  value  of  the various debt instruments
            has been estimated  using interest  rates  currently  offered to the
            Company for  borrowings  having  similar  character,  collateral and
            duration.  The  fair  value  of  such  instruments  approximates the
            Company's carrying amounts.

      (o)   Accounting Changes
            ------------------
 
            Effective   January  1,  1996,  the  Company  adopted  Statement  of
            Financial  Accounting  Standards (SFAS) No. 121, "Accounting for the
            Impairment  of  Long-Lived  Assets and for  Long-Lived  Assets to Be
            Disposed  Of."  SFAS   121  requires   that   long-lived  assets and
            certain identifiable  intangibles to be held and used by the Company
            be  reviewed   for   impairment   whenever   events  or  changes  in
            circumstances  indicate that the carrying amount of an asset may not
            be  recoverable.  This  statement  requires  that  the  majority  of
            long-lived  assets  and  certain  identifiable   intangibles  to  be
            disposed  of be  reported  at the lower of  carrying  amount or fair
            value less cost to sell.  Implementation  of this  statement did not
            have a  material  impact  on the  Company's  consolidated  financial
            statements.

            Also effective  January 1, 1996,  the Company  adopted SFAS No. 123,
            "Accounting for Stock Based  Compensation", which permits   entities
            to recognize as  expense  over the vesting  period the fair value of
            all stock-based  awards on the date of grant.  Alternately, SFAS 123
            allows  entities  to  continue to apply the provisions of APB 25 and
            provide pro forma net  earnings  and pro forma  earnings  per  share
            disclosures  for  employee  stock  option  grants  made  in 1995 and
            future years as if the fair-value-based  method  defined in SFAS 123
            has been  applied.  The Company has elected to continue to apply the
            provisions of APB 25 and provide the pro forma disclosure provisions
            of SFAS 123.

            The Financial Accounting Standards Board  has  issued  SFAS No. 128,
            "Earnings per Share,"  and  SFAS  No.129, "Disclosure of Information
            about  Capital  Structure."  SFAS  128   establishes  standards  for
            computing and presenting  earnings per share and applies to entities
            with publicly held common stock. SFAS 129 establishes  standards for
            disclosing  information  about  an  entity's  capital  structure and
            applies  to  all entities.   Management  believes that the Company's
            adoption  of  these  standards,  when  effective,  will  not  have a
            significant   impact   on   the  Company's   consolidated  financial
            statements.
                                           32

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                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994

      (p)   Reclassifications
            -----------------
 
            Certain prior year balances have been reclassified to conform to the
            1996 presentation.

(2)   Mergers, Acquisitions and Divestitures
      --------------------------------------
  
      In March 1994, the Company  acquired all of the  outstanding  stock of The
      Eye Health  Network,  Inc.,  a Denver  based eye  health  and vision  care
      provider  organization.  The Company  issued  787,500 shares of its common
      stock to the former  shareholders  of The Eye Health Network to effect the
      acquisition,  which has been accounted for as a pooling-of-interests.  All
      previously reported financial information has been restated to give effect
      to the pooling.

      Details of revenue and earnings of the Company and The Eye Health  Network
      for the three months prior to consummation of the combination  included in
      the 1994 combined net earnings are presented below.

                                                Total            Net       
                                              Revenues     Earnings (Loss) 
                                              --------     --------------- 
                                                                           
           Omega Health Systems, Inc.        $4,486,357       (107,082)    
           The Eye Health Network, Inc.       1,675,200        129,759     
                                             ----------       --------     
           Combined                          $6,161,557         22,677     
                                             ==========       ========     
   
      On January 2, 1996, the Company  completed the acquisition of the stock of
      Warren R.  Berrie,  MD,  PC, of  Nashville,  Tennessee.  This  acquisition
      included substantially all of the assets of the medical practice of Warren
      R. Berrie, MD.  Simultaneously  with the acquisition,  the Company entered
      into  a  five  year  management  agreement  with  Dr.  Berrie.  The  total
      consideration for the acquisition of the assets of the Berrie practice was
      $650,000,  of which $50,000 was paid in cash, with the balance in the form
      of a five year subordinated note. The note is due in monthly installments,
      bears interest at 7% and is convertible  into common stock at a conversion
      price of $5.89 per share.

      On March 12, 1996, the Company  completed the acquisition of the assets of
      the  ophthalmology  practice  of  Paul R.  Garland,  MD,  of  Tallahassee,
      Florida. In addition, the Company acquired all of the capital stock of the
      surgery center associated with Dr. Garland's practice, Capital Eye Surgery
      Center, Inc. Simultaneously with the acquisition, the Company entered into
      a twenty-five year management  agreement with Dr.  Garland's  professional
      corporation. The total consideration for the Garland transactions was $3.4
      million,  of which $2 million  was paid in cash,  with the  balance in the
      form  of a five  year  subordinated  note.  The  note  is  due in  monthly
      installments,  bears interest at 7% and is  convertible  into Omega common
      stock at a conversion  price of $6.50 per share.  In  connection  with the
      Garland acquisition,  the Company obtained bridge financing in the form of
      a 12% $2.5 million  subordinated  note. The financing was obtained from an
      affiliate of the Company's chairman of the board. The note was repaid June
      12, 1996 with the proceeds of the sale of preferred stock.
                                      33


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                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994

      On  September  10,  1996,  the  Company   completed  the   acquisition  of
      substantially  all of the net assets of EyeCare and SurgeryCenter of North
      Texas,  P.A.  and  ECSC  Retina,  P.A.,  two  Dallas,  Texas  professional
      associations which practice ophthalmology,  in exchange for 771,429 shares
      of the common stock. Omega Health Systems of North Texas, Inc. manages the
      practices pursuant to long-term management agreements.

      Also on September 10, 1996, a subsidiary  of the Company and  SurgEyeCare,
      Inc.  entered into a  partnership  agreement to form  SurgEyeCare  General
      Partnership  (the  "Partnership").  Under  the  terms  of the  partnership
      agreement,  the Company contributed $4,550,000 cash to the Partnership and
      SurgEyeCare,  Inc.  contributed assets with an agreed value of $6,100,000.
      After the  initial  capital  contributions,  the  Partnership  distributed
      $4,476,438 in cash to  SurgEyeCare,  Inc.  After these  transactions,  the
      Company owns a 75% interest in the Partnership and SurgEyeCare,  Inc. owns
      a 25%  interest.  Under  the  terms  of  the  partnership  agreement,  the
      subsidiary of the Company is designated as managing  partner.  The Company
      financed the contribution to the  Partnership,  in part, with the proceeds
      of a $3,280,000  acquisition  term loan from a commercial  bank.  The loan
      bears interest at the bank's prime rate plus 50 basis points and is due in
      48  monthly  installments  of  principal  and  interest.   This  loan  was
      refinanced in February 1997.

      The following sets forth certain pro forma  financial  information for the
      twelve months ended December 31, 1996 and 1995 as if the  Tallahassee  and
      Dallas  transactions,  which were  accounted  for as  purchases,  had been
      completed as of January 1, 1995:

   
                                                    1996            1995   
                                                    ----            ----   
          Revenues                             $46,653,440      30,651,000 
          Net earnings                           1,776,670       1,094,000 
          Net earnings per common share                .03             .20 
          Weighted average shares                6,114,621       5,465,781 
    
                                                                           



















                                       34


<PAGE>
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                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994


(3)   Leases

      The Company and its wholly owned  subsidiaries are obligated under capital
      leases for  equipment  and  furniture  and fixtures that expire within the
      next five years. The Company and its wholly owned  subsidiaries  also have
      several  noncancellable  operating  leases for  equipment and office space
      that expire within the next ten years.

      Future minimum lease payments under  noncancellable  operating  leases and
      the present value of future minimum  capital lease payments as of December
      31, 1996 are:

                                                      Capital       Operating
                                                       Leases         Leases
                                                       ------         ------
        Years ending December 31:
                 1997                                 $847,699      1,446,523
                 1998                                  643,981      1,099,197
                 1999                                  443,422        933,032
                 2000                                  454,127        675,852
                 2001                                   77,512        338,691
                 2002 and thereafter                         -        569,526
                                                    ----------     ---------- 
                                                    $2,466,741     $5,062,791
                                                                   ==========
        Less amount representing
        interest (at an average rate of 11%)           456,559
                                                    ----------
                                                     2,010,182
        Less current installments of
        obligations under capital leases               642,464
                                                    ----------    
        Obligations under capital leases,
        excluding current installments              $1,367,718
                                                   ===========

Total rental  expense under  operating  leases for the years ended  December 31,
1996,  1995 and 1994 was  approximately  $1,811,000,  $1,418,000 and $1,226,000,
respectively.





















                                       35


<PAGE>
--------------------------------------------------------------------------------
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994


(4)   Long-term debt

      Long-term debt at December 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
                                                                                1996              1995
                                                                                ----              ----
<S>                                                                          <C>            <C>    
         Note payable  for   physician   practice   payable  in  monthly
             installments of $81,417 including interest at prime plus 1%
             through September 2000, secured by assets
             of several centers, repaid in February 1997                     $3,099,902             -
         Subordinated note payable for physician practice payable
             in monthly installments of $27,504 including
             interest at 7% through February 2001, and
             convertible into common stock at $6.50 per share                 1,187,881             -
         Note payable under revolving credit agreement, bearing
             interest at prime plus 1%, interest due monthly,  principal
             due August 1997, secured by accounts  receivable at several
             centers.  No unused amount is available under the agreement
             at December 31, 1996, repaid in February 1997                      750,000       650,000
         Subordinated note payable for physician practice, payable
              in monthly installments of $11,881 including interest
              at 7% through January 2001, convertible into common
              common stock at $5.89 per share                                   505,076             -
         Borrowings under revolving line of credit, with interest at
             prime plus 3%,  secured by receivables at two centers,
             repaid in February 1997                                            218,345             -
         Non-interest bearing note payable for physician practice,
             payable in monthly installments of  $16,500 through
             December 1997, secured by assets of the St. Louis
             center, repaid in February 1997                                    205,500       306,704
         Unsecured note payable for physician practice, due in
             monthly installments of $8,670 including interest at
             15%, payable through May 1997                                       41,775       132,099
         Unsecured note payable, interest at 10% payable
             annually and principal due January 1996                                  -        10,000
         Various notes payable, with interest rates varying from
             6% to 9.95%, due in monthly installments including
             interest, through June 2004, secured by equipment
             with a total depreciated cost of $385,699                          332,221       437,329
         Other                                                                   59,352        89,790
                                                                            -----------    ----------
                  Total long-term debt                                        6,400,052     1,625,922
         Less current installments                                              562,596     1,164,431
                                                                            -----------    ----------
                  Long-term debt, excluding current
                  installments                                              $ 5,837,456       461,491
                                                                            ===========    ==========
</TABLE>
















                                       36

<PAGE>
--------------------------------------------------------------------------------
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994

      At December 31, 1996, the Company  classified  $1,965,531 of borrowing due
      within one year as long-term debt. The Company refinanced these amounts on
      a long-term basis through its revolving  credit  agreement on February 25,
      1997 as described in note 10.

      Maturities  of  long-term  debt  subsequent  to  December  31, 1996 are as
      follows:  1997,  $562,596;   1998,  $483,867;   1999,  $1,272,260;   2000,
      $1,342,277; and 2001, $2,739,052.

(5)   Other Assets
      ------------

      In December 1996, the Company acquired $500,000 face amount of convertible
      preferred  stock of Clearvision  Laser Centers,  Inc.  (Clearvision).  The
      preferred  stock is convertible  into common stock of Clearvision  using a
      formula based on actual sales of  Clearvision  common stock during the six
      month period ending June 30, 1997.  In  exchange  for the preferred stock,
      the Company paid $250,000 in cash and contributed  certain  marketing  and
      educational materials with an agreed value of $250,000. In addition, Omega
      received warrants to purchase an additional $250,000 in Clearvision common
      stock  at a price  based  on the  same  formula.  The  preferred  stock is
      convertible at any time after June 30, 1997.  The  warrant is  exercisable
      for a one  year  period ending  June  30,  1998.  Upon  conversion  of the
      preferred  stock,  the Company's investment is expected to represent  less
      than 5% of Clearvision's outstanding common stock and  would  therefore be
      accounted for using the cost method.

(6)  Income Taxes
     ------------
  
      No provision  for current and deferred  Federal and State income taxes was
      required  for the years  ended  December  31, 1996, 1995 and 1994.  Income
      tax expense differs from the amount computed by applying a  Federal income
      tax rate of 34% to net earnings due to the following:

<TABLE>
<CAPTION>
                                                      1996         1995         1994
                                                      ----         ----         ----
<S>                                                 <C>            <C>           <C>   
Tax expense at statutory rate                       $ 443,000      164,000       38,000
Increase (reduction) in taxes resulting from:
   Non-deductible expenses                             33,000        44,00       65,000
   Change in the valuation allowance for deferred
      tax assets                                     (476,000)    (208,000)    (103,000)
                                                    ---------    ---------    ---------
      Total                                         $    --           --           --
                                                    =========    =========    =========
</TABLE>












                                       37


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                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994


      The tax  effect of  temporary  differences  that give rise to  significant
      portions of the deferred tax assets are as follows:

<TABLE>
<CAPTION>

                                                      1996           1995           1994
                                                      ----           ----           ----
<S>                                               <C>            <C>           <C>   
Deferred tax assets:

Equipment, furniture and fixtures, principally
   due to differences in depreciation            $   215,000        172,000        309,000
Intangible assets, principally recognition
   of amortization                                   100,000        153,000        238,000
Receivables, principally due to
    allowance for doubtful accounts                  256,000        141,000        254,000
Accrued expense                                      112,000         69,000         73,000
Net operating loss carryforwards                   2,917,000      3,541,000      3,409,000
                                                 -----------    -----------    -----------
 Total gross deferred tax assets                   3,600,000      4,076,000      4,283,000

Valuation allowance                               (3,600,000)    (4,076,000)    (4,283,000)
                                                 -----------    -----------    -----------
        Net deferred tax assets                  $    --               --           --    
                                                 ===========    ===========    ============
</TABLE>


      In  assessing  the  realizability  of  deferred  tax  assets,   management
      considers  whether it is more likely than not that some  portion or all of
      the deferred tax assets will not be realized.  The ultimate realization of
      deferred tax assets is dependent  upon the  generation  of future  taxable
      income  during the periods in which  those  temporary  differences  become
      deductible.  Management  considers the scheduled  reversal of deferred tax
      liabilities,  projected future taxable income, and tax planning strategies
      in making this assessment. Based on expectations for future taxable income
      over the periods which the deferred tax assets are deductible,  management
      believes the Company has established a reasonable valuation allowance.  As
      of December  31,  1996,  the  Company had  available  net  operating  loss
      carryforwards,  subject to Internal  Revenue Code Section 382 limitations,
      of approximately $8,000,000 expiring from the year 2000 to 2007.

(7)   Stockholders' Equity
      --------------------
 
      The Company  accounts for stock options in accordance  with the provisions
      of Accounting Principles Board Opinion No 25, "Accounting for Stock Issued
      to Employees," and related interpretations (APB 25). As such, compensation
      expense is recorded on the date of grant only if the current  market price
      of the underlying stock exceeds the exercise price.

      The Company has a "1985 Stock  Option  Plan" which was made  available  to
      selected  employees,  including  officers of the Company,  directors,  key
      advisors and selected  physicians  practicing  at Company  facilities  and
      which  expired in 1994.  The plan allowed  options to be granted for up to
      450,000 shares. The following table summarizes the information about these
      stock options:

                                       38


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                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994



                                                                    
                                                               Weighted Average 
                                       Number of Shares         Exercise Price 
                                       -----------------       ----------------
       Balance at December 31, 1993          314,335                $3.27
            Granted                          145,500                 4.02
            Exercised                          4,167                 3.00
            Forfeited                          3,332                 3.00
            Expired                           22,500                 3.11
                                             -------                ----- 
       Balance at December 31, 1994          429,836                $3.54
            Granted                                -                    -
            Exercised                         20,460                 2.78
            Forfeited                         20,000                 3.00
            Expired                                -                    -
                                             -------                ----- 
       Balance at December 31, 1995          389,376                $3.60
            Granted                                -                    -
            Exercised                          4,999                 3.00
            Forfeited                         26,000                 3.67
            Expired                            2,376                 4.80
                                             -------                -----   
       Balance at December 31, 1996          356,001                $3.60

      At December 31, 1996,  the range of exercise  prices and  weighted-average
      remaining contractual life of outstanding options was $3.00-$6.50 and 2.67
      years, respectively.  At December 31, 1996 and 1995, the number of options
      exercisable was 111,167 and 26,710, respectively, and the weighted average
      exercise price of those options was $3.56 and $5.14, respectively.

      The Company  adopted the "1995 Stock Option Plan" which was made available
      to selected employees,  including officers of the Company,  directors, key
      advisors and selected  physicians  practicing at Company  facilities.  The
      plan allows options to be granted for up to 300,000 shares.  The following
      table summarizes the information about these stock options  outstanding at
      December 31, 1996 and 1995:

                                                               Weighted Average 
                                       Number of Shares         Exercise Price 
                                       -----------------       ----------------
       Balance at December 31, 1994                -                    -
            Granted                            2,500                $5.00
            Exercised                              -                    -
            Forfeited                              -                    -
            Expired                                -                    -
                                             -------                -----    
       Balance at December 31, 1995            2,500                $5.00
            Granted                          125,000                 5.73
            Exercised                              -                    -
            Forfeited                              -                    -
            Expired                                -                    -
                                             -------                -----      
       Balance at December 31, 1996          127,500                $5.72


                                       39


<PAGE>
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                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994



      At December 31, 1996,  the range of exercise  prices and  weighted-average
      remaining contractual life of outstanding options was $5.00-$5.75 and 5.47
      years,  respectively.  At  December  31,  1996  and 1995 no  options  were
      exercisable.

      The per share  weighted-average fair value of stock options granted during
      1996 and 1995 was  $4.46  and  $3.83 on the date of grant  using the Black
      Sholes   option-pricing   model   with  the   following   weighted-average
      assumptions:  1996  and 1995  -expected  dividend  yield of 0%,  risk-free
      interest rate of 6%, and an expected life of 6 years.

      Since  the  Company  applies  APB  25 in  accounting  for  its  plans,  no
      compensation  cost  has  been  recognized  for its  stock  options  in the
      consolidated  financial statements.  Had the Company recorded compensation
      cost based on the fair value at the grant date for its stock options under
      SFAS 123,  the  Company's  net  earnings and earnings per share would have
      been  reduced  by  approximately  $53,000  or $0.01  per share in 1996 and
      approximately $1,000 or $0.00 per share in 1995.

      Pro forma net  earnings  reflect  only  options  granted in 1996 and 1995.
      Therefore,  the full  impact of  calculating  compensation  cost for stock
      options  under  SFAS 123 is not  reflected  in the pro forma net  earnings
      amounts presented above because  compensation costs are reflected over the
      option's vesting period of three years and  compensation  cost for options
      granted prior to January 1, 1995 is not considered.

      In November  and  December  1989,  in  connection  with  refinancing  debt
      obligations  of the Company,  the Company agreed to issue shares of common
      stock to  shareholders  in return  for loans and loan  guarantees  made by
      these shareholders to the Company.  The primary debt obligation  resulting
      from  this  refinancing  was a  $450,000  loan  from  a  bank,  with  five
      shareholders as direct obligors  thereunder.  Those shareholders  received
      approximately  120,000 shares of common stock for their  participation  in
      the  refinancing.  The  shares  of common  stock  were  recorded  at their
      estimated  fair  market  value of  approximately  $3.00 per share with the
      offsetting  amount,  considered to be unamortized  financing  costs,  as a
      deduction from stockholders'  equity.  The unamortized  financing cost was
      amortized  using a method that  approximated  the interest method over the
      contractual term of the above loan, which matured in December 1994.

      In January 1990, the Company entered into a stock bonus  arrangement  with
      one of its  officers,  whereby  that  officer was issued  1,667  shares of
      common stock on each January 1 from 1991 through  1995,  provided  that he
      was an employee of the Company each of those dates.

      The 1991 Employee Stock Purchase Plan provides for the  implementation  of
      stock  purchases by employees of shares of the Company stock either on the
      open market or from such  available  authorized but unissued  shares.  The
      Company has reserved  50,000 shares for issuance  under the Purchase Plan.
      Each eligible  employee is granted on the grant date of each Purchase Plan
      year options to purchase  1,250 shares of the  Company's  stock during the
      Purchase Plan year. The issue price of the stock is equal to the lesser of
      (1) 85% of the market price on the  exercise  date of each  Purchase  Plan
      year or (2) 85% of the market  price on each  grant date of each  Purchase
      Plan year. As of December 31, 1996,  27,119 shares have been  purchased by
      the Plan;  and 12,494  shares were issued in 1997 for  contributions  made
      through December 31, 1996.

                                       40



<PAGE>
--------------------------------------------------------------------------------
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994

      In December 1994, the Company issued 172,643 shares of its common stock to
      a group of ophthalmologists  for $725,100.  In addition,  the Company also
      issued warrants to purchase  145,020 shares of the Company's  common stock
      at $7 per share and warrants to purchase an additional  159,523  shares of
      the Company's  common stock at $5 per share.  The warrants expire December
      29, 1997.

      On May  17,  1996,  the  Company  completed  the  sale  of  $7,290,000  in
      convertible preferred stock. Subject to certain limitations, the preferred
      stock is  convertible  into common stock at an exercise price equal to the
      lesser of $5.75 or 85% of the average bid price of the common stock at the
      time of conversion.  The preferred stock automatically converts at the end
      of three  years if not  already  converted. Until converted, the preferred
      stock has an 8% dividend,  payable in kind.  In  addition,  the  investors
      received warrants to purchase  approximately  634,000 additional shares at
      an exercise  price of $5.75.  The net proceeds  were  approximately  $6.49
      million  and were  used to repay  the  bridge  financing  incurred  in the
      Tallahassee practice acquisition,  to finance a portion of the cost of the
      Dallas transaction and for working capital. Of the 729 shares of preferred
      stock  issued,  670 shares had been  converted  into  1,370,097  shares of
      common stock at December 31, 1996.

      On  September  10,  1996,  the  Company   completed  the   acquisition  of
      substantially  all of the net assets of EyeCare and SurgeryCenter of North
      Texas,  P.A.  and ECSC  Retina,  P.A.,  two  Dallas,  Texas,  professional
      associations  which practice  ophthalmology in exchange for 771,429 shares
      of common stock.
   
(8)   Benefit Plan
      ------------
    
      In 1996, the Company established a 401(k) Profit Sharing Plan (the "Plan")
      which  allows  qualifying  employees  electing  participation  to  defer a
      portion of their income on a pretax  basis  through  contributions  to the
      Plan.  The  Plan  permits  discretionary  contributions  to be made by the
      Company,   as  determined  by  the  Company's   Board  of  Directors.   No
      contributions were made by the Company during 1996.
   
(9)   Contingencies
      -------------
    
      The Company  maintains  professional  liability  coverage on a claims made
      basis for its centers,  employees, and independent contractors,  including
      center directors,  with minimum  requirements of $3,000,000 per occurrence
      and  $3,000,000  annually.  The Company also maintains  general  liability
      coverage.   Additionally,  the  physicians  associated  with  the  Company
      maintain  professional  liability  coverage.  Providing support associated
      with health care  services may give rise to claims from patients or others
      for damages. The Company has been named in certain professional  liability
      claims. The Company believes that the ultimate resolution of these matters
      will not have a significant effect on the Company's  financial position or
      results of operations.  To the extent that any claims-made coverage is not
      renewed or replaced with equivalent insurance, claims based on occurrences
      during the term of such  coverage,  but  reported  subsequently,  would be
      uninsured.  Management anticipates that the claims-made coverage currently
      in place will be renewed or replaced with equivalent insurance as the term
      of such coverage expires.
   
(10)  Supplemental Cash Flow  Information
      -----------------------------------
    
      Capital  lease  obligations  of  approximately  $981,000,  $1,275,000  and
      $76,000 were incurred in 1996, 1995, and 1994, respectively. See note 3.
                                       41

<PAGE>
--------------------------------------------------------------------------------
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1996, 1995 and 1994



      Common  stock was issued for other than cash  consideration  during  1996,
      1995 and 1994. See notes 2 and 6.

      Interest paid totaled  $673,727,  $301,573 and $238,141 in 1996,  1995 and
      1994, respectively.

   
(11)  Subsequent Events
      -----------------
    
 
      On February 25, 1997,  the Company  entered into a  $15,000,000  revolving
      credit agreement with NationsCredit  Commercial Corporation,  an affiliate
      of  NationsBank.  Borrowings  under the credit  agreement  will be used to
      finance  acquisitions,  repay existing  indebtedness  and provide  working
      capital.  The credit  agreement has a six-year term and is fully revolving
      for the first two years.

      On March 5, 1997 the Company  completed the  acquisition  of the assets of
      the ophthalmology practice of Sarah J. Hays, M.D. of Birmingham,  Alabama.
      Simultaneously with the acquisition,  the Company entered into a long-term
      management agreement with Dr. Hays' professional  corporation.  The assets
      were acquired in exchange for 108,081 shares of the Company's common stock
      and  $859,500 in cash.  The cash portion of the  transaction  was financed
      under  the  Company's   revolving   credit  facility  with   NationsCredit
      Commercial Corporation.


   
(12)  Supplementary Information
      -------------------------
    
 
     The following sets forth supplementary information regarding the allowances
     for contractual adjustments and doubtful accounts:


               Balance at   Additions                  Change in    Balance at
 Year ended   Beginning of  Charged to                Contractual     End of
December 31,      Year       Expense     Charge-offs  Adjustments      Year
------------      ----       -------     -----------  -----------      ----

    1996       1,674,000     367,037       135,302     (145,735)    1,760,000
    1995       1,596,423     444,810       498,296      131,063     1,674,000
    1994       1,615,182     505,421       573,672       49,493     1,596,423








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