<PAGE>   1
                                                                             

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

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

                                          OR

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

        Commission File Number 1-11538

                                  HEALTHSOURCE, INC.
                (Exact name of registrant as specified in its charter)

                 New Hampshire                              02-0387748
        (State or other jurisdiction of                  (I.R.S. Employer
        incorporation or organization)                  Identification No.)

                     Two College Park Drive, Hooksett, NH  03106
                       (Address of principal executive offices)

                                    (603) 268-7000
                 (Registrant's telephone number, including area code)
                                                     
             Securities registered pursuant to Section 12(b) of the Act:
                             Common Stock, $.10 par value
                                   (Title of Class)

          Securities registered pursuant to Section 12(g) of the Act:  NONE
                                        
        Indicate by check mark whether the registrant (1) has filed all
        reports required to be filed by Section 13 or 15(d) of the Securities
        Exchange Act of 1934 during the preceding 12 months (or for such
        shorter period that the registrant was required to file such
        reports), and (2) has been subject to such filing requirements for
        the past 90 days.  Yes X  No ___

        Indicate by check mark if disclosure of delinquent filers pursuant to
        Item 405 of Regulation S-K is not contained herein, and will not be
        contained, to the best of the 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 [   ].

        State the aggregate market value of the voting stock held by
        non-affiliates of the registrant: $2,377,729,938 (based upon the
        reported closing price of $40 1/8 on the New York Stock Exchange on
        February 26, 1996).

        Indicate the number of shares outstanding of each of the issuer's
        classes of common stock, as of the latest practicable date.
        Title of Each Class:    Common Stock, $.10 par value
        Number of Shares Outstanding at February 26, 1996: 63,590,827 
        shares



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                         DOCUMENTS INCORPORATED BY REFERENCE

        Certain portions of the Definitive Proxy Statement in connection with 
        the Registrant's 1996 Annual Meeting of Shareholders are incorporated 
        by reference in Part III of this Form 10-K.



















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<TABLE>
                              HEALTHSOURCE, INC.
                                  FORM 10-K
                 -------------------------------------------
                 TABLE OF CONTENTS AND CROSS-REFERENCE SHEET

<CAPTION>
                                                                   Reference by Page   
                                                                   to Information      
                                                      Page of      Incorporated        
        Item No. on Form 10-K                         Report       by Reference        
        ---------------------                         -------      -----------------   
        <S>                                           <C>          <C>                 
        PART I                                                                         
        ------                                                                         
                                                                                       
        1.   Business                                 p.  1        N/A                 
                                                                                       
        2.   Properties                               p. 10        N/A                 
                                                                                       
        3.   Legal Proceedings                        p. 11        N/A                 
                                                                                       
        4.   Submission of Matters to a Vote          p. 12        N/A              
             of Security Holders

        PART II
        -------

        5.   Market for Registrant's Common           p. 12        N/A 
             Equity and Related Shareholder           
             Matters

        6.   Selected Financial Data                  p. 13        N/A 
                                                        

        7.   Management's Discussion and              p. 14        N/A 
             Analysis of Financial Condition            
             and Results of Operations

        8.   Financial Statements and                 p. F-1       N/A 
             Supplementary Data                         

        9.   Changes in and Disagreements with        p. 35        N/A
             Accountants on Accounting and
             Financial Disclosure

        PART III
        -------

        10.  Directors and Executive Officers         p. 35        1996 Proxy Statement 
             of the Registrant

        11.  Executive Compensation                   N/A          1996 Proxy Statement

        12.  Security Ownership of Certain            N/A          1996 Proxy Statement
             Beneficial Owners and Management


        13.  Certain Relationships and Related        N/A          1996 Proxy Statement
             Transactions

        PART IV
        -------

        14.  Exhibits, Financial Statements           p. 39        N/A
             Schedules, and Reports on Form 8-K

        Exhibit Index                                 p. 45        N/A

</TABLE>
<PAGE>   4
                                    PART 1

     ITEM 1. BUSINESS

             (a) General Development of Business.  See (c) below.

             (b) Financial Information about Industry Segments.  
                 Not Applicable.

             (c) Narrative Description of Business.

GENERAL
 
        Healthsource, a New Hampshire corporation established in 1985
("Healthsource" or the "Company"), is a geographically diversified provider of
a broad range of managed healthcare services. Healthsource is a leading managed 
care provider with health maintenance organizations ("HMOs") in North Carolina,
South Carolina, New Hampshire, Massachusetts, Indiana, Maine, Tennessee,
Arkansas, Syracuse, New York, Louisville, Kentucky, Georgia, north central
Texas, southwestern Ohio and Connecticut. In a joint venture with Chubb Life
Insurance Company, Healthsource also operates an HMO in the New York City and
northern New Jersey areas. Healthsource acquired the group health, HMO and
third party administration ("TPA") business of Provident Life and Accident
Insurance Company of America ("Provident") of Chattanooga, Tennessee in May
1995 (the "Provident Transaction"). The national indemnity insurance and TPA
business acquired from Provident (collectively referred to as "Healthsource
Provident") is concentrated in the Southeast and serves a total of over 2
million members. In February 1996, the Company completed the acquisition of
substantially all of the HMO assets of Central Massachussetts Health Care, Inc.
("CMHC"), an 83,400 member HMO in Worcester, Massachusetts. As a result of the
Provident Transaction and the membership of CMHC and strong enrollment gains in
its existing plans, on January 1, 1996 Healthsource provided or administered
healthcare benefits for over 3.5 million members. Healthsource also offers
point of service ("POS") plans, preferred provider organization ("PPOs") plans, 
utilization review ("UR") services, managed workers' compensation services, 
pharmacy benefit management services and other managed care consulting and 
administrative services to other healthcare payors including Provident and
Liberty Mutual Insurance Company. The Company's executive offices are located 
at Two College Park Drive, Hooksett, New Hampshire 03106; telephone number 
(603) 268-7000.
 
THE MANAGED CARE INDUSTRY
 
     The managed care industry has grown substantially in recent years. Total
HMO enrollment grew 13.1% in 1994 to approximately 51.1 million members at
December 31, 1994. Healthsource expects industry growth to continue because of
continued pressure from employers and state and federal governments to control
healthcare costs and the failure of unmanaged indemnity products to provide such
controls. Healthsource believes that managed care will continue to be a major
mechanism to control, finance and deliver healthcare in the United States in the
future and may replace the current indemnity healthcare financing system.
 
HEALTHSOURCE'S BUSINESS STRATEGY
 
     Healthsource seeks to enhance its position as a leader in providing quality
and affordable healthcare in an expanding set of local markets. Healthsource's
business strategy has three components: (i) to expand the number of geographic
markets in which it offers HMOs and other services, (ii) to increase HMO
enrollment in its existing markets by capitalizing on the historically low HMO
penetration rate in most of those markets, emphasizing the conversion to HMO
membership of members currently being served in the Company's indemnity and
self-funded plans (especially those acquired in the Provident Transaction) and
continuing to develop and offer new products for different segments of the
population such as Medicare, and (iii) to continue positioning its HMOs to be
less vulnerable to declining average premiums by linking a large portion of
healthcare costs to premiums through global capitation arrangements or other
suitable arrangements with healthcare providers. When entering new markets,
Healthsource seeks to purchase existing plans or seeks strategic alliances
with local providers to support start-up HMOs thereby lowering the risk of entry
and enhancing the competitive position of such plans. In seeking to convert
existing members to HMO membership, Healthsource continues to maintain close
working relationships with local physicians and hospitals and, in certain
markets, to provide operating and financial support to primary care practices in
order to enhance the access to, and quality and cost effectiveness of, its
managed care products.
 
     As part of its expansion strategy in all markets, Healthsource actively
seeks opportunities to acquire, make significant investments in, or provide
managed care services to HMOs, managed care companies, healthcare financing and
administrative companies, healthcare providers and related businesses. The
Company considers such opportunities in the ordinary course of its business.
 
HEALTHSOURCE HEALTH PLANS
 
     Healthsource owns fourteen (14) operating HMOs as well as two (2) other
major operating subsidiaries: (i) Healthsource Provident Administrators, Inc.
("HPA"), which operates the 1.7 million member TPA business acquired in the 
Provident Transaction and (ii) Healthsource Provident Insurance Company 
("HPIC"), which operates the 390,000 member indemnity group health insurance 
business acquired in the
 
                                          1 

<PAGE>   5
 
Provident Transaction. HPA and HPIC are headquartered in Chattanooga, Tennessee
and service a national client base.
 
     Healthsource has organized its business into two geographic regions -- the
Northern and Southern Regions (as defined in the following chart). The Northern
Region is headquartered in Hooksett, New Hampshire. The Southern Region is
headquartered in Chattanooga, Tennessee.
 
     The following table shows the membership by the Northern and Southern
Region plans at January 1, 1996:
 
                        MEMBERSHIP AS OF JANUARY 1, 1996
 
<TABLE>
<CAPTION>
                                        HMO/OTHER
                                          FULLY                                SELF-INSURED
                                         INSURED      INDEMNITY   --------------------------------------
                PLANS                  HMO PRODUCTS   INSURANCE      TPA        POS      PPO      OTHER        TOTAL
-------------------------------------- ------------   ---------   ---------   -------   ------   -------     ---------
<S>                                    <C>            <C>         <C>         <C>       <C>      <C>         <C>
NORTHERN REGION:
Healthsource New Hampshire............    122,300        1,200      110,000    85,500   45,150   120,000       484,150
Healthsource CMHC(1)..................     83,400           --           --        --       --        --        83,400
Healthsource Indiana..................     67,000        4,900           --        --      500     1,800        74,200
Healthsource Maine....................     65,500           --           --    30,800    2,000     3,700       102,000
ChubbHealth(2)
  New York City.......................     30,750           --           --        --       --        --        30,750
  New Jersey..........................      1,950           --           --        --       --        --         1,950
Healthsource HMO of New York (Syracuse
  NY).................................     21,200           --           --     1,300    6,800        --        29,300
Healthsource Kentucky.................     11,200           --           --        --       --        --        11,200
Healthsource Ohio.....................      1,000           --           --        --       --        --         1,000
Healthsource Connecticut(3)...........         --           --           --        --       --        --            --
                                       ------------   ---------   ---------   -------   ------   -------     ---------
SUBTOTAL -- NORTH.....................    404,300        6,100      110,000   117,600   54,450   125,500       817,950
                                       ------------   ---------   ---------   -------   ------   -------     ---------
SOUTHERN REGION:
Healthsource North Carolina...........    170,600           --           --    68,000       --     2,000       240,600
Healthsource South Carolina...........    143,700          900           --     2,100       --    11,400       158,100
Healthsource Tennessee................     62,400           --           --     6,100    8,400     4,100        81,000
Healthsource Arkansas(4)..............     32,800           --       62,100     2,500    5,500        --       102,900
Healthsource Georgia(5)...............     10,200           --           --        --       --        --        10,200
Healthsource North Texas(4)...........      4,100           --           --        --      100     1,500         5,700
HPIC (Chattanooga)(6).................         --       59,600           --        --       --   329,600(7)    389,200
HPA (Chattanooga)(6)..................         --           --    1,705,800        --       --        --     1,705,800
                                       ------------   ---------   ---------   -------   ------   -------     ---------
SUBTOTAL -- SOUTH.....................    423,800       60,500    1,767,900    78,700   14,000   348,600     2,693,500
                                       ------------   ---------   ---------   -------   ------   -------     ---------
TOTAL ALL REGIONS.....................    828,100       66,600    1,877,900   196,300   68,450   474,100     3,511,450
                                       ============   ========    =========   ========  ======   ========    =========

<FN>
---------------------
(1) Acquired as of February 1, 1996.
 
(2) 15% owned with an option to own 50%.
 
(3) Recently licensed, not yet operational.
 
(4) 70% owned.
 
(5) 95% owned.
 
(6) Totals only -- Not separately categorized into POS and PPO plans, although
    many of these members are in such plans.
 
(7) Consists of Experience-Rated Refundable Premium Insurance.

</TABLE>
 
MANAGED CARE PRODUCTS -- INNOVATION AND FLEXIBILITY
 
     With the rise in healthcare costs, many private employers are encouraging
their employees to enroll in HMOs or other managed care options. Responding to
similar cost pressures, various federal and state
 

                                          2

<PAGE>   6
 
government healthcare programs are adding more managed care options to their
healthcare plans. Healthsource seeks to meet these needs of employers and
government programs not only through its core offerings of traditional HMO
plans, but with a spectrum of other managed care options, including POS plans,
PPO plans and managed workers' compensation. Healthsource also offers UR
services, third-party claims administration and pharmacy benefit management
services to assist self-insured employers. Healthcare providers typically
participate in each of the Healthsource managed care plans that cover their
geographic area.
 
     Healthsource's management philosophy is to emphasize strong local
management of its plans while providing assistance, leadership and oversight,
when necessary, from its Hooksett, New Hampshire and Chattanooga, Tennessee
headquarters. Assistance and leadership is often provided regarding negotiating
major provider contracts, important marketing assignments, product innovation,
expansion and other strategic initiatives. Corporate headquarters oversight
includes financial, treasury, accounting and systems functions.
 
  HMO Products
 
     Healthsource offers a variety of HMO products, enabling it to modify its
benefit structure and pricing to appeal to the varying needs of employers and
their employees. In an HMO plan, the HMO bears the underwriting risk that the
covered medical expenses of its members will exceed related premium revenues in
return for charging actuarially-determined premiums on a per member per month
("PMPM") basis to employers.
 
     Healthsource's HMOs consist of individual practice association plans in
which each HMO maintains a network of primary care and specialist physicians,
most of whom contract directly with the HMO. Independent physicians are
generally reimbursed for their services by each HMO according to a fee schedule
(also known as fee-for-service) or under fixed fee PMPM arrangements (also known
as capitation). Both methodologies provide various incentives for quality and
cost-effective care. The Company is emphasizing its global capitation
arrangements with hospitals (discussed at greater length below) under which more
of the costs of physicians serving Healthsource members are borne by the
hospitals at risk for such members' healthcare costs.
 
     The Company's contracts with hospital providers are a key element in its
efforts to control healthcare costs. While the Company routinely contracts with
hospitals on a discounted fee-for-service and per diem basis, the primary focus
of the Company's current contracting policy is to have global capitation
arrangements with major hospital providers. In such arrangements, the hospital
generally accepts as full payment for its services all monies remaining from the
global capitation amount after payment of all other covered medical and
healthcare expenses of assigned members; this global capitation amount is
generally linked to a fixed dollar amount PMPM or a percentage of the Company's
premiums collected for assigned members with certain negotiated variations.
Through these global capitation arrangements, hospitals and their affiliated
providers, such as owned physician practices, are incentivized to mitigate
inappropriate utilization and otherwise strive for efficiencies in patient care.
Generally, the global capitation rate in these contracts moves directly
proportional to premium pricing, which provides incentives for hospitals that
are parties to global capitation arrangements to assist in enhancing the
quality, value and perception of the Company's HMOs in the marketplace and
allows the Company more predictability in its medical loss ratio ("MLR") and
less exposure to reductions in premium pricing since any such reductions in 
premium pricing would often be absorbed pro-rata by the hospitals that are 
parties to global capitation arrangements. On January 1, 1996, approximately 40%
of the Company's members were covered by generally non-terminable global 
capitation arrangements typically having terms of from five to ten years, with
many more such arrangements under active negotiation. The goal of the Company is
to obtain as many global capitation arrangements as reasonably possible.
 
  Point of Service Plans
 
     A POS plan incorporates greater flexibility than a traditional HMO plan,
typically containing some of the favored provider pricing and utilization
controls of an HMO while permitting the member to use providers outside the
prescribed network at an increased cost to the member. These plans may be
offered to employers on a fully-insured or self-insured basis depending upon the
preferences of the employer. The availability of the POS option has enabled
Healthsource to service various large national employers who have requested this
option.
 
                                          3

<PAGE>   7
 
  Preferred Provider Organization 
 
     A PPO is an indemnity healthcare plan which relies on a network of
physicians, hospitals and other providers to provide care on negotiated
financial terms (including discounts or other favorable pricing methodologies)
and which provides members with a greater level of coverage for using network
providers. In markets where the Company has its own HMO, it typically uses the
HMO providers as the preferred providers in the PPO network. To serve the
broader geographic base of members acquired in the Provident Transaction and
other national and regional accounts in other markets, the Company contracts
with third-party PPO providers for access to their networks. The Company
believes PPOs are a transitional product since gatekeeper health plans such as
HMOs and POS plans allow better utilization management and are more easily
supported by global capitation arrangements.
 
  Third-Party Administration Services
 
     Through its TPA services, Healthsource processes claims for medical and
dental services to members of employer-sponsored, self-funded plans and
reimburses the provider or member according to the terms of each plan. Employers
often purchase TPA services which are bundled with UR services and selected PPO
networks in an effort to apply managed care techniques to their self-funded
plans. Under its TPA arrangements, Healthsource does not generally bear any
healthcare cost risk and, accordingly, is not paid an underwriting premium.
Instead, Healthsource's TPA arrangements typically provide for the payment of
administrative fees which generally vary by the number of members covered.
Certain of these contracts contain performance guarantees as to timeliness and
accuracy and certain other risk features which can place compensation under such
contracts at risk. Of the total of 1.9 million members being provided TPA
services, more than 1.7 million are serviced by HPA from its headquarters in
Chattanooga, Tennessee, seven regional claim centers, and field sales offices in
13 states. Other significant TPA operations are administered by affiliates of
the New Hampshire and Arkansas plans.
 
  Medicare Risk Products
 
     The Company is actively developing HMO products for the Medicare market
using a task force headquartered in New Hampshire. The task force is designing
provider contracts, creating marketing materials and strategies and preparing
the Health Care Financing Administration ("HCFA") applications and documentation
on a centralized basis with the expectation that Medicare Risk contracts would
be sought in most of the Company's markets. The Company expects to support the
offering of Medicare HMO products in each market typically with a global
capitation arrangement with one or more local hospitals. The Company has found
that its hospital providers are often interested in providing care to Medicare
HMO plans and willing to consider healthcare risk assumption under global
capitation arrangements. The degree of customer acceptance of these products is
unknown and will depend upon various policy decisions by Congress and HCFA, as
well as upon successful marketing in each market inasmuch as Medicare HMO
membership is sold on an individual rather than group basis. The Company's
objective is to have Medicare risk contracts in six markets within 12 months;
one such plan is currently operational.
 
INDEMNITY INSURANCE PRODUCTS
 
     Prior to the Provident Transaction, the Company owned three small indemnity
insurance companies. With the Provident Transaction, the Company chartered a new
Tennessee insurance company -- HPIC, headquartered in Chattanooga, Tennessee.
HPIC assumed the indemnity insurance portion of the Provident group health
business and provided healthcare insurance to approximately 390,000 members on
January 1, 1996 through two basic forms of coverage -- Experience Rated
Refundable Premium Insurance and Other Insurance Products.
 
  Experience Rated Refundable Premium Insurance
 
     Approximately 330,000 persons are covered under Experience Rated Refundable
Premium policies in which the employer generally bears most of the healthcare
claims risk and can receive a refund when claims
 
                                          4

<PAGE>   8
 
experience is favorable. Premiums for this coverage are based on the actual
claims experience of the employer in prior periods, adjusted for projected
future experience, plus a charge for administrative expenses, certain risks and
profit. At the end of each policy year, an employer's account will show a
surplus or deficit balance depending on defined claims experience. Surplus
balances for a current year are first applied to prior deficits, if any, and
then, at the employer's election, either held in reserve to offset future
deficits or refunded. In years with deficit balances, premiums for future
periods are sought to be adjusted so that Healthsource may recover the deficit,
provided the employer maintains its relationship with Healthsource; there is no
assurance that any such deficit can ultimately be recovered. Operating results
fluctuate with claims experience since all claims are expensed, whether or not
currently recoverable from employers.
 
  Other Insurance Products
 
     In the Provident Transaction, Healthsource also acquired a book of
fully-insured group health policies which are marketed to small and medium sized
employers and which covered 60,000 members on January 1, 1996. The current
market for this business is primarily employers located in the southeastern
United States and having approximately 25 to 150 employees, although in some
cases larger employers may choose these types of plans. The majority of this
business includes the use of contracted PPO networks with premiums actuarially
based on the expected claims experience of pools of similar risks, together with
provision for administrative expenses and profit. Profitability of this business
is affected by premium pricing competition, deviations of actual claims
experience from expected claims experience and the ability to control
administrative expenses. Claims experience for this product is primarily a
function of healthcare costs, morbidity rates and the effectiveness of
utilization controls and provider discounts available through contracted PPO
networks.
 
OTHER MANAGED CARE SERVICES
 
  Utilization Review Services
 
     UR services are provided to certain self-funded and insured plans by
Healthsource's healthcare professionals and may include pre-admission
certification and concurrent review of inpatient care, as well as other
utilization management services. As with TPA services, Healthsource does not
typically bear utilization risk in providing UR services; rather it receives
fees which are based on the level of services provided.
 
  Managed Workers' Compensation
 
     Healthsource also applies its managed care expertise to workers'
compensation programs of insurers and employers, both in the residual and
voluntary markets. Under these managed workers' compensation arrangements, the
insurer or employer retains the underwriting risk for healthcare and disability
costs while Healthsource furnishes access to provider networks and renders TPA
and case management services for a fee. Healthsource currently has a managed
workers' compensation program in New England including the residual market in
New Hampshire and Vermont but also for commercial accounts in New Hampshire,
Maine and Massachusetts.
 
  Pharmacy Benefit Management Services
 
     Through its subsidiary, Healthsource Rx, Healthsource provides pharmacy
benefit management services to its affiliated plans and to self-insured
employers. These services include network and claims administration services and
discount arrangements.
 
PHYSICIAN RELATIONSHIPS
 
     Healthsource believes that physicians are a critical factor in managing
healthcare costs through their ability to control the quality and utilization of
services from hospitals, specialists and other providers. Therefore,
Healthsource has structured its business on the premise that physicians need to
be actively involved in its HMOs. Healthsource's HMOs typically have quality
assurance and UR committees comprised of local physicians, and physicians
currently constitute a majority of the Board of Directors of Healthsource and
 
                                          5

<PAGE>   9
 
several of Healthsource's majority-owned HMOs. Healthsource has also found that
its policy of involving physicians is helpful as it seeks to enlist physician
support in new markets. Healthsource currently contracts with over 40,000
physicians.
 
QUALITY MANAGEMENT
 
     The Company promotes quality healthcare for its members. Most initiatives
are performed at the local HMO level. Typical initiatives include programs to
increase preventive screening such as mammography testing, primary care
physician profiling for quality indicators ("report cards"), disease management
programs to improve certain disease outcomes (such as for asthma treatment),
consumer satisfaction surveys to assess member perceptions, and quality of
service indicators such as telephone waiting time.
 
     The Company operates an organ transplant provider network from its
Chattanooga headquarters for the benefit of its HMOs and various other managed
care subsidiaries. The providers in this network are among the nation's leading
organ transplant centers, although individual HMOs and other subsidiaries are
not required to use it exclusively.
 
     The Company has begun obtaining voluntary accreditations for its health
plans from the National Committee of Quality Assurance (NCQA), an independent
organization which reviews HMOs. The Company's HMOs in New Hampshire, North
Carolina and Maine have received provisional one year accreditations and the
Syracuse, New York plan has received a one year accreditation. The Company's
South Carolina HMO has been reviewed but has not been yet notified of the
results. The Company is planning to have its other HMOs reviewed as soon as
practicable.
 
MARKETING
 
     The Company uses a variety of marketing strategies to sell its managed care
products. The Company, as with most HMOs, has relied upon an internal sales
force to pursue local markets. With additional opportunities in the small group
market, the Company's HMOs have often built relationships with independent
insurance brokers in their markets. The Company has also acquired two TPA firms
headquartered in New Hampshire and Arkansas whose contacts with self-insured
employers and brokers have led to substantial contracts in the New England and
Arkansas markets. These acquisitions have provided valuable experience in
integrating various distribution systems and multi-line products and have
assisted in the assimilation of the book of business acquired in the Provident
Transaction and the development of strategies to convert those members to HMO
products.
 
     The Company is developing a coordinated approach to regional accounts in
New England and the Southeast across plan lines to improve effectiveness. As a
result of the Provident Transaction, a similar approach (using resources in New
Hampshire and Chattanooga) is being developed for national accounts. The Company
has a focused marketing effort on a cross-plan basis to seek HMO conversions
from its TPA membership. The Company's sales force is also cross-selling HMO,
POS, TPA, and indemnity products so as to seek total replacement coverage for
customer accounts.
 
STRATEGIC ALLIANCES
 
     Healthsource believes that strategic alliances are an important way to
enter new markets on a start-up basis. Healthsource has forged strategic
alliances to enhance its competitiveness, reduce risks and accelerate market
penetration. These alliances have taken various forms and involved various
allies, including strong regional healthcare providers. Healthsource has
strategic hospital alliances for its HMOs in Arkansas, Savannah, Georgia, Fort
Worth, Texas, Worcester, Massachusetts and Dayton, Ohio. In addition,
Healthsource has joined with Liberty Mutual Insurance Company to provide managed
care services to the workers' compensation market in New Hampshire.
 
                                          6

<PAGE>   10
 
MANAGEMENT INFORMATION SERVICES
 
     All of the Company's HMOs and other products use extensive computer-based
management information systems ("MIS") for various purposes, including claims
processing, billing, utilization management and precertification of selected
healthcare services, underwriting, marketing and sales tracking, general
accounting, medical cost trending, managed care reporting and financial
planning. The MIS systems provide on-line support to member, group and provider
service functions. The Company's MIS systems and supporting hardware are
continually being enhanced and upgraded in order to increase efficiency,
capacity and flexibility of the system.
 
     The Company maintains two major MIS centers in Hooksett, New Hampshire (120
employees) and Raleigh, North Carolina (70 employees) to service its HMOs and
related products. HPIC and HPA receive data services from Provident's main
computer system in Chattanooga under a comprehensive Computer Services Agreement
with a term through May 1, 1999 and containing an option by the Company to
terminate at any time after May 1, 1997. The Company has 140 MIS employees in
Chattanooga primarily working on software maintenance and development to support
the business needs of HPIC and HPA. As part of a comprehensive review of the
computer needs of the Company, the Company is evaluating opportunities to
outsource its data center operations in Chattanooga as well as other sites.
 
     The Company has made substantial investments in MIS for healthcare cost,
utilization and quality management reporting. Assisting its healthcare providers
with their data needs is a major priority of the Company's MIS Department and
involves a large commitment of resources by the Company. The claims history of
managed care members is available on a separate computer system, the "Data
Warehouse," which utilizes a relational database to accomplish data analysis and
report generation by MIS personnel, financial analysts and plan personnel.
Healthsource's medical management subsidiary, Healthsource Innovative Medical
Management, Inc., is developing a proprietary set of reports, the Diagnostic
Medical Management Information System. Two components of this system will be (i)
the Network Performance Package which provides an analysis of the healthcare
utilization of members associated with the particular capitated hospital group
to support the development of customized, effective, medical management
improvement initiatives, and (ii) the PrimarySource which profiles a primary
care physician on the utilization of medical services associated with members
under the physician's care.
 
COMPETITION
 
     The managed healthcare industry is highly competitive at both the local HMO
level and in the regional and national employer markets. The principal
competitive factors affecting the Company's products are premium rates and fees,
plan design and flexibility, and physician/hospital network and reputation. In
many historically under-penetrated markets such as the Carolinas, many new HMOs
have been recently licensed which is reflected in premium pressure for new and
renewal business. As a result of this competition, the Company experienced a
3.5% decline in average premium yield per member during 1995 and expects a
similar decline during 1996.
 
     The Company competes in all of its markets with Blue Cross plans, indemnity
insurers, HMOs, TPAs, PPOs and other managed care companies, some of which have
greater financial resources than the Company. The Company also faces competition
in many of its markets from hospitals and other provider groups who have
organized their own networks to contract directly with employer groups. As
managed care has expanded generally, many more employers are offering both HMO
and indemnity options; thus the ability to offer a wide variety of HMO, POS, PPO
and other services has become an important competitive factor. The Company uses
its strategic alliance concept and selective contracts with key physician groups
to enhance its competitive position. The Company expects that competition for
all business may become even more intense during 1996.
 
     In connection with start-up HMOs developed with strategic provider partners
and certain consulting arrangements, the Company often agrees to restrict its
activities in a defined area; the Company has made such agreements in connection
with Healthsource Arkansas, Healthsource Savannah, Healthsource North Central
Texas, ChubbHealth and Vermont Blue Cross. As part of the Provident Transaction,
the Company entered into a non-competition agreement with Provident under which
the Company agreed not to write for its
 
                                          7

<PAGE>   11
 
own account certain types of medical stop-loss insurance, group long- and
short-term disability insurance or group life insurance for certain accounts and
areas and for certain restricted periods ending between 1998 and 2000 as
specified in the agreement. The non-competition agreement is subject to various
exceptions.
 
GOVERNMENTAL REGULATION
 
     General.  State and federal regulation of HMOs, managed care products and
indemnity insurance varies from jurisdiction to jurisdiction, is subject to
frequent change and generally gives responsible administrative agencies broad
discretion. Laws and regulations relating to Healthsource's businesses are
subject to amendment or interpretation in each jurisdiction and any such
amendments or interpretations could adversely affect Healthsource's operations,
products, profitability or business prospects or require Healthsource to change
some of its products, services, contracting policies or marketing plans.
Healthsource is unable to forecast which additional laws or regulations, if any,
affecting its business might be enacted in the future nor how existing or future
regulations might be interpreted.
 
     New Restrictive Laws.  A number of states have enacted small group
insurance and rating reforms which generally limit the ability of insurers or
HMOs to use risk selection or pre-existing condition exclusions as methods of
controlling costs. In addition, many states are considering (or have enacted)
specific limitations on the ability of insurers or HMOs to control admissions
and length of stay, to affect the provision of healthcare services through UR
procedures, to use certain capitation or other payment methodologies, to expend
less than a certain percentage of premium on healthcare costs, to contract
exclusively with physicians or other providers or to exclude certain providers
and other measures. The effect of widespread enactment of such laws might be to
reduce the Company's ability to control some major elements of its healthcare
expenses.
 
     HMOs.  All of the states in which the Company owns HMOs have enacted
comprehensive statutes regulating the activities of HMOs. Most states require
periodic financial reports from licensed HMOs and impose minimum capital and
specific reserve requirements. These capital requirements impose significant
restrictions on the ability of any affiliated HMO to pay dividends to the
Company and could require the Company to make additional capital contributions
to its HMOs. A significant portion of the Company's cash, marketable securities
and other assets is held by HPIC, Healthsource New Hampshire, Healthsource North
Carolina, Healthsource South Carolina, and other HMOs, and is restricted to use
within the operations of each of those entities. In addition, certain of the
Company's HMOs are required to maintain segregated cash reserves in
interest-bearing instruments held by bank trustees or state regulators. Some
regulations also enable state agencies to review all material contracts entered
into by HMOs, including management contracts, for reasonableness of fees charged
and other issues.
 
     Governmental Programs.  The Company currently has one Medicare risk
contract, but will be seeking approval of such contracts in many of the
Company's markets. The Company's HMOs which obtain Medicare risk contracts will
be subject to regulation by the HCFA, an agency of the United States Department
of Health and Human Services. HCFA has the right to audit HMOs operating under
Medicare risk contracts to determine compliance with HCFA contracts and
regulations as well as the quality of care rendered to plan members. Medicare
risk contracts also require an HMO to (i) be either a federally qualified HMO or
a Competitive Medical Plan (as defined by the Social Security Act) and (ii)
comply with requirements for independent review of member services by contracted
peer review organizations. The Company's HMOs which have Medicaid contracts are
subject to both federal and state regulation regarding services to be provided
to Medicaid enrollees and payment for those services. Both Medicare and Medicaid
have extensive laws and regulations relating to physician incentive plans and
provider referrals which may affect the Company's operations. Many of the
Company's HMOs have contracts with the Office of Personnel Management ("OPM")
for the Federal Employees Health Benefits Program; these contracts are subject
to extensive regulation, including complex rules relating to permissible
premiums that may be charged to employees. OPM has the authority to audit the
rates charged and often seeks refunds and other sanctions against participating
HMOs where premiums are claimed to have exceeded permissible levels. Many of the
Company's HMOs also have contracts with states permitting HMO products to be
offered to a broad range of governmental employees in such states and are
subjected to various operating and financial requirements as a condition of such
contracts.
 
                                          8

<PAGE>   12
 
     Indemnity Insurance Regulation.  The Company's indemnity insurance
subsidiaries are subject to regulation by the Department of Insurance in each
state in which the entity is licensed. Regulatory authorities exercise extensive
supervisory power over insurance companies with respect to the licensing of new
companies and products, the level of required capital and reserves, required
benefits, the approval of policy forms, limitations on investments, and periodic
examination of operations. The Company's insurance company subsidiaries are also
required to file periodic statutory financial statements in each licensed
jurisdiction and are restricted in their ability to pay dividends to, or
contract with, the Company and its affiliates to the same extent as HMOs.
 
     Insurance Holding Company Regulation.  The Company, by virtue of its
ownership of HMOs and insurance subsidiaries is subject to various state
insurance holding company laws; such insurance holding company laws and related
regulations generally require registration with the state Department of
Insurance and the filing of certain periodic reports describing the capital
structure, ownership, financial condition, certain intercompany transactions and
general business operations of the holding company system. Changes to the
capital structure of the Company and its subsidiaries or material inter-company
transfers or agreements may trigger notice or prior approval requirements,
depending on the size and nature of the transactions.
 
     ERISA.  The provision of goods and services to or through certain types of
employee health benefit plans is subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") and regulations promulgated thereunder. ERISA is
administered by the United States Department of Labor ("DOL") and provides
various restrictions on the Company's administration of most self-funded and
other ERISA-governed plans exclusive of governmental plans. The DOL is engaged
in an active ERISA enforcement program, including litigation surrounding the
calculation of percentage co-insurance provisions on discounted services, which
enforcement activities may expand the potential liabilities associated with
administering ERISA plans. The provisions of ERISA have generally been
considered to preempt state regulation (other than insurance regulation) of
plans governed by ERISA and the Company thereby has been exempt from most
state-law based claims arising from the administration of ERISA plans; recent
judicial decisions, however, have weakened the ERISA preemption doctrine. There
have also been recent legislative attempts to limit ERISA's preemptive effect.
As a result, the Company could be exposed to greater threat of state law-based
claims relating to ERISA plans and services.
 
     TPAs.  HPA and certain other subsidiaries of the Company are also licensed
as TPAs in states where such licensing is required for their activities. TPA
regulations generally contain certain required claims procedures, periodic
reporting obligations and minimum financial requirements which vary by state.
 
     PPOs.  Certain of the Company's subsidiaries that offer PPO panels or
arrangements may be subject to regulation in various states. Such PPO
regulations generally contain certain network, contracting, financial and
reporting requirements which vary by state.
 
     UR.  A number of states have enacted laws or adopted regulations governing
the provision of UR activities. Generally, these laws and regulations require
compliance with specific standards for the delivery of services,
confidentiality, staffing and policies and procedures of private review
entities. Some of these laws and regulations may affect certain operations of
the Company's subsidiaries.
 
PERSONNEL
 
     As of February 1, 1996, Healthsource and its majority-owned subsidiaries
employed approximately 5,200 employees. None of Healthsource's employees are
subject to collective bargaining agreements. Healthsource believes its
relationship with its employees is good.
 
PROVIDENT TRANSACTION
 
     Effective May 1, 1995, Healthsource acquired the group health, HMO and TPA
business of Provident for $231 million in cash and securities. The business
acquired in such transaction had $76 million in tangible net equity. The Company
paid $131 million in cash, subject to certain post-closing adjustments, and
issued to Provident 1,000,000 shares of non-voting, non-convertible Class A
Cumulative Preferred Stock with a face
 
                                          9

<PAGE>   13
 
value of $100 per share. The Preferred Stock pays an annual dividend of 6.25% 
for an initial two-year period, during which the Company has the right to 
redeem such stock for cash or by issuing a ten-year subordinated note bearing
a market interest rate, failing which the dividend rate on the Preferred Stock
is to be reset on May 1, 1997 to a market rate. The cash portion of the purchase
price was paid in part from cash on hand and in part from an advance under the
Company's revolving line of credit with Chase Manhattan Bank, as administrative
agent, and a syndicate of other banks (the "Chase Facility").
 
     In conjunction with the Provident Transaction, the Company and Provident
entered into an agreement expiring in December 1997 under which the Company will
provide certain administrative services relating to Provident's retained
stop-loss business and Provident's disability products. The Company also entered
into a Computer Services Agreement having a minimum term of two years by which
the services of Provident's main computer center are provided to the operations
of HPA and HPIC.
 
RECENT ACQUISITIONS
 
  CMHC
 
     Effective February 1, 1996, the Company acquired substantially all of the
operating assets of CMHC, a not-for-profit HMO with 83,400 members located in
Worcester, Massachusetts the ("CMHC Transaction"). The Company paid 
approximately $46.5 million in cash for such HMO assets, which after post-
closing adjustments will have a closing net worth of approximately $7.2 million.
The Company will continue to operate this HMO under the name Healthsource CMHC
from the headquarters in Worcester and will provide additional support and 
integration from the Company's corporate staff and HMO in New Hampshire.
 
  PACC
 
     On January 22, 1996, the Company entered into a definitive agreement to
purchase substantially all of the operating assets of PACC HMO and PACC Health
Plans (jointly "PACC") for a price of approximately $80 million in cash subject
to significant accounting adjustments (the "PACC Transaction"). PACC is a
110,000 member not-for-profit managed care provider serving the greater
Portland, Oregon area. The assets being acquired are required to have a
consolidated net worth at closing of approximately $41 million. The Company
intends to fund the PACC Transaction from borrowings under the Chase Facility
or other financial resources. Due to the not-for-profit status of PACC, the
transaction is subject to the approval of the Oregon Attorney General's Office.
The transaction is also subject to regulatory approvals and certain other
material closing conditions. Healthsource cannot predict when or if such
approvals will be obtained or such closing conditions will be satisfied.

     SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
     ACT OF 1995: The statements contained in this section concerning
     future premium pricing levels, future MLR levels, the Company's
     ability to control healthcare and SG&A costs and all other statements
     that are not historical facts are forward looking statements; actual
     results may differ materially from those projected in the forward
     looking statements, which statements involve risks and uncertainties,
     including but not limited to the following: that increased regulation
     will increase healthcare expenses; that increased competition in the
     Company's markets, changes in product mix or other factors will
     unexpectedly reduce premium yield; that the Company will be unable to
     close sufficient global capitation arrangements with key providers;
     that healthcare costs in any given period may be greater than expected
     due to unexpected incidence of major cases, natural disasters,
     epidemics, changes in physician practices and new technologies; and
     that the Company will be unable to close acquisitions of other HMOs
     and healthcare financing companies on satisfactory terms in key
     markets. Shareholders are also directed to the other risks discussed
     in other documents filed by the Company with the Securities and Exchange
     Commission (the "Commission").
 
        ITEM 2. PROPERTIES

        Healthsource's principal executive offices are located at Two College
Park Drive, Hooksett, New Hampshire 03106, where Healthsource owns a large
tract of land. Healthsource currently occupies a 97,600 square foot office
building on this site and has announced plans to ultimately construct two
additional buildings on the same site with approximately 200,000 square feet to
replace other leased facilities in New Hampshire.


                                          10

<PAGE>   14
 
     Healthsource's health plans and other affiliates own or lease office space
in the following major locations, among others, to support their operations:
 
<TABLE>
<CAPTION>
                                                        FACILITY
                                                          (SQ.                         MONTHLY
    LOCATION                                              FT.)       LEASED/OWNED     BASE RENT
    --------                                            --------     ------------     ---------
    <S>                                                  <C>            <C>           <C>
    Chattanooga, TN...................................   196,400        Leased        $ 227,200
    Concord, NH.......................................    89,000        Leased        $  43,200
    Chattanooga, TN...................................    87,600         Owned              N/A
    Morrisville, NC...................................    63,100        Leased        $  72,500
    Charleston, SC....................................    45,300        Leased        $  54,900
    Freeport, ME......................................    44,700        Leased        $  38,000
    Little Rock, AK...................................    30,500        Leased        $  21,600
    Indianapolis, IN..................................    30,000        Leased        $  21,600
</TABLE>
 
     Healthsource Provident also maintains sales offices in 20 cities in leased
facilities.
 
     Healthsource believes that the facilities which it currently owns or
leases, together with the expansion plans and options which it has arranged,
will be adequate to meet its current needs.
 

     ITEM 3. LEGAL PROCEEDINGS
 
     Healthsource is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business.
 

 
                                          11

<PAGE>   15
        ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

             None.


                                       PART II

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


                          PRICE RANGE OF COMMON STOCK
 
     The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "HS." The approximate number of record holders of the Company's
Common Stock as of February 26, 1996 was 10,600. Such number does not reflect
the number of persons or entities who hold shares in nominee or "street" name
through various brokerage firms.  The following table sets forth for the periods
indicated the high and low closing sales prices for the Company's Common Stock
as reported on the New York Stock Exchange Composite Tape, as adjusted for a
two-for-one stock split effective December 15, 1995 and a two-for-one stock
split effective March 14, 1994.
 
<TABLE>
<CAPTION>
                                                                          HIGH       LOW
                                                                          -----     -----
    <S>                                                                   <C>       <C>
    1994
    First Quarter.......................................................   16 7/8   13 1/4
    Second Quarter......................................................   16 1/2   13 1/4
    Third Quarter.......................................................   17 3/4   13 1/4
    Fourth Quarter......................................................   20 1/2   15 3/4
    1995
    First Quarter.......................................................   23 5/8   19 1/4
    Second Quarter......................................................   23       15 1/8
    Third Quarter.......................................................   24 1/2   17 1/4
    Fourth Quarter......................................................   36       21
    1996
    First Quarter (through February 26, 1996)...........................   40  1/8  29   1/4
</TABLE>
 
     The Company has not paid cash dividends on its Common Stock since its
inception and does not expect to pay cash dividends on the Common Stock in the
foreseeable future.
 
                                          12

<PAGE>   16

        ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial information should be read in conjunction
with the accompanying Consolidated Financial Statements and the related notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing elsewhere in this Report.
 
<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                               ----------------------------------------------------------
                                                                  1995         1994        1993        1992        1991
                                                               ----------    --------    --------    --------    --------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE AND MEMBERSHIP DATA)
<S>                                                            <C>           <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue:
    HMO medical premiums....................................   $  811,645    $515,639    $239,600    $135,861    $ 69,764
    Other insured medical premiums..........................      184,819      16,837      21,190      19,894       1,111
    Administrative and managed care fees....................      170,233      51,767      30,045      21,831      16,642
                                                               ----------    --------    --------    --------    --------
    Total operating revenue.................................    1,166,697     584,243     290,835     177,586      87,517
Expenses:
    Cost of HMO medical premiums............................      621,888     394,173     178,241     104,003      49,599
    Cost of other insured medical premiums..................      149,396      14,020      17,142      14,980       1,101
Selling, general and administrative:
    HMO and other insured services(2).......................      153,326      82,550      39,902      20,855       9,169
    Administrative and managed care services................      146,340      40,107      23,300      17,874      14,463
                                                               ----------    --------    --------    --------    --------
    Total selling, general and administrative(2)............      299,666     122,657      63,202      38,729      23,632
    Depreciation and amortization...........................       24,129      11,254       6,028       3,913       1,743
                                                               ----------    --------    --------    --------    --------
    Operating income........................................       71,618      42,139      26,222      15,961      11,442
Interest income(3)..........................................       20,823      13,004       6,648       4,646       3,806
Interest expense............................................       (5,392)         --          --          --          --
Equity in income of unconsolidated affiliates...............           --       1,670       3,544       3,006       2,098
Net income..................................................       56,271      39,044      26,064      16,987      12,700
Preferred stock dividends(4)................................       (4,167)         --          --          --          --
                                                               ----------    --------    --------    --------    --------
Net income applicable to common shareholders................   $   52,104    $ 39,044    $ 26,064    $ 16,987    $ 12,700
Net income per common share(5)..............................   $     0.81    $   0.62    $   0.48    $   0.35    $   0.29
Shares used in calculating net income per common share(5)...       64,195      62,818      54,332      48,888      44,796
OPERATING STATISTICS -- FULLY INSURED HMO(6):
    Membership:
        Northern region.....................................      273,000     200,300     175,800     152,900      83,700
        Southern region.....................................      332,200     197,500     124,000      88,200      62,500
                                                               ----------    --------    --------    --------    --------
        Total...............................................      605,200     397,800     299,800     241,100     146,200
    Average annual hospital bed days per 1,000 members(7):
        Northern region.....................................          226         244         254         278         281
        Southern region.....................................          248         248         283         287         300
    Medical loss ratio(8):
        Northern region.....................................        77.7%       76.9%       74.8%       76.6%       72.5%
        Southern region.....................................        75.6%       76.1%       77.3%       77.6%       75.6%
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                               ----------------------------------------------------------
                                                                  1995         1994        1993        1992        1991
                                                               ----------    --------    --------    --------    --------
<S>                                                            <C>           <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
    Working capital.........................................   $  144,470    $100,411    $127,388    $ 51,772    $ 56,586
    Total assets............................................      873,039     424,275     294,924     146,568     115,240
    Long term debt..........................................       95,000          --          --          --          --
    Total shareholders' equity(4)...........................      488,082     322,484     241,642     119,480     101,100
<FN> 
---------------
 
(1) Acquisitions in all years presented affect the comparability of these
    amounts. See Note 4 to the Consolidated Financial Statements.
 
(2) Includes premium tax of $4,265, $3,578, $2,837, $2,236 and $1,397 for 1995,
    1994, 1993, 1992 and 1991, respectively which were previously separately
    reported.
 
(3) Includes minority interest in (income) loss of consolidated entities of
    $277, $397, $59, $(65) and $(133) for 1995, 1994, 1993, 1992 and 1991,
    respectively which were previously separately reported.
 
(4) The Company paid cash dividends relating to its preferred stock of $4.2
    million in 1995. No cash dividends were paid in any previous periods
    presented.
 
(5) Healthsource declared a two-for-one stock split in the form of a 100% stock
    dividend effective December 15, 1995, a two-for-one stock split in the form
    of a 100% stock dividend effective March 14, 1994, and a three-for-two stock
    split in the form of 50% stock dividend effective December 15, 1992. All
    share and per share amounts have been restated for the stock splits.
 
(6) The Northern Region includes HMOs operating in New Hampshire, Indiana,
    Syracuse, New York, Louisville, Kentucky and Maine. The Southern Region
    includes HMOs operating in South Carolina, Tennessee, North Carolina,
    Arkansas, Savannah, Georgia and north central Texas. Indiana, Tennessee, and
    North Carolina are included since the ownership of investments therein were
    acquired in May 1992, December 1991, and December 1990, respectively.
    Arkansas, Savannah, Georgia, north central Texas and Louisville, Kentucky
    are included since commencement of operations in January 1994, November
    1994, January 1995 and July 1995, respectively. Syracuse, New York is
    included since January 1991, which is the first full year that the Company
    managed the plan.
 
(7) Calculated on the basis of average members during the period, excluding
    mental health and substance abuse days.
 
(8) Cost of HMO medical premiums for the plans in each region divided by HMO
    medical premium revenue.

</TABLE>
 
                                          13
<PAGE>   17

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

RESULTS OF OPERATIONS
 
     General -- The Company has experienced substantial growth in both revenues
and profitability since its formation in New Hampshire in 1985. Revenue growth
has been accomplished through increasing membership and medical premiums per
member and administrative and managed care fees from self-insured employers and
through acquisitions. The Company has made acquisitions of HMO companies
resulting in wholly-owned subsidiaries in South Carolina, Tennessee, Maine,
Indiana, North Carolina, and Syracuse, New York. The Company has formed
strategic alliances with hospitals to operate HMOs in Arkansas, Georgia, north
central Texas, Worcester, Massachusetts and southwestern Ohio and has formed
start-up HMOs in Connecticut and Louisville, Kentucky. It also formed a
strategic alliance with Chubb Life Insurance Company to operate an HMO
(ChubbHealth) in the metropolitan New York City and northern New Jersey areas.
Effective May 1, 1995, the Company acquired the group health, TPA and HMO
business from Provident for $231 million in cash and preferred stock. To conduct
the acquired businesses, the Company organized and capitalized HPIC to assume
the insured business and HPA to administer the self-insured business.
 
     Many federal and state proposals have been made in the past to reform the
healthcare system. The Company anticipates that federal and state legislatures
will continue to assess alternative healthcare systems and payment
methodologies. The Company is unable to predict which, if any, of these
healthcare reform proposals may be adopted. While the Company does not believe
it would be materially adversely impacted by most of the proposed reforms,
certain proposals could have such an impact and the imposition of a single-payor
system in any state could potentially eliminate the Company's business in that
state. See "Business -- Governmental Regulation."
 
     The premium pricing environment became much more competitive in the
Company's markets during 1995. The Company experienced a decline in average
premium of 3.5% PMPM. The Company expects a similar decline in 1996. This trend
may continue beyond 1996. As a result of this premium pricing pressure, the
Company's medical loss ratio and ultimately its profitability will depend on
its ability to control healthcare costs. Since the Company commits to provide
its services to members at prices fixed for one year, unexpected cost increases
during this period cannot be passed on to employers or to members. The Company
believes its continued profitability in 1995 can be attributed primarily to
increases in membership, increased revenue from administrative and managed care
services, its success in obtaining global capitation provider agreements and
other cost control efforts, the effects of the Provident Transaction in May
1995 and the acquisition of the remaining interest in Healthsource HMO of New
York (HSNY) in November 1994.
 
     Fiscal Year 1995 Compared To Fiscal Year 1994 -- Revenue increased 100% to
$1.17 billion from $584 million. The majority of the increase was the result of
a 57% increase in HMO medical premium revenue to $812 million from $516 million.
The change in HMO medical premium revenue was attributable to: (1) a $131
million increase due to the effect of the acquisition of the remaining interests
in Healthsource North Carolina (HSNC) and HSNY and the acquisition of HMO
members in the Provident Transaction (2) the combined effect of a 44% increase
in average membership and a 3.5% decrease in average medical premium yield to
$130 PMPM from $135 PMPM at its subsidiaries, Healthsource New Hampshire (HSNH),
Healthsource Tennessee (HSTN), Healthsource Maine (HSME), Healthsource South
Carolina (HSSC), Healthsource Arkansas (HSAR), and Healthsource Indiana (HSIN)
("Existing Plans"); and (3) from the commencement of operations of Healthsource
Savannah (HSSV) and Healthsource Kentucky (HSKY).
 
     In addition, there was a significant increase in other insured medical
premiums to $185 million from $17 million as a result of the acquisition of
Provident's fully-insured managed indemnity products and experience rated
refundable premium products.
 
     The remaining revenue increase was due to a 229% increase in administrative
and managed care fee revenue to $170 million from $52 million which resulted
from the Provident Transaction, continued growth of the Company's self-funded,
POS business in various states, workers' compensation healthcare administration
 

                                          14

<PAGE>   18
 
fees in New Hampshire, and the effect of the acquisition of the remaining 
interest in Healthsource North Carolina Administrators, Inc. (HSNCA) during 
1994.
 
     Cost of HMO medical premiums increased 58% to $622 million from $394
million. This increase was due to the effect of the acquisition of the remaining
interests in HSNC and HSNY, the combined effect of the 44% increase in average
membership with a 3.7% decrease in average cost of medical premiums to $99 PMPM
from $103 PMPM at Existing Plans, and the commencement of operations of HSSV and
HSKY. This 3.7% decrease in costs resulted from lower inpatient and outpatient
hospital costs as a result of favored hospital pricing arrangements and global
capitation arrangements offsetting increases in diagnostic testing and
pharmaceutical costs.
 
     The Company's cost of HMO medical premiums as a percent of HMO medical
premiums (HMO medical loss ratio or "MLR") increased to 76.6% from 76.4%. 
Although the 3.5% decrease in the average premium yield was less than the 3.7%
decrease in average cost of medical premiums at Existing Plans, this positive
effect was offset by HSNC, HSNY, HSSV, and HSKY which combined had higher
medical loss ratios than the Existing Plans. The Company expects the premium
pricing environment to remain competitive during 1996 and possibly beyond. The
medical loss ratio may increase if the Company is unable to keep the cost of
medical premiums in line with premium yields.
 
     The cost of other insured medical premiums increased to $149 million from
$14 million as a result of the acquisition of Provident's fully-insured managed
indemnity products and experience rated refundable premium products.
 
     Total selling, general and administrative ("SG&A") expenses increased to
$300 million from $123 million due to acquisitions and the development of
existing and new businesses. As a percent of total revenue, SG&A increased to
25.7% from 21.0% as a result of the self-funded business acquired in the
Provident Transaction which has inherently higher levels of SG&A expense.
 
     SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 86% to $153 million from $83 million. This increase was
primarily due to the effect of the acquisition of the remaining interests in
HSNC and HSNY and the Provident Transaction, the membership increases at
Existing Plans and start up of operations at HSSV and HSKY, and other business
development activities. SG&A expenses related to administrative and managed care
fees increased 265% to $146 million from $40 million due to the Provident
Transaction, the effect of the acquisition of the remaining interest in HSNCA
and increases in the Company's administrative service businesses serving
self-insured POS and managed workers' compensation membership.
 
     Depreciation and amortization expense increased 114% to $24 million from
$11 million due to amortization expense associated with the acquisitions of
Provident and the remaining interests in HSNC and HSNY and depreciation
associated with increased capital purchases.
 
     Interest and other income increased 60% to $21 million from $13 million.
This increase resulted primarily from the increase in cash, cash equivalents and
marketable securities associated with the Provident Transaction, the acquisition
of HSNC and continued increases in cash available from operations. The Company
incurred interest expense of $5 million in 1995 as a result of borrowings
associated with the Provident Transaction.
 
     The Company had no equity in the income of unconsolidated affiliates for
the year ended December 31, 1995 as compared to $1.7 million in the same period
in 1994. This decrease occurred because of the Company's acquisition of the
remaining interests in HSNC and HSNY which were previously accounted for using
the equity method.
 
     The Company's effective tax rate increased to 35.4% from 31.2% due to the
decline of non-taxable interest income as a percentage of total interest income
and as a percentage of total operating income.
 
     Fiscal Year 1994 compared to Fiscal Year 1993 -- Revenue increased 101% to
$584 million from $291 million. The majority of the increase was due to a 115%
increase in HMO medical premium revenue which was attributable to: (1) $181
million in medical premium revenue due to the acquisition of the remaining
 
                                          15
<PAGE>   19
 
interest in the parent companies of HSME, HSNC, and HSNY; (2) the combined
effect of an 11% increase in average membership and a 4% increase in average
medical premium yield to $145 PMPM from $140 PMPM at its wholly-owned
subsidiaries HSNH, HSIN, and HSTN; and (3) $12 million in medical premiums from
the commencement of operations of HSAR. The remaining revenue increase was due
to a 72% increase in administrative and managed care fees to $52 million from
$30 million resulting primarily from continued growth of the Company's
self-funded POS business in New Hampshire and Maine, managed workers'
compensation healthcare administration fees in New Hampshire, administrative
fees generated by the acquisition of a TPA business in Arkansas and the
acquisition of the remaining interest in HSNCA.
 
     Cost of HMO medical premiums increased 121% to $394 million from $178
million. This increase was due to the acquisition of the remaining interests in
HSME, HSNC, and HSNY, the commencement of operations of HSAR, and the combined
effect of the 11% increase in average membership with an increase in average
costs of medical premiums of 6% to $110 PMPM from $104 PMPM at HSNH, HSIN, and
HSTN. This 6% increase was primarily attributable to HSIN, which experienced
unfavorable inpatient case mix and significantly higher diagnostic, physician
and pharmaceutical costs.
 
     The Company's MLR increased to 76.4% from 74.4% because the 4% increase
in the average premium yield was less than the 6% increase in average cost of
medical premiums at HSNH, HSTN, and HSIN and because of the acquisition of the
remaining interest in HSME which had a higher MLR than the Company's 1993 MLR.
 
     Total SG&A expenses increased to $123 million from $63 million due to
acquisitions and the development of existing and new business. As a percent of
total revenue, SG&A decreased to 21.0% from 21.7%.
 
     SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 107% to $83 million from $40 million. The increase was
primarily due to the acquisition of the remaining interest in HSNC; the
inclusion of HSSC for a full year; higher levels of membership at HSNH, HSTN,
HSIN, and HSME; and the commencement of operations at HSAR. SG&A expense related
to administrative and managed care fees increased 72% to $40 million from $23
million due to increases in the Company's administrative services businesses,
such as its self-funded POS and managed workers' compensation businesses, the
acquisition of the TPA in Arkansas, and the acquisition of the remaining
interest in HSNCA.
 
     Depreciation and amortization expense increased 87% to $11 million from $6
million primarily due to the amortization expense associated with the Company's
acquisitions of the remaining interests in HSNC, HSME, and HSNY.
 
     Interest and other income increased 96% to $13 million from $6.6 million.
This increase resulted primarily from the increased funds available for
investment from the Company's $73 million public offering in August 1993, the
acquisition of the remaining interests in HSSC, HSME, HSNC, and HSNY and
continued increases in cash available from operations.
 
     Equity in the income of unconsolidated affiliates decreased 53% to $1.7
million from $3.5 million. This decrease occurred because of the Company's
acquisition of the remaining interests in HSSC, HSME, HSNC, and HSNY which were
previously accounted for using the equity method.
 
                                          16

<PAGE>   20
 
     The following table shows certain income statement data expressed as a
percentage of total operating revenues and is not intended to be indicative of
margins earned on each revenue source:
 
<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                                    ---------------------------
                                                                    1995       1994       1993
                                                                    -----      -----      -----
<S>                                                                 <C>        <C>        <C>
Revenue:
     HMO medical premiums.........................................   69.6%      88.3%      82.4%
     Other insured medical premiums...............................   15.8        2.9        7.3
     Administrative and managed care fees.........................   14.6        8.8       10.3
                                                                    -----      -----      -----
Total operating revenue...........................................  100.0      100.0      100.0
                                                                    -----      -----      -----
Expenses:
     Cost of HMO medical premiums.................................   53.3       67.5       61.3
     Cost of other insured medical premiums.......................   12.8        2.4        5.9
     Selling, general and administrative:
       HMO and other insured services.............................   13.2       14.1       13.7
       Administrative and managed care fees.......................   12.5        6.9        8.0
                                                                    -----      -----      -----
          Total selling, general and administrative...............   25.7       21.0       21.7
                                                                    -----      -----      -----
     Depreciation and amortization................................    2.1        1.9        2.1
                                                                    -----      -----      -----
Total operating expenses..........................................   93.9       92.8       91.0
                                                                    -----      -----      -----
Operating income..................................................    6.1        7.2        9.0
Interest income...................................................    1.8        2.2        2.3
Interest expense..................................................    (.5)      --         --
                                                                    -----      -----      -----
Interest income, net..............................................    1.3        2.2        2.3
                                                                    -----      -----      -----
Income before equity in income of unconsolidated affiliates and
  provision for income taxes......................................    7.4        9.4       11.3
Equity in income of unconsolidated affiliates.....................   --          0.3        1.2
Provision for income taxes........................................   (2.6)      (3.0)      (3.5)
                                                                    -----      -----      -----
Net income........................................................    4.8%       6.7%       9.0%
                                                                    =====      =====      =====
</TABLE>
 
LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1995, cash, cash equivalents and marketable securities
totaled approximately $224 million, of which $203 million was held by regulated
operating subsidiaries and was largely restricted to use in those subsidiaries.
 
     During 1995, the Company generated $51 million of cash from operations. The
Company liquidated approximately $118 million in marketable securities and
invested $55 million in property and equipment. The Provident Transaction
resulted in a net cash expenditure of approximately $154 million.

     On February 22, 1996, the Company announced its intention to privately
offer to institutional investors $215 million principal amount of convertible
subordinated notes (the "Notes").  The Company intends to use $100
million of the net proceeds of the Note offering to redeem the $100 million
face amount of the Company's outstanding 6.25% Class A Cumulative Preferred
Stock. The Company intends to use the balance of the net proceeds of the 
offering to repay a portion of the outstanding principal balance under the 
Chase Facility.
 
     The Company's Chase Facility is a $300 million unsecured revolving line of
credit, which is committed through March 15, 2000. At December 31, 1995, the
Company had $95 million outstanding. Subsequent to year end, the Company
borrowed an additional $50 million under the Chase Facility to fund the CMHC
Transaction in February 1996. Additionally, the Company has signed a definitive 
agreement to purchase substantially all of the operating assets of PACC for 
approximately $80 million in cash subject to significant adjustments. The 
Company intends to fund the PACC Transaction from borrowings under the Chase 
Facility or other financial resources.
 
     Although the Company has no other present commitments for significant
capital expenditures, the Company's 1996 budget reflects capital expenditures in
excess of $40 million. The Company believes that its existing cash balances and
cash flow generated by its wholly-owned plans coupled with the proceeds of the
sale of the Notes and the amounts, if any, available for borrowing under the 
Chase Facility, are adequate to fund its existing operations on a short-term 
and long-term basis.
 
     The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121) and Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
(FAS 123), which are effective for fiscal years beginning after December 15,
1995.
 
                                          17

<PAGE>   21
 
Management believes that the adoption of FAS 121 and FAS 123 will not have a
material impact on the Company's consolidated financial statements, although a
detailed study has not been completed. In accordance with the provisions of FAS
123, the Company will elect to continue to account for stock based compensation
under the provisions of APB 25.
 
  Effects of Inflation
 
     Historically, medical premiums and the cost of medical premiums generally
have risen at a rate higher than that for consumer goods as a whole. Nationally,
the rate of inflation of premiums and costs of medical premiums slowed
substantially during 1995. The Company experienced a decrease of 3.7% in the
average cost of medical premiums during 1995 over 1994. There is no assurance
that the Company's cost of medical premiums will continue to decline.
 
     The Company attempts to mitigate increases in the cost of medical premiums
through some or all of the following activities: (1) securing global capitation
arrangements with major hospital providers and improving its contracting
methodologies with other providers to achieve lower costs and to promote
risk-sharing; (2) reviewing and, as necessary, modifying benefit designs so as
to discourage inappropriate levels of consumer-driven utilization; (3) using
various UR techniques and technologies to mitigate inappropriate use of health
care resources by providers; and (4) communicating with the Company's primary
care physicians about the impact of clinically inappropriate utilization of
healthcare resources.
 
          SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
     REFORM ACT OF 1995: The statements contained in this Management's
     Discussion and Analysis of Financial Condition and Results of
     Operations concerning future premium pricing levels, future MLR
     levels, the Company's ability to control healthcare and SG&A costs and
     all other statements that are not historical facts are forward looking
     statements; actual results may differ materially from those projected
     in the forward looking statements, which statements involve risks and
     uncertainties, including but not limited to, the following: that
     increased regulation will increase healthcare expenses; that increased
     competition in the Company's markets, changes in product mix or other
     factors will unexpectedly reduce premium yield; that the Company will
     be unable to close sufficient global capitation arrangements with key
     providers; that healthcare costs in any given period may be greater
     than expected due to unexpected incidence of major cases, natural
     disasters, epidemics, changes in physician practices and new
     technologies; and that the Company will be unable to close
     acquisitions of other HMOs and healthcare financing companies on
     satisfactory terms in key markets. Shareholders are also directed to the
     other risks discussed in other documents filed by the Company with the 
     Commission.
 
                                          18
<PAGE>   22

        ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                     PAGE
    <S>                                                                              <C>
    Independent Auditors' Report...................................................  F-2
    Consolidated Balance Sheets....................................................  F-3
    Consolidated Statements of Operations..........................................  F-4
    Consolidated Statements of Cash Flows..........................................  F-5
    Consolidated Statements of Changes in Shareholders' Equity.....................  F-6
    Notes to Consolidated Financial Statements.....................................  F-7
</TABLE>
                                         F-1
                                         
<PAGE>   23
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors
Healthsource, Inc.
Hooksett, New Hampshire
 
     We have audited the accompanying consolidated balance sheets of
Healthsource, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Healthsource, Inc. and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
 
DELOITTE & TOUCHE LLP
 
Boston, Massachusetts
February 16, 1996
 
                                         F-2
                                          
<PAGE>   24

<TABLE>
 
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1995 AND 1994
 
<CAPTION>
                                                                         1995           1994
                                                                       --------       --------
                                                                           (IN THOUSANDS)
<S>                                                                    <C>            <C>
                                            ASSETS
Current assets:
     Cash and cash equivalents (Note 2)..............................  $121,467       $ 67,193
     Marketable securities (Notes 2, 3 and 11).......................    34,301         94,321
     Premiums and administrative fees receivable (Note 11)...........   117,871         16,525
     Restricted investments (Notes 2, 3, 8 and 11)...................   123,871             --
     Other current assets............................................    29,986         18,324
                                                                       --------       --------
          Total current assets.......................................   427,496        196,363
Long-term marketable securities (Notes 2, 3 and 11)..................    68,357         97,083
Property and leasehold improvements -- net (Notes 2 and 5)...........   103,611         39,686
Restricted investments (Notes 2, 3, 8 and 11)........................     8,099          6,618
Intangible assets (Notes 2 and 4)....................................   254,886         76,760
Other assets.........................................................    10,590          7,765
                                                                       --------       --------
          Total......................................................  $873,039       $424,275
                                                                       ========       ========
                             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Medical claims payable (Notes 2 and 11).........................  $152,649       $ 72,676
     Accounts payable and accrued expenses...........................    85,678         17,536
     Estimated liability under retrospective refund agreements (Note
      2).............................................................    35,623             --
     Deferred revenue (Note 2).......................................     7,489          3,388
     Other current liabilities.......................................     1,587          2,352
                                                                       --------       --------
          Total current liabilities..................................   283,026         95,952
Revolving note payable (Note 6)......................................    95,000             --
Other liabilities....................................................     6,931          5,839
                                                                       --------       --------
          Total liabilities..........................................   384,957        101,791
                                                                       --------       --------
Commitments and contingencies (Note 8)
Shareholders' equity (Notes 2 and 10):
     Preferred stock -- 10,000 shares authorized, 1,000 issued and
      outstanding -- $100 stated value (Note 4)......................   100,000             --
     Common stock -- $.10 par value -- 200,000 shares authorized,
      63,581 and 31,280 issued and outstanding.......................     6,358          3,128
     Additional paid-in capital......................................   221,048        213,463
     Retained earnings...............................................   159,547        107,443
     Unrealized gain (loss) on marketable securities (Notes 2 and
      3).............................................................     1,129         (1,550)
                                                                       --------       --------
          Shareholders' equity.......................................   488,082        322,484
                                                                       --------       --------
          Total......................................................  $873,039       $424,275
                                                                       ========       ========
</TABLE>
 
                 See notes to consolidated financial statements

                                         F-3
                                          

<PAGE>   25

<TABLE>
 
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
 
<CAPTION>
                                                                 1995         1994        1993
                                                              ----------    --------    --------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>           <C>         <C>
Revenue (Note 2):
     HMO medical premiums...................................  $  811,645    $515,639    $239,600
     Other insured medical premiums.........................     184,819      16,837      21,190
     Administrative and managed care fees...................     170,233      51,767      30,045
                                                              ----------    --------    --------
          Total operating revenue...........................   1,166,697     584,243     290,835
                                                              ----------    --------    --------
Expenses (Note 2):
     Cost of HMO medical premiums...........................     621,888     394,173     178,241
     Cost of other insured medical premiums.................     149,396      14,020      17,142
     Selling, general and administrative (Note 2):
       HMO and other insured services.......................     153,326      82,550      39,902
       Administrative and managed care services.............     146,340      40,107      23,300
                                                              ----------    --------    --------
          Total selling, general and administrative.........     299,666     122,657      63,202
                                                              ----------    --------    --------
     Depreciation and amortization..........................      24,129      11,254       6,028
                                                              ----------    --------    --------
          Total operating expenses..........................   1,095,079     542,104     264,613
                                                              ----------    --------    --------
Operating income............................................      71,618      42,139      26,222
     Interest income........................................      20,823      13,004       6,648
     Interest expense.......................................      (5,392)      --          --
                                                              ----------    --------    --------
               Interest income, net.........................      15,431      13,004       6,648
                                                              ----------    --------    --------
Income before equity in income of unconsolidated affiliates
  and provision for income taxes............................      87,049      55,143      32,870
Equity in income of unconsolidated affiliates...............      --           1,670       3,544
                                                              ----------    --------    --------
     Income before provision for income taxes...............      87,049      56,813      36,414
Provision for income taxes (Notes 2 and 7)..................      30,778      17,769      10,350
                                                              ----------    --------    --------
     Net income.............................................  $   56,271    $ 39,044    $ 26,064
                                                               =========    ========    ========
Preferred stock dividends...................................       4,167       --          --
                                                              ----------    --------    --------
Net income applicable to common shareholders................  $   52,104    $ 39,044    $ 26,064
                                                              ----------    --------    --------
Net income per common share (Note 2)........................  $     0.81    $   0.62    $   0.48
Weighted average number of common and common equivalent
  shares outstanding (Note 2)...............................      64,195      62,818      54,332
</TABLE>
 
                 See notes to consolidated financial statements

                                         F-4
                                          
<PAGE>   26
 
<TABLE>
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
 
<CAPTION>
                                                                 1995        1994        1993
                                                               --------    --------    --------
                                                                        (IN THOUSANDS)
<S>                                                            <C>         <C>         <C>
Cash flows from operating activities:
     Net income..............................................  $ 56,271    $ 39,044    $ 26,064
     Adjustments to reconcile net income to net cash provided
       by operating activities:
       Non-cash items:
          Depreciation and amortization......................    24,129      11,254       6,028
          Equity items, including minority interests.........      (277)     (2,067)     (3,603)
          Deferred income taxes..............................     2,726      (1,844)       (511)
     Changes in assets and liabilities net of the effects of
       acquisitions:
       Premiums and administrative fees receivable...........   (20,316)     (3,778)     (4,543)
       Other current assets..................................   (11,605)     (3,333)     (2,744)
       Medical claims payable................................    (5,062)      6,004       7,629
       Accounts payable and accrued expenses.................     2,247       8,541       3,331
       Deferred revenue......................................     2,456      (1,570)      1,360
                                                               --------    --------    --------
          Net cash provided by operating activities..........    50,569      52,251      33,011
                                                               --------    --------    --------
Cash flows from investing activities:
     Decrease (increase) in marketable securities............   119,448     (29,545)    (49,960)
     Investment in affiliates, net of cash acquired..........  (159,165)      7,831       3,501
     Additions to property and leasehold improvements........   (55,357)    (23,253)    (11,298)
     Decrease (increase) in other assets and restricted
       investments...........................................     2,162      (5,742)     (1,289)
                                                               --------    --------    --------
          Net cash used for investing activities.............   (92,912)    (50,709)    (59,046)
                                                               --------    --------    --------
Cash flows from financing activities:
     Net borrowings under revolving note payable.............    95,000       --          --
     Issuance of common stock................................     5,727       1,642      74,951
     Preferred stock dividends...............................    (4,167)      --          --
     Increase (decrease) in other liabilities................        57        (220)        624
                                                               --------    --------    --------
          Net cash provided by financing activities..........    96,617       1,422      75,575
                                                               --------    --------    --------
Increase in cash and cash equivalents........................    54,274       2,964      49,540
Balance, beginning of year...................................    67,193      64,229      14,689
                                                               --------    --------    --------
Balance, end of year.........................................  $121,467    $ 67,193    $ 64,229
                                                               ========    ========    ========
Supplemental disclosure of cash flow information:
     Income taxes paid.......................................  $ 23,955    $ 16,537    $  9,655
     Interest paid...........................................     5,331       --          --
</TABLE>
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
 
     In 1995, the Company issued $100 million in 6.25% cumulative preferred
stock in connection with the Provident Transaction (as defined in Note 1) (See
Note 4).
 
     In 1994, the Company issued 1,242,000 shares of common stock, which were
valued at $39.2 million in connection with the Healthsource Health Plans, Inc.
acquisition (See Note 4).
 
     In 1993, the Company issued 738,000 shares of common stock, which were
valued at $19.7 million in connection with the Physician's Health Systems, Inc.
("PHS") acquisition (See Note 4).
 
                 See notes to consolidated financial statements
 
                                         F-5
<PAGE>   27

<TABLE>
 
                                           HEALTHSOURCE, INC. & SUBSIDIARIES

                               CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                  FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<CAPTION>
                                                                                                     UNREALIZED
                                                                                                        GAIN
                                       PREFERRED STOCK      COMMON STOCK     ADDITIONAL              (LOSS) ON
                                      -----------------   ----------------    PAID-IN     RETAINED   MARKETABLE   SHAREHOLDERS'
                                      SHARES    AMOUNT    SHARES   AMOUNT     CAPITAL     EARNINGS   SECURITIES      EQUITY
                                      ------   --------   ------   -------   ----------   --------   ----------   ------------
                                                                           (IN THOUSANDS)
<S>                                    <C>     <C>        <C>       <C>        <C>        <C>            <C>          <C>
Balance January 1, 1993.............    --     $  --      12,036    $1,204     $ 75,941   $ 42,335       $ --         $119,480
Stock issued in connection with PHS
  acquisition.......................    --        --         738        74       19,662      --            --           19,736
Exercise of stock options...........    --        --         139        14        3,053      --            --            3,067
Stock issued in connection with                                                                        
  public offering...................    --        --       1,955       195       73,100      --            --           73,295
Stock split.........................    --        --      14,868     1,487       (1,487)     --            --
Net income..........................    --        --       --         --         --         26,064         --           26,064
                                       -----   --------   ------    ------     --------   --------       ------       --------
Balance, December 31, 1993..........    --        --      29,736     2,974      170,269     68,399         --          241,642
Stock issued in connection with HSHP
  acquisition.......................    --        --       1,242       124       39,098      --            --           39,222
Exercise of stock options...........    --        --         302        30        4,096      --            --            4,126
Unrealized loss on marketable
  securities........................    --        --        --        --          --         --          (1,550)        (1,550)
Net income..........................    --        --        --        --          --        39,044         --           39,044
                                       -----   --------   ------    ------     --------   --------       ------       --------
Balance, December 31, 1994..........    --        --      31,280     3,128      213,463    107,443       (1,550)       322,484
Stock issued in connection with                                                          
  Provident Transaction.............   1,000    100,000     --        --          --         --            --          100,000
Preferred stock dividends...........    --        --        --        --          --        (4,167)        --           (4,167)
Exercise of stock options...........    --        --         511        51       10,764      --            --           10,815
Unrealized gain on marketable
  securities........................    --        --        --        --          --         --           2,679          2,679
Stock split.........................    --        --      31,790     3,179       (3,179)     --            --            --
Net income..........................    --        --        --        --          --        56,271         --           56,271
                                       -----   --------   ------    ------     --------   --------       ------       --------
Balance, December 31, 1995..........   1,000   $100,000   63,581    $6,358     $221,048   $159,547       $1,129       $488,082
                                       =====   ========   ======    ======     ========   ========       ======       ========
</TABLE>
 
                 See notes to consolidated financial statements
 
                                         F-6
<PAGE>   28
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  ORGANIZATION AND NATURE OF BUSINESS
 
     Healthsource, Inc. and its subsidiaries (together referred to as the
"Company") operate in a single business segment, managed healthcare, and provide
a broad range of managed healthcare products and services through various
subsidiaries. The Company owns health maintenance organizations (HMOs) in New
England, upstate New York, and the Central, Southeastern and South Central
United States and acquired the group health, HMO and third-party administration
business of Provident Life and Accident Insurance Company of America
("Provident") of Chattanooga, Tennessee in May 1995 (the "Provident
Transaction") (see Note 4). The Company also provides managed care and
administration services directly to other healthcare payors.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Principles of Consolidation  The consolidated financial statements include
the accounts of Healthsource, Inc. and its majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation. Investments in entities in which ownership interests range from
20% to 50% and in which the Company exercises significant influence are
accounted for by the equity method. Interests of other investors in the
Company's majority-owned entities are accounted for as minority interests and
are included in other liabilities for financial reporting purposes.
 
     Cash and Cash Equivalents  The Company considers all money market deposits
and instruments, repurchase agreements, remarketed preferred stock, certificates
of deposit and U.S. Government obligations with original maturities of three
months or less to be cash equivalents.
 
     Marketable Securities  Effective January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (FAS 115). The cumulative
effect of the adoption of FAS 115 was not material to the financial statements.
The Company's investment portfolio is comprised principally of debt securities.
In 1995, the Company has classified its securities as "available-for-sale" and
recorded them at market value. The difference between cost and market, net of
the related tax effect, has been reflected as a separate component of
shareholders' equity. In 1994, certain securities were classified as
"held-to-maturity" and recorded at amortized cost . The carrying value of
investments sold is determined on a specific identification basis.
 
     Property and Leasehold Improvements  Property and leasehold improvements
are stated at cost. Depreciation of property is computed using straight-line and
accelerated methods over the estimated useful lives of the related assets,
principally five to seven years. Depreciation of building and improvements is
computed using the straight-line method over the estimated useful life of forty
years. Amortization of leasehold improvements and assets under capital leases is
computed using the straight-line method over the shorter of the estimated useful
lives or the related lease terms.
 
     Intangible Assets  Intangible assets consist of costs in excess of net
assets acquired, covenants not to compete, hospital services agreements,
physician networks and acquired membership lists. The costs in excess of net
assets acquired are amortized over various periods not exceeding forty years
using a straight-line method. The other intangible assets are amortized using a
straight-line method over their estimated useful lives ranging from three to
fifteen years. The Company continually evaluates the recoverability of goodwill
using various methods and believes that no material impairment of goodwill
existed at December 31, 1995.
 
     Medical Claims Payable  Reported claims expected to be paid after the
balance sheet date for services provided to members prior to the balance sheet
date are recorded as liabilities. Claims for services provided to members during
the financial reporting period which are unreported at the balance sheet date
are also recorded as liabilities based on the Company's claims experience. The
amounts are based upon estimates of the ultimate net cost of such services
provided.

                                         F-7
<PAGE>   29
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Retrospective Refund Agreements  The liability for retrospective refund
agreements and the retrospective refund credits due and accrued represent
estimated amounts to be either refunded to group contract holders or used to
adjust future premiums based on formulas which compare a group's claims
experience to premiums paid.
 
     Physician Risk Withholding  The cost of medical premiums (including the
portion of the physicians' fees withheld) are charged to expense as incurred,
and amounts withheld from physicians are recorded as liabilities. Amounts to be
returned to physicians are reviewed periodically, and any amounts not returned
under the risk-sharing arrangement are recorded as reductions of the cost of
medical premiums and corresponding reductions of the related liability for
physician risk withholding.
 
     Revenue  HMO medical premium revenue and other insured medical premium
revenue are recognized in the month in which members are entitled to receive
healthcare services and are reported net of retrospective refunds. Medical
premiums collected in advance are recorded as deferred revenue. Administrative
and managed care fees are recognized in the period that claims processing and
other managed care services are provided to self-funded clients. Revenue from
management service agreements is recognized in the period for which the Company
performs the services.
 
     Cost of HMO Medical Premiums  Cost of HMO medical premiums includes the
costs of all medical services delivered to enrolled members of the Company's
majority-owned HMOs and for whom the entities have recorded HMO medical premium
revenue during the reporting period. These costs include payments for specific
medical services and for capitation. The cost of specific medical services
include those paid to physicians, hospitals, and other healthcare providers on a
fee for service basis. These costs include claims paid, claims in process and
pending, estimates of unreported claims, estimates of contractual adjustments
pursuant to hospital and other provider contracts, and charges at the balance
sheet date for which the Company will be responsible. Adjustments to prior
period estimates are reflected in the current period and are not significant.
The costs of capitation (fixed monthly payments per member) include payments to
certain physicians, hospitals, laboratories, pharmaceutical and mental
healthcare providers. Adjustment to prior period estimates are reflected in the
current period and are not significant.
 
     Cost of Other Insured Medical Premiums  Cost of other insured medical
premiums includes the costs of all medical services delivered to enrolled
members of the Company's non-HMO medical plans for whom the entities have
recorded medical premium revenue during the reporting period. These costs
include claims paid, claims in process and claims pending, and estimates of
unreported claims and charges at the balance sheet date for which the Company
will be responsible. Adjustment to prior period estimates are reflected in the
current period and are not significant.
 
     Reinsurance  The Company's operating subsidiaries are covered under medical
reinsurance agreements that provide partial coverage for medical services in
excess of certain amounts. Reinsurance premiums, net of recoveries, are included
in the cost of medical premiums.
 
     Selling, General & Administrative ("SG&A") Expense  HMO and other insured
SG&A expense includes the costs recognized by the Company and its majority-owned
entities: (1) to market and administer the delivery of medical services for
which the Company is at risk and (2) to develop and administer its management
services agreements. Administrative and managed care fees SG&A expense includes
the costs recognized by the Company and its majority-owned entities to market
and administer the delivery of medical services for self-insured clients.
Corporate SG&A is included within HMO and other insured SG&A expense.
 
     Income Taxes  The Company and its majority-owned subsidiaries file
consolidated federal, New Hampshire, and Maine income tax returns. All other
state income tax returns are filed on a separate company basis.

                                         F-8
<PAGE>   30
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109. Deferred income tax assets
and liabilities are computed for differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
 
     Net Income Per Common Share  Net income per common share for all periods
presented was computed by dividing net income less preferred dividends by the
weighted average number of shares outstanding during each respective period
after giving effect to a two-for-one stock split effected in the form of a 100%
stock dividend payable to shareholders, December 15, 1995. Preferred stock
dividends amounted to $4,167,000 in 1995. Stock options, which do not materially
dilute net income per common share, are included as common stock equivalents.
 
     Risks and Uncertainties  The Company's business could be impacted by
continuing price pressure on new and renewal business, the Company's ability to
effectively control healthcare costs, additional competitors entering the
Company's markets, federal and state legislation in the area of healthcare
reform and governmental licensing regulations of HMOs and insurance companies.
Changes in these areas could adversely impact the Company's operations in the
future.
 
     Use of Estimates  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those
estimates.
 
     Accounting Pronouncements  The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FAS 121) and Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (FAS 123), which are effective for fiscal years
beginning after December 15, 1995. Management believes that the adoption of FAS
121 and FAS 123 will not have a material impact on the Company's consolidated
financial statements, although a detailed study has not been completed. In
accordance with the provisions of FAS 123, the Company will elect to continue to
account for stock based compensation under the provisions of APB 25.
 
     Reclassifications  Acquisitions in all years presented affect the
comparability of amounts. Other insured medical premiums, cost of other insured
medical premiums and a significant portion of SG&A are impacted and relate
primarily to the Provident Transaction. Accordingly, certain prior year amounts
have been reclassified to conform with the current year presentation.

                                         F-9
<PAGE>   31
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  MARKETABLE SECURITIES AND RESTRICTED INVESTMENTS
 
     The Company's investment portfolio consisted of the following securities
which were classified as "available-for-sale" at December 31, 1995:
 
<TABLE>
<CAPTION>
                                                    MARKET    UNREALIZED   UNREALIZED   AMORTIZED
                                                    VALUE        GAIN         LOSS        COST
                                                   --------   ----------   ----------   ---------
                                                                   (IN THOUSANDS)
<S>                                                <C>          <C>           <C>       <C>
Current Assets:
  Marketable Securities:
     Municipal Tax Exempt Bonds..................  $ 23,992     $  136        $ 32      $ 23,888
     Remarketed Preferred Stock..................    10,309       --           119        10,428
                                                   --------     ------        ----      --------
          Total..................................    34,301        136         151        34,316
                                                   --------     ------        ----      --------
  Restricted Investments:
     Taxable Municipal Bonds.....................    45,187          2          15        45,200
     Municipal Tax Exempt Bonds..................    48,208        579         --         47,629
     Remarketed Preferred Stock..................    13,936       --           --         13,936
     Other.......................................    16,540       --           --         16,540
                                                   --------     ------        ----      --------
          Total..................................   123,871        581          15       123,305
                                                   --------     ------        ----      --------
Non-Current Assets:
  Marketable Securities:
     US Government and Agencies..................     2,852          7         --          2,845
     Municipal Tax Exempt Bonds..................    62,072      1,104          57        61,025
     Other.......................................     3,433       --            44         3,477
                                                   --------     ------        ----      --------
          Total..................................    68,357      1,111         101        67,347
                                                   --------     ------        ----      --------
  Restricted Investments:
     US Government and Agencies..................     4,503        119           2         4,386
     Municipal Tax Exempt Bonds..................     1,248       --           --          1,248
     Other.......................................     2,348         16         --          2,332
                                                   --------     ------        ----      --------
                                                      8,099        135           2         7,966
                                                   --------     ------        ----      --------
Total Available-for-Sale.........................  $234,628     $1,963        $269      $232,934
                                                   ========     ======        ====      ========
</TABLE>
 
     Proceeds from sales of "available-for-sale" securities during 1995 were
$27.5 million. Realized gains on these sales totalled $.4 million.

                                          F-10
<PAGE>   32
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company's investment portfolio, which was recorded at market value for
"available-for-sale" and amortized cost for "held-to-maturity" investments,
consisted of the following at December 31, 1994:
 
<TABLE>
<CAPTION>
                                                MARKET    UNREALIZED    UNREALIZED     AMORTIZED
                                                VALUE        GAIN          LOSS          COST
                                               --------   ----------    ----------     ---------
                                                                 (IN THOUSANDS)
<S>                                            <C>           <C>          <C>          <C>
Available-for-Sale:
  Current Assets:
     Municipal Tax Exempt Bonds..............  $ 72,046      $ 57         $1,607       $ 73,596
                                               ========      ====         ======       ========
Held-to-Maturity:
  Current Assets:
     US Government and Agencies..............  $  1,267      $ --         $   12       $  1,279
     Municipal Tax Exempt Bonds..............    20,635        57            134         20,712
     Other...................................       277        --              7            284
                                               --------      ----         ------       --------
          Total..............................    22,179        57            153         22,275
                                               --------      ----         ------       --------
  Non-Current Assets:
     US Government and Agencies..............       519        --             44            563
     Municipal Tax Exempt Bonds..............    94,057       284          2,447         96,220
     Other...................................       296         1              5            300
                                               --------      ----         ------       --------
          Total..............................    94,872       285          2,496         97,083
                                               --------      ----         ------       --------
            Total Held-to-Maturity...........  $117,051      $342         $2,649       $119,358
                                               ========      ====         ======       ========
</TABLE>
 
     Non-current restricted investments at December 31, 1994 consisted primarily
of US Government Agencies and Municipal Tax Exempt Bonds.
 
Maturities of investments are as follows at December 31, 1995:
 
<TABLE>
<CAPTION>
                                                                         MARKET    AMORTIZED
                                                                         VALUE        COST
                                                                        --------   ---------
                                                                           (IN THOUSANDS)
<S>                                                                     <C>         <C>
Available-for-Sale:
     Within One Year..................................................  $131,558    $131,486
     One Through Five Years...........................................    92,578      91,209
     After Five Through Ten Years.....................................    10,117       9,884
     After Ten Years..................................................       375         355
                                                                        --------    --------
                                                                        $234,628    $232,934
                                                                        ========    ========
</TABLE>
 
     On December 31, 1995, the Company reclassified its "held-to-maturity"
investments to "available-for-sale," based on a one time assessment of the
portfolio. The impact of the transaction was to transfer securities with a
market value of $128.1 million and an amortized cost of $126.9 million from
"held-to-maturity" to "available-for-sale."

                                          F-11
<PAGE>   33
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4.  ACQUISITIONS
 
     The Company's intangible assets were acquired as the result of various
acquisitions. At December 31, 1995 and 1994, the Company's intangible assets
consisted of the following:
 
<TABLE>
<CAPTION>
                                                                         1995      1994
                                                                       --------   -------
                                                                       (IN THOUSANDS)
     <S>                                                               <C>        <C>
     Identifiable intangible assets..................................  $ 20,053   $17,227
     Cost in excess of net assets acquired...........................   255,191    70,625
                                                                       --------   -------
     Total intangible assets.........................................   275,244    87,852
     Less accumulated amortization...................................   (20,358)  (11,092)
                                                                       --------   -------
     Intangible assets, net..........................................  $254,886   $76,760
                                                                       ========   =======
</TABLE>
 
     Identifiable intangible assets consist of covenants not to compete,
membership lists, hospital services agreements and physician networks which are
being amortized over estimated useful lives ranging from three to fifteen years
based on formal valuation studies. In connection with the Provident Transaction,
the formal valuation study to determine the allocation of purchase price among
tangible and intangible assets and the assignment of estimated lives to
intangibles has not yet been completed. Amortization expense for the years ended
December 31, 1995, 1994, and 1993 was $9.3 million, $4.7 million, and $3.1
million, respectively.
 
     1995 Acquisition  Effective May 1, 1995, the Company acquired the group
health, HMO and third party administration business of Provident for $231
million in cash and securities. The Company paid cash of $131 million and issued
to Provident non-voting non-convertible Class A Cumulative Preferred Stock with
a face value of $100 million. The Preferred Stock bears a 6.25% annual dividend
rate and through May 1, 1997 is redeemable at par only at the option of the
Company in cash or for a 10-year subordinated note with interest at a market
rate or, failing that, the dividend rate on the Preferred Stock will be reset to
a market rate on May 1, 1997. The transaction was accounted for as a purchase.
 
     1994 Acquisitions  On January 13, 1994, the Company acquired the remaining
60.2% interest in Healthsource Maine, Inc. (HSME). Under the terms of the
agreement, the Company made a cash payment of $11.5 million in exchange for all
of the shares of HSME which it did not already own. The transaction was
accounted for as a purchase.
 
     On March 31, 1994, the Company acquired the remaining 69.9% of Healthsource
Health Plans, Inc. (HSHP), the parent company of Healthsource North Carolina,
Inc. (HSNC). Under the terms of the agreement, HSHP shareholders received
approximately 1.24 million shares of the Company's common stock. In addition,
certain existing options held by HSHP management were converted at the same
ratio to options to purchase approximately 153,000 shares of Healthsource common
stock with an exercise price of approximately $4.60 per share. The transaction
was accounted for as a purchase. The number of shares and option price per share
have not been adjusted for subsequent stock splits.
 
     In November 1994, the Company completed a cash tender offer to purchase the
remaining 60% interest in Healthsource New York, Inc. (formerly CNY Patient's
Network, Inc.), the parent company of Healthsource HMO of New York (HSNY) which
resulted in a total purchase price of approximately $11 million. The transaction
was accounted for as a purchase.
 
     1993 Acquisitions  On March 31, 1993, the Company acquired the remaining
69.6% of PHS, the parent company of Healthsource South Carolina (HSSC). Under
the terms of the agreement, Healthsource, Inc. issued 737,775 shares of common
stock in exchange for all of the shares of PHS which it did not own.
Additionally, the Company cashed out the rights to future share grants and
options for approximately $1.2 million. The transaction was accounted for as a
purchase. The number of shares has not been adjusted for subsequent stock
splits.

                                          F-12
<PAGE>   34
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On August 31, 1993, the Company acquired 40.0% of Healthsource New York,
Inc. (formerly CNY Patient's Network, Inc.), the parent company of HSNY for $1.0
million.
 
     The following unaudited pro forma consolidated statement of operations
information assumes the Provident Transaction and the HSME, HSHP and HSNY
acquisitions had occurred on January 1 of each year.
 
<TABLE>
<CAPTION>
                                                                         1995           1994
                                                                      ----------     ----------
                                                                           (IN THOUSANDS,
                                                                       EXCEPT PER SHARE DATA)
<S>                                                                   <C>            <C>
Revenue.............................................................  $1,312,462     $1,021,011
Operating income....................................................      73,997         52,164
Net income..........................................................      58,691         48,685
Net income per common share.........................................       $0.82          $0.68
</TABLE>
 
5.  PROPERTY AND LEASEHOLD IMPROVEMENTS
 
     Property and leasehold improvements at December 31, 1995 and 1994 consisted
of the following:
 
<TABLE>
<CAPTION>
                                                                         1995      1994
                                                                       --------   -------
                                                                       (IN THOUSANDS)
     <S>                                                               <C>        <C>
     Land............................................................  $  5,913   $ 1,425
     Building and improvements.......................................    13,886     5,022
     Furniture, fixtures and equipment...............................    85,271    39,467
     Purchased computer software.....................................    21,314     2,543
     Leasehold improvements..........................................     6,065     5,204
                                                                       --------   -------
               Total.................................................   132,449    53,661
     Less accumulated depreciation and amortization..................   (28,838)  (13,975)
                                                                       --------   -------
     Property and leasehold improvements -- net......................  $103,611   $39,686
                                                                       ========   =======
</TABLE>
 
     Depreciation and amortization expense for the years ended December 31,
1995, 1994 and 1993 was $14.9 million, $6.5 million and $2.9 million,
respectively.
 
6.  REVOLVING NOTE PAYABLE
 
     The Company has a $300 million unsecured revolving credit agreement with a
bank syndicate which is committed through March 15, 2000. Interest under this
revolving credit facility may range between LIBOR plus .2% and LIBOR plus .45%
depending upon the Company's ratio of indebtedness to total capital. In
connection with the agreement, the Company is required to maintain certain
minimum financial ratios and other covenants. Management believes the Company to
be in compliance with all covenants under this agreement. At December 31, 1995
the Company had $95 million outstanding under this facility. The interest rate
at December 31, 1995 was approximately 6.0%. See Note 8 regarding the
acquisition of substantially all of the HMO assets of Central Massachusetts
Health Care, Inc. ("CMHC"). The revolving credit agreement contains restrictions
on the payment of cash dividends to 50 percent of consolidated net income (as
defined) plus $10 million.

                                         F-13
<PAGE>   35
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7.  INCOME TAXES
 
     The provision for income taxes was comprised of the following:

<TABLE>
<CAPTION>
                                                                 1995      1994      1993
                                                                -------   -------   -------
                                                                (IN THOUSANDS)
     <S>                                                        <C>       <C>       <C>
     Current:
          Federal.............................................  $25,190   $17,000   $ 9,461
          State...............................................    2,862     2,613       378
                                                                -------   -------   -------
               Total current..................................   28,052    19,613     9,839
                                                                -------   -------   -------
     Deferred:
          Federal.............................................    2,640    (1,651)      407
          State...............................................       86      (193)      104
                                                                -------   -------   -------
               Total deferred.................................    2,726    (1,844)      511
                                                                -------   -------   -------
               Total provision................................  $30,778   $17,769   $10,350
                                                                =======   =======   =======
</TABLE>
 
     Deferred income tax expense arose from differences between the reported
amounts of assets and liabilities and their tax bases provided for in accordance
with FAS 109.
 
     Deferred tax assets and liabilities were not material individually or in
the aggregate and are included in other current assets, other assets, other
current liabilities, and other liabilities for financial reporting purposes.
 
     The difference between the Company's effective income tax rate and the
federal statutory rate is reconciled below:
 
<TABLE>
<CAPTION>
                                                                1995       1994      1993
                                                              --------   --------   -------
     <S>                                                        <C>        <C>        <C>
     Federal statutory rate.................................    35.0%      35.0%      35.0%
     State income taxes.....................................     2.1        1.6         .9
     Equity in income of unconsolidated affiliates..........    --         (1.0)      (3.0)
     Non-taxable income.....................................    (3.9)      (5.4)      (5.2)
     Non-deductible expenses and other......................     2.2        1.3         .7
                                                                -----      -----      ----
     Effective income tax rate..............................    35.4%      31.5%      28.4%
                                                                =====      =====      ====
</TABLE>
 
8.  COMMITMENTS AND CONTINGENCIES
 
     Acquisitions  In February 1996, the Company acquired substantially all of
the HMO assets of CMHC for approximately $46.5 million, subject to post closing
purchase price adjustments. The purchase price was funded with proceeds from its
revolving line of credit.
 
     In January 1996, the Company announced that it had signed a definitive
agreement to purchase substantially all of the operating assets of PACC HMO and
PACC Health Plans for an estimated net price of $80 million in cash, subject to
certain adjustments. The definitive agreement is subject to regulatory and other
approvals.
 
     Regulatory Requirements  The Company's affiliated HMOs and insurance
companies are subject to various regulatory requirements including maintenance
of minimum statutory net worth. At December 31, 1995 the Company believes that
it was in compliance with all such requirements. Certain wholly-owned and
majority-owned subsidiaries are required to maintain restricted investments in
the amount of approximately $131 million which includes approximately $123
million placed in a temporary trust to cover claims payments associated with the
Provident Transaction until such time as the policies acquired are novated to
the Company from the Provident.
 
     Legal Proceedings  The Company is involved in legal actions in the ordinary
course of business. Although the outcome of any such legal actions cannot be
predicted, in the opinion of management there are

                                         F-14
<PAGE>   36
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
no legal proceedings pending against or involving the Company, the outcome of
which is likely to have a material adverse effect upon the consolidated
financial position or results of operations of the Company.
 
     Employee Benefit Plans  The Company sponsors defined contribution
retirement plans covering substantially all full-time employees. The Company
matches employee contributions to a maximum of 3% of compensation. Expense
related to this plan amounted to $1.7 million, $.4 million and $.2 million in
1995, 1994 and 1993, respectively.
 
     Leases  The Company leases certain equipment and premises under
noncancellable operating leases. Rent expense under all operating leases was
$10.9 million, $3.4 million, and $1.7 million for the years ended December 31,
1995, 1994 and 1993, respectively.
 
     At December 31, 1995, future minimum annual lease payments under
noncancellable operating leases are as follows:
 
<TABLE>
<CAPTION>
                                                                        OPERATING
                                                                          LEASES
                                                                      --------------
                                                                      (IN THOUSANDS)
          <S>                                                             <C>
          1996......................................................      $13,955
          1997......................................................       13,651
          1998......................................................       11,964
          1999......................................................        7,761
          2000......................................................        4,088
          2001 and thereafter.......................................       13,765
</TABLE>
 
9.  RELATED PARTY TRANSACTIONS
 
     Under the terms of various management services agreements, the Company
provided services to previously unconsolidated affiliates. Additionally, several
members of the Board of Directors are also physicians who provide services to a
wholly-owned subsidiary under a standard agreement used for all physicians, and
three hospitals who are minority shareholders of each of three of the Company's
consolidated subsidiaries also provide services under standard provider
agreements.
 
10.  STOCK OPTION PLANS
 
     The Company, with the approval of the shareholders, has three Non-Qualified
Stock Option Plans for employees and one Non-Qualified Stock Option Plan for
non-employee directors (the "Plans"). Options granted to employees may be
designated by the Company as qualified or non-qualified at the date of grant.
Under the provisions of the Plans, the Company is currently entitled to grant up
to approximately 7 million options, plus annually an amount equal to 1 1/2% of
the number of outstanding shares on the preceeding December 31. Each option is
convertible into one share of common stock of the Company and may be awarded to
employees of the Company and its subsidiaries and non-employee directors of the
Company at a purchase price of at least 110% of the fair market value of the
stock as of the date of grant. Options may be

                                         F-15
<PAGE>   37
                       HEALTHSOURCE, INC. & SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
exercised in accordance with the terms and conditions of each grant. Information
concerning options outstanding for 1995, 1994 and 1993, is as follows:
 
<TABLE>
<CAPTION>
                                                 1995               1994                 1993
                                                ------             ------                -----
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>                <C>                  <C>
Outstanding, beginning of year.............      4,538              2,754                2,460
     Granted...............................      1,471              2,512                  896
     Exercised.............................     (1,022)              (604)                (558)
     Forfeited.............................        (11)              (124)                 (44)
                                                 -----              -----                -----
Outstanding, end of year...................      4,976              4,538                2,754
                                                 =====              =====                =====
Exercisable, end of year...................      1,884                946                1,046
Option price per share.....................  $2.31 - $25.78     $2.31 - $19.83       $0.84 - $15.20
</TABLE>
 
11.  CONCENTRATIONS OF CREDIT RISK
 
     Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of investments in marketable
securities, premiums receivable and hospital settlement receivables. The
Company's investments in marketable securities are managed by internal and
external investment managers within the guidelines established by the Board of
Directors, which, as a matter of policy, limit the amounts which may be invested
in any one issuer. Concentrations of credit risk with respect to premiums
receivable and hospital settlement receivables are limited due to the large
number of employer groups and hospital providers comprising the Company's
customer base and provider networks, respectively. Additionally, the Company has
a right of offset with respect to amounts due from and to the hospitals. As of
December 31, 1995, management believes that the Company had no significant
concentrations of credit risk.
 
12.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     The following table presents selected quarterly financial information for
each of the four quarters of 1995 and 1994. Such information includes all
adjustments the Company considers necessary for a fair presentation thereof.
 
<TABLE>
<CAPTION>
                                                      FIRST       SECOND      THIRD       FOURTH
                                                     --------    --------    --------    --------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>         <C>         <C>         <C>
1995
  Revenue..........................................  $208,107    $286,744    $328,211    $343,635
  Operating income.................................    14,057      15,942      18,853      22,766
  Net income.......................................    11,771      13,622      15,023      15,855
  Net income per share.............................  $   0.19    $   0.20    $   0.21    $   0.22
1994
  Revenue..........................................  $109,256    $151,790    $155,587    $167,610
  Operating income.................................     7,770      10,902      11,046      12,421
  Net income.......................................     8,414       9,493      10,142      10,995
  Net income per share.............................  $   0.14    $   0.15    $   0.16    $   0.17
</TABLE>
 
     The sum of the above quarterly amounts may not equal reported year to date
amounts due to rounding.

                                         F-16
<PAGE>   38
                  ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
                       ACCOUNTING AND FINANCIAL DISCLOSURE.

             None.

                                       PART III

                  ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

                  (i)  Directors.  This information required for this item
             regarding directors of Healthsource is incorporated by reference
             to Healthsource's Definitive 1996 Proxy Statement.

                  (ii)  Executive Officers.  The following information
             concerning executive officers is provided in response to Part
             III, Item 10 of Form 10-K pursuant to Item 401 of the Regulation
             S-K Integrated Disclosure Rules.  Unless otherwise specified, the 
             specified positions are with Healthsource, Inc.



                                      35

<PAGE>   39
<TABLE>
      Name                        Age    Position
      ----                        ---    --------
<S>                               <C>    <C>
Norman C. Payson, M.D.            47     President and Chief Executive Officer  
Sally W. Crawford                 42     Chief Operating Officer
Charles M. Schneider              50     Executive Vice President
Francis G. Middleton, M.D.        56     President, Healthsource South, Inc.  
Richard B. Salmon, M.D., Ph.D.    46     Corporate Medical Director
Robert Chin                       36     Chief Information Officer
Thomas M. Congoran                52     Chief Financial Officer
</TABLE>
 
     Norman C. Payson, M.D. has been a director and the President and Chief
Executive Officer of the Company since its founding in 1985. He has been in the
HMO field since 1975, first as a practicing physician and director of an HMO
quality program. By 1980, Dr. Payson had assumed a full-time position as Chief
Executive Officer of a large physician group practice and as Medical Director
for a related HMO company. Dr. Payson is a graduate of the Massachusetts
Institute of Technology and Dartmouth Medical School.
 
     Sally W. Crawford has served as the Chief Operating Officer of the Company
since 1985. She served as the Chief Executive Officer of Healthsource New
Hampshire, Inc. from 1986 to 1993. Ms. Crawford is responsible for the Company's
Northern Region operations and marketing efforts. Ms. Crawford has been involved
in HMO management as the Director of Marketing of the Matthew Thornton Health
Plan from 1979 until 1982 and Beacon Health Plan from 1983 until 1985. Ms.
Crawford is a graduate of Smith College and has a Master of Science degree from
Boston University.
 
     Charles M. Schneider has served as Executive Vice President of the Company
since October 1993. Mr. Schneider is responsible for the Company's Southern
Region operations and development activities. From February 1991 to October
1993, Mr. Schneider served as Vice President for Development of the Company and
from April 1990 to February 1991 served as Director of Business Development of
Healthsource New Hampshire, Inc. Before joining the Company in April 1990, Mr.
Schneider served as Chief Executive Officer of a New England hospital, and
previously held several senior healthcare management positions. He is a graduate
of Wayne State University where he also earned a Masters in Economics and
completed a doctoral program in Economics.
 
     Francis G. Middleton, M.D. has served as President of Healthsource South,
Inc. since January 1995. In this capacity he is responsible for development
activities throughout the southern United States. Dr. Middleton served as
Medical Director of Healthsource South Carolina, Inc. from 1986 to January 1995.
Until July 1991, Dr. Middleton practiced medicine in Charleston, South Carolina
as a specialist in internal medicine and infectious disease. Dr. Middleton is a
graduate of the University of the South and received his 

                                      36

<PAGE>   40
M.D. from the Medical College of South Carolina. Dr. Middleton has also served 
as a director of the Company since 1989.

     Richard B. Salmon, M.D., Ph.D. has served as Corporate Medical Director of
the Company since October 1994. Dr. Salmon is responsible for medical management
policy issues on a company-wide basis. He also currently serves as an adjunct
assistant professor of Community and Family Medicine at Dartmouth Medical
School. Prior to his appointment as Corporate Medical Director, Dr. Salmon
served as Medical Director for Healthsource New Hampshire, Inc. from 1986 to
1994. Before joining the Company in 1986, Dr. Salmon served as medical director
for another New Hampshire HMO and was a family practice physician. He is a
graduate of Princeton University and received his M.D. and Ph.D. in Biomedical
Engineering from Case Western Reserve University.

     Robert Chin has served as Chief Information Officer of the Company since
August 1993. Mr. Chin is responsible for the Company's information services and
technology development functions. Prior to joining Healthsource in August 1993,
Mr. Chin served as Chief Information Officer at Tufts Associated Health Plan
from 1985 to 1993 and as Systems Manager at Harvard Community Health Plan from
1977 to 1985. He is a graduate of Harvard College and holds a Master of Science
degree from Tufts University.

     Thomas M. Congoran has served as the Chief Financial Officer of
Healthsource since July 1989 and served as the Director of Information Services
of the Company from 1987 to July 1989. Mr. Congoran was the Software/Product
Manager of Contel Business Systems, Inc., a computer systems company, from 1985
to 1987. He was the President of Suntax, Inc., a software contractor, from 1979
to 1985. Mr. Congoran is a graduate of Stanford University and earned an M.B.A.
from San Diego State University.
 

                                      37
<PAGE>   41

                             
             There are no family relationships existing between or among any
        of the above listed officers, nor is there any involvement in certain
        legal proceedings for which disclosure is required under Item 401 of
        Regulation S-K.  The term of office of each of the foregoing officers
        extends until the organizational meeting of the Board of Directors of
        Healthsource following the annual meeting of shareholders or until
        removed by the Board of Directors.

             Information on certain matters relating to beneficial ownership
        of directors, executive officers and ten percent shareholders of
        Healthsource required for this item is incorporated by reference to
        Healthsource's Definitive 1995 Proxy Statement.


             ITEM 11.  EXECUTIVE COMPENSATION.

             The information required for this item is incorporated by
        reference to Healthsource's Definitive 1996 Proxy Statement.


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

             The information required for this item is incorporated by
        reference to Healthsource's Definitive 1996 Proxy Statement.


             ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

             The information required for this item is incorporated by
        reference to Healthsource's Definitive 1996 Proxy Statement.


                                      38
                                      
<PAGE>   42
                                       PART IV

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

                 (a) Documents Filed as Part of This Report.

                 (1)  Financial Statements. The following financial
                      statements are filed herewith and appear in Item 8:

                      Independent Auditors Report

                      Consolidated balance sheets as of December 31, 1995 
                      and 1994

                      Consolidated statements of operations for the years ended 
                      December 31, 1995, 1994 and 1993

                      Consolidated statements of cash flows for the years ended 
                      December 31, 1995, 1994 and 1993

                      Consolidated statements of changes in shareholders' 
                      equity for the years ended December 31, 1995, 1994 
                      and 1993 

                      Notes to consolidated financial statements
        

                 (2)  Financial Statement Schedules. Not applicable.


                 (3)  Exhibits.  Pursuant to Rule 12b-32 and General
                      Instruction G, the following Exhibits are
                      required to be filed with this Report under Item
                      14 and are incorporated by reference from
                      the reference source cited in the Exhibit Index
                      below, are filed herewith, or are not
                      applicable.
                 




                                      39
<PAGE>   43

<TABLE>
                                    EXHIBIT INDEX

<CAPTION>

        Reg. S-K                                                                                                   
        Item 601                                                             Source or Consecutive                          
        Exhibit No.   Document                                               Page of This Report                            
        -----------   --------                                               ---------------------                          
        <S>           <C>                                                    <C>                                            

                                                                                                                   
        (3)           Articles of Incorporation and By-Laws    
                                                                                                                   
                      3.1  Articles of Incorporation of Healthsource,        Exhibit 3.1 to Form 10-K for the               
                           Inc.,  as amended                                 Fiscal Year Ended December 31, 1994            
                                                                             filed on March 19, 1995                        
                                                                                                                   
                      3.2  By-Laws of Healthsource, Inc., as amended         Exhibit 3.2 to Amendment No. 2 to              
                                                                             Form S-4 Registration Statement                
                                                                             No. 33-56446 dated February 19, 1993           
                                                                                                                   
                      3.3  Articles of Amendment to the Articles of          Exhibit 4.1 to Form 8-K dated                  
                           Incorporation of Healthsource, Inc.               June 14, 1995                                  
                           designating the rights of the Class A 
                           Cumulative Preferred Stock  
                                                                                                                   
        (10)      Material Contracts                                                                               
                                                                                                                   
                      10.1 Indemnity Agreement (form) dated September         Exhibit 10.7 to Form S-1 Registration          
                           11, 1989 between Healthsource, Inc. and            Statement No. 33-31165 dated                   
                           September 20, 1989 each of its directors and
                           executive officers (compensatory contract)  
                                                                                                                   
                      10.2 Amendment to Healthsource, Inc. 1987               Exhibit 10 to Form 10-Q for the Quarter        
                           Non-Qualified Stock Option Plan (compensatory      Ended March 31, 1991 filed on May 3, 1991          
                           plan)                                                                                   
                                                                                                                   
                      10.3 Healthsource, Inc. 1991 Non-Qualified Stock        Exhibit 10.21 to Form 10-K for the             
                           Option Plan (compensatory plan)                    Fiscal Year Ended December 31, 1990            
                                                                              filed on March 28, 1991                        
</TABLE>

                                      40
<PAGE>   44
                                                     
<TABLE>
<CAPTION>
        <S>       <C>                                                   <C>                                      
                   10.4   Healthsource, Inc. 1992 Director              Exhibit 10.2 to Form 10-Q for the        
                          Stock Option Plan (compensatory plan)         Quarter Ended June 30, 1992 filed on     
                                                                        August 12, 1992                          
                                                                                                                 
                   10.5   Healthsource, Inc. 1994 Stock Option          Exhibit to Proxy Statement for the
                          Plan (compensatory plan)                      Annual Meeting of Shareholders held
                                                                        on May 11, 1994 filed on April 11, 1994
                                         
                   10.6   Employment Agreement dated as of              Exhibit 10.7 to Form  10-K for the Fiscal Year 
                          January 1, 1995 between Healthsource,         Ended December 31, 1994 dated March 17, 1995 
                          Inc.  and Francis G. Middleton,                              
                          M.D. (compensatory contract)                                                                              
                                                                                                                 
                   10.7   Employment Agreement dated November           Exhibit 10.16 to Form 10-K for the 
                          24, 1993 between Healthsource, Inc.           Fiscal Year Ended December 31, 1993
                          filed on March 30, 1994 and David      
                          W. Schall, M.D. (compensatory contract)                                     
                                                                                                                 
                   10.8   Formation Agreement dated July 28,            Exhibit 10 to Form 8-K dated July 30,
                          1993 between Healthsource, Inc. and           1993
                          St. Vincent Infirmary Medical Center                                                                 
                               
                   10.9   Investment Agreement dated as of              Exhibit 10.1 to Form 10-Q for 
                          April 8, 1993 between Healthsource New        the Quarter Ended March 30, 1993
                          York, Inc. and ChubbLife Insurance            and filed May 1, 1993
                          Company of America                           
                               
                  10.10   Agreement Regarding Formation of              Exhibit 10 to Form 10-Q for the Quarter
                          Health Maintenance Organization in            Ended June 30, 1993 filed July 20, 1993
                          Savannah, Georgia dated July 19,                           
                          1993 between Healthsource, Inc. and      
                          Candler Health System, Inc.                
                               
                  10.11   Agreement Regarding Formation of              Exhibit 10.1 to Form 8-K dated April 12,
                          Health Maintenance Organization in            1994
                          North Central Texas dated April                           
                          1, 1994 among Healthsource South      
                          Central, Inc., All Care, Inc. and      
                          All Saints Health Systems, Inc.                           
                                                                        
</TABLE>
                          
                                      41
<PAGE>   45

                      
                      
<TABLE>
<CAPTION>

        <S>              <C>                                            <C>                                      
                  10.12   Asset and Stock Purchase Agreement            Exhibit 2.1 to Form 10-K for the Fiscal
                          dated as of December 20, 1994 among           Year Ended December 31, 1994 dated March
                          Provident Life and Accident Insurance         17, 1995
                          Company of America, Provident Life Capital
                          Corporation, Provident Life and Accident 
                          Insurance Company, Provident Life and 
                          Casualty Insurance Company, Provident 
                          Health Care Plans, Inc. and Healthsource,                           
                          Inc.                           
                               
                  10.13   Third Closing Amendment to Asset and          Exhibit 10.1 to Form  8-K dated June 14, 1995
                          Stock Purchase Agreement dated                           
                          May 31, 1995 among Provident Life and      
                          Accident Insurance Company of America,      
                          et al. and Healthsource, Inc.                           
                               
                  10.14   Non-Competition Agreement dated May 31,       Exhibit 10.3 to Form 8-K dated June 14, 1995
                          1995 between Healthsource, Inc. and                           
                          Provident Life and Accident Insurance      
                          Company of America                           
                               
                  10.15   Lease dated as of May 1, 1995 between         Exhibit 10.4 to form 8-K dated June 14, 1995
                          Provident Life and Accident Insurance                           
                          Company and Healthsource Provident                           
                          Administrators, Inc. relating to a      
                          certain property located at One      
                          Fountain Square, Chattanooga, Tennessee                           
                               
                  10.16   Asset Purchase Agreement dated               Exhibit 10.2 to Form 10-Q for the Quarter
                          as of April 10, 1995 between                 Ended March 30, 1995 filed on May 10, 1995
                          Central Massachusetts Health Care,      
                          Inc. and Healthsource Massachusetts,                           
                          Inc.                           
                               
                  10.17   First Amendment dated November               Exhibit 4.2 to Form 8-K dated February 23, 1996
                          9, 1995 to Asset Purchase Agreement      
                          between Central Massachusetts                           
                          Health Care, Inc. and Healthsource                           
                          Massachusetts, Inc.                           

</TABLE>
                      
                                      42
<PAGE>   46
                      
                      
<TABLE>
<CAPTION>
        <S>        <C>                                                    <C>                                      
                   10.18  Second Amendment dated December 11, 1995        Exhibit 4.3 to Form 8-K dated February 23, 1996
                          to Asset Purchase Agreement between                      
                          Central Massachusetts Health Care, Inc.                      
                          and Healthsource Massachusetts, Inc.                      
                      
                   10.19  Asset Purchase Agreement dated as of             Filed herewith 
                          January 22, 1996 among PACC HMO, PACC                                                               
                          Health Plans and Healthsource Northwest, Inc.                   

        (11)       Computation of Per Share Earnings                       Filed herewith  
                      
        (12)       Computation of Historical Financial Ratios              Filed herewith  

        (21)       Subsidiaries of Healthsource, Inc.                      Filed herewith  
                      
        (23)       23.1  Consent of Deloitte & Touche LLP regarding        Filed herewith  
                         incorporation of Healthsource, Inc. 
                         Consolidated Financial Statements by 
                         reference in Healthsource, Inc.  Form S-8 
                         Registration Statements No. 33-43242, 
                         33-49856, 33-76910 and 33-80456 filed 
                         October 9, 1991, July 23, 1992, March 25,                      
                         1994 and June 17, 1994 

        (27)       Financial Data Schedule                                 Filed herewith 

</TABLE>
                      
             (b)  Reports on Form 8-K.                      
                      
                       The following reports on Form 8-K were filed with the
                  Securities and Exchange Commission during the quarter ended
                  December 31, 1995 and subsequently.
                                                   
                  (i)  On January 26, 1996, Healthsource filed a Form 8-K
                       reporting the signing of a definitive agreement on
                       January 23, 1996 with PACC HMO and PACC Health Plans,
                       affiliated Oregon nonprofit managed care companies, to
                       purchase substantially all of the operating assets of
                       those entities for an estimated net purchase price $80
                       million in cash.

                  (ii) On February 23, 1996, Healthsource filed a Form 8-K
                       reporting the closing on February 9, 1996 of its
                       previously-announced agreement to acquire the
                       operating assets of Central Massachusetts Health Care,
                       Inc., a Worcester, Massachusetts nonprofit HMO, for
                       $46.5 million in cash, subject to certain post-closing
                       adjustments.

                 (iii) On February 28, 1996, Healthsource filed a Form 8-K 
                       announcing its intention to conduct a private offering 
                       of $215 million principal amount of convertible 
                       subordinated notes, with other terms to be agreed upon


                                      43
<PAGE>   47
                                                                             

                                      SIGNATURES

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


        Date: February 27, 1996           HEALTHSOURCE, INC.


                                          By: /s/ Norman C. Payson, M.D.   
                                              -----------------------------
                                              Norman C. Payson, M.D.       
                                              President and Chief Executive
                                              Officer
                                              (Principal Executive Officer)


                                          By: /s/ Thomas M. Congoran
                                              -----------------------------
                                              Thomas M. Congoran
                                              Chief Financial Officer
                                              (Principal Financial and 
                                              Accounting Officer)

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

<TABLE>
<CAPTION>
        Date                                     Date
        <S>                                      <C>
        2/27/96  /s/ Merwyn Bagan, M.D.          2/27/96  /s/ Norman C. Payson, M.D.
                 ---------------------------              ---------------------------
                 Merwyn Bagan, M.D.                       Norman C. Payson, M.D.    
                 Chairman of the Board                    President, Chief Executive
                 and Director                             Officer and Director

                                                 2/24/96  /s/ Daniel F. Eubank, M.D.
                 ---------------------------              ---------------------------
                 Paul D. Baron, M.D.                      Daniel F. Eubank, M.D.
                 Director                                 Director


         2/27/96  /s/ Robert A. Leipold, M.D.    2/26/96  /s/ David W. Schall, M.D.
                 ---------------------------              -------------------------
                Robert A. Leipold, M.D.                   David W. Schall, M.D.
                Director                                  Director


         2/27/96  /s/ Francis G. Middleton, M.D. 2/27/96  /s/ Robert S. Cathcart III, M.D.
                 ---------------------------              -----------------------------------
                 Francis G. Middleton, M.D.               Robert S. Cathcart III, M.D.
                 Director                                 Director


                                                 2/27/96  /s/ J. Harold Chandler
                 ---------------------------              -----------------------------------
                 Robert H. Bilbro, M.D.                   J. Harold Chandler
                 Director                                 Director
</TABLE>


                                      44
<PAGE>   48

<TABLE>
                                    EXHIBIT INDEX
 <CAPTION>
       Reg. S-K
       Item 601                                                              Source or Consecutive
       Exhibit No.    Document                                               Page of This Report
       -----------    --------                                               ---------------------
       <S>            <C>                                                    <C>
        (3)           Articles of Incorporation and By-Laws    
                                                                                                                   
                      3.1  Articles of Incorporation of Healthsource,        Exhibit 3.1 to Form 10-K for the               
                           Inc.,  as amended                                 Fiscal Year Ended December 31, 1994            
                                                                             filed on March 19, 1995                        
                                                                                                                   
                      3.2  By-Laws of Healthsource, Inc., as amended         Exhibit 3.2 to Amendment No. 2 to              
                                                                             Form S-4 Registration Statement                
                                                                             No. 33-56446 dated February 19, 1993           
                                                                                                                   
                      3.3  Articles of Amendment to the Articles of          Exhibit 4.1 to Form 8-K dated                  
                           Incorporation of Healthsource, Inc.               June 14, 1995                                  
                           designating the rights of the Class A 
                           Cumulative Preferred Stock  
                                                                                                                   
        (10)      Material Contracts                                                                               
                                                                                                                   
                      10.1 Indemnity Agreement (form) dated September         Exhibit 10.7 to Form S-1 Registration          
                           11, 1989 between Healthsource, Inc. and            Statement No. 33-31165 dated                   
                           September 20, 1989 each of its directors and
                           executive officers (compensatory contract)   

                      10.2 Amendment to Healthsource, Inc. 1987               Exhibit 10 to Form 10-Q for the Quarter        
                           Non-Qualified Stock Option Plan (compensatory      Ended March 31, 1991 filed on May 3, 1991          
                           plan)                                                                                   
                                                                                                                   
                      10.3 Healthsource, Inc. 1991 Non-Qualified Stock        Exhibit 10.21 to Form 10-K for the             
                           Option Plan (compensatory plan)                    Fiscal Year Ended December 31, 1990            
                                                                              filed on March 28, 1991                        
 
                      10.4 Healthsource, Inc. 1992 Director                   Exhibit 10.2 to Form 10-Q for the        
                           Stock Option Plan (compensatory plan)              Quarter Ended June 30, 1992 filed on     
                                                                              August 12, 1992                          
                                                                                                                 
                      10.5 Healthsource, Inc. 1994 Stock Option               Exhibit to Proxy Statement for the
                           Plan (compensatory plan)                           Annual Meeting of Shareholders held
                                                                              on May 11, 1994 filed on April 11, 1994
                                         
                      10.6 Employment Agreement dated as of                   Exhibit 10.7 to Form  10-K for the Fiscal Year 
                           January 1, 1995 between Healthsource,              Ended December 31, 1994 dated March 17, 1995 
                           Inc.  and Francis G. Middleton,                              
                           M.D. (compensatory contract)                       
                                                                                                                 
                      10.7 Employment Agreement dated November                Exhibit 10.16 to Form 10-K for the 
                           24, 1993 between Healthsource, Inc.                Fiscal Year Ended December 31, 1993
                           filed on March 30, 1994 and David      
                           W. Schall, M.D. (compensatory contract)            
                                                                                                                 
                      10.8 Formation Agreement dated July 28,                Exhibit 10 to Form 8-K dated July 30,
                           1993 between Healthsource, Inc. and               1993
                           St. Vincent Infirmary Medical Center                                                                 
                               
                      10.9 Investment Agreement dated as of                  Exhibit 10.1 to Form 10-Q for 
                           April 8, 1993 between Healthsource New            the Quarter Ended March 30, 1993
                           York, Inc. and ChubbLife Insurance                and filed May 1, 1993
                           Company of America                           
                               
                     10.10 Agreement Regarding Formation of                  Exhibit 10 to Form 10-Q for the Quarter
                           Health Maintenance Organization in                Ended June 30, 1993 filed July 20, 1993
                           Savannah, Georgia dated July 19,                           
                           1993 between Healthsource, Inc. and      
                           Candler Health System, Inc.                

</TABLE>
                      
<PAGE>   49


<TABLE>

                     <S>   <C>                                               <C>
                     10.11 Agreement Regarding Formation of                  Exhibit 10.1 to Form 8-K dated April 12,
                           Health Maintenance Organization in                1994
                           North Central Texas dated April                           
                           1, 1994 among Healthsource South      
                           Central, Inc., All Care, Inc. and      
                           All Saints Health Systems, Inc.                           
                                                                        
                     10.12 Asset and Stock Purchase Agreement                Exhibit 2.1 to Form 10-K for the Fiscal
                           dated as of December 20, 1994 among               Year Ended December 31, 1994 dated March
                           Provident Life and Accident Insurance             17, 1995
                           Company of America, Provident Life Capital
                           Corporation, Provident Life and Accident 
                           Insurance Company, Provident Life and 
                           Casualty Insurance Company, Provident 
                           Health Care Plans, Inc. and Healthsource,                           
                           Inc.                           
                                
                     10.13 Third Closing Amendment to Asset and             Exhibit 10.1 to Form  8-K dated June 14, 1995
                           Stock Purchase Agreement dated                           
                           May 31, 1995 among Provident Life and      
                           Accident Insurance Company of America,      
                           et al. and Healthsource, Inc.                           
                               
                     10.14 Non-Competition Agreement dated May 31,          Exhibit 10.3 to Form 8-K dated June 14, 1995
                           1995 between Healthsource, Inc. and                           
                           Provident Life and Accident Insurance      
                           Company of America                           
                               
                     10.15 Lease dated as of May 1, 1995 between            Exhibit 10.4 to form 8-K dated June 14, 1995
                           Provident Life and Accident Insurance                           
                           Company and Healthsource Provident                           
                           Administrators, Inc. relating to a      
                           certain property located at One      
                           Fountain Square, Chattanooga, Tennessee                           
                               
                     10.16 Asset Purchase Agreement dated                  Exhibit 10.2 to Form 10-Q for the Quarter
                           as of April 10, 1995 between                    Ended March 30, 1995 filed on May 10, 1995
                           Central Massachusetts Health Care,      
                           Inc. and Healthsource Massachusetts,                           
                           Inc.                           
                               
                     10.17 First Amendment dated November                  Exhibit 4.2 to Form 8-K dated February 23, 1996
                           9, 1995 to Asset Purchase Agreement      
                           between Central Massachusetts                           
                           Health Care, Inc. and Healthsource                           
                           Massachusetts, Inc.                           

                    10.18 Second Amendment dated December 11, 1995        Exhibit 4.3 to Form 8-K dated February 23, 1996
                          to Asset Purchase Agreement between                      
                          Central Massachusetts Health Care, Inc.                      
                          and Healthsource Massachusetts, Inc.                      
                      
                    10.19 Asset Purchase Agreement dated as of             Filed herewith 
                          January 22, 1996 among PACC HMO, PACC                                                               
                          Health Plans and Healthsource Northwest, Inc.                   

        (11)       Computation of Per Share Earnings                       Filed herewith  
                      
        (12)       Computation of Historical Financial Ratios              Filed herewith  

        (21)       Subsidiaries of Healthsource, Inc.                      Filed herewith  
                      
        (23)       23.1  Consent of Deloitte & Touche LLP regarding        Filed herewith  
                         incorporation of Healthsource, Inc. 
                         Consolidated Financial Statements by 
                         reference in Healthsource, Inc.  Form S-8 
                         Registration Statements No. 33-43242, 
                         33-49856, 33-76910 and 33-80456 filed 
                         October 9, 1991, July 23, 1992, March 25,                      
                         1994 and June 17, 1994 

        (27)       Financial Data Schedule                                 Filed herewith 

</TABLE>