<PAGE>   1





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

(Mark One)

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

                 For the fiscal year ended December 31, 1996

                                       OR

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

     For the transition period from ________________ to _______________.

                        Commission File Number 0-21354

                       GULF SOUTH MEDICAL SUPPLY, INC.
            (Exact name of registrant as specified in its charter)

          DELAWARE                                    64-0831411
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

          ONE WOODGREEN PLACE                            39110
          MADISON, MISSISSIPPI                        (Zip Code)
(Address of principal executive offices)

     Registrant's telephone number, including area code:  (601) 856-5900

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

                                     None

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

                         Common Stock, $.01 Par Value

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

                       Yes  X                      No 
                           ---                        ---
<PAGE>   2
                                     -2-

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

Aggregate market value as of March 11, 1997, of Common Stock held by
non-affiliates of the Registrant:  $212,434,354 based on the last reported sale
price on that date on The Nasdaq Stock Market.

Number of shares of Common Stock outstanding at March 11, 1997: 16,308,564.

                      DOCUMENTS INCORPORATED BY REFERENCE

    The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1996.  Portions of such proxy statement are incorporated by reference in Part
III of this Report.
<PAGE>   3
                                      -3-




ITEM 1.           BUSINESS.

GENERAL

    Gulf South is a leading national distributor of medical supplies and related
products to the long-term care industry.  The Company provides products and
services to approximately 10,500 long-term care facilities in all 50 states.
The Company's customers range from independent nursing home operators to large
national chains offering a broad range of healthcare services, such as Beverly
Enterprises, Multicare, Grancare, National Healthcare and Sun Healthcare Group,
as well as home healthcare providers, hospices and sub-acute, rehabilitative
and transitional care providers. Through its 18 full-service regional
distribution centers, the Company offers both national coverage to
multi-facility customers and local service to individual facilities and
independent operators. Gulf South believes that it has achieved its success to
date due to the expertise gained from more than twelve years of focus on the
long-term care industry and its strong commitment to providing superior service
to its customers.

INDUSTRY OVERVIEW

    According to the latest industry data available, sales of medical supplies
and related products to the nursing home segment of the long-term care industry
in the United States were more than $1.6 billion in 1995 and the Company
estimates that such sales are growing at an annual rate in excess of 10%. The
Company believes that the home healthcare and sub-acute care segments are
growing at a faster rate than the nursing home segment of the long-term care
industry.  Medical supplies and related products are distributed to healthcare
providers through two primary channels of distribution. Distribution to
hospitals and surgical clinics generally is made through several large national
hospital distributors or directly by manufacturers. In contrast, distribution
to long-term care facilities typically is made through many local and regional
distributors as well as several national distributors.

    Hospital Distribution. The hospital distribution market is characterized by
customers that have physical plants with large inventory storage capacity and
that serve large numbers of patients primarily with short-term acute-level
medical care. In order to service this market and maintain economies of scale,
the large national hospital distribution companies have established multiple
warehouse facilities near the largest concentrations of customers, generally in
urban or metropolitan areas, with an infrastructure that allows them to deliver
goods in bulk volume with frequent, and in many cases same day, service.
Hospital distributors typically maintain their own trucking fleets to deliver
products.  Because of the specialized acute care services performed by
hospitals, hospital distributors must handle an extremely broad and diverse
range of products that focus on the short-term medical and surgical needs of
hospital patients.

    Distribution to Long-Term Care Industry. Distributors serving the long-term
care market must address a different set of customer needs. The long-term care
market is highly fragmented, consisting of large numbers of independent
operators, small to mid-sized local and regional chains and several national
chains. Facilities are typically located in suburban and rural areas, often at
considerable distances from one another. Long-term care facilities generally
serve a limited patient population (typically from 20 to 200 beds) and have
relatively small physical plants with limited inventory storage capacity.
Although long-term care facilities do not demand immediate same-day delivery,
they require distributors to deliver products in small quantities (including
"broken case" shipments) on a consistent and reliable basis. Distributors
serving the long-term care market must generally have the capability to tailor
their ordering, shipping and billing processes to suit customers'
individualized needs. Because of the fragmented structure and the specialized
service needs of the long-term care market, long-term care facilities have
traditionally been served by locally- or regionally-based distributors which
maintain supply relationships with a limited number of customers within a
finite geographic area. However, these local and regional distributors are
increasingly subject to intense competitive pressures as a result of the
consolidation of independent long-term care operators by large national chains
and a growing trend by manufacturers to deal with fewer and larger distributors
in this market.

    Certain Trends Affecting the Long-Term Care Market. Economic, regulatory,
political and demographic pressures are combining to cause significant changes
in the long-term care industry. Cost containment pressures
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                                      -4-



from governmental and private reimbursement sources have led to a reduction in
the length of expensive hospital stays and a resulting increase in the demand
for long-term care facilities to provide such services at a significantly lower
cost than hospitals. This trend has also led to a general increase in the
acuity levels of patients found in traditional long-term care facilities, as
well as to the emergence of sub-acute, rehabilitative, transitional and other
specialized long-term care facilities. Cost containment pressures have also
contributed to a need for greater efficiency by long-term care operators, and
have led to some consolidation among these healthcare providers. In addition,
the demographic pressures of an aging U.S. population have caused continued
demand for traditional custodial long-term care and other long-term care
services. Census Bureau data indicates that the number of persons aged 65 and
older is expected to increase from approximately 31.2 million in 1990 to
approximately 34.5 million by the year 2000 and that the number of persons aged
85 years and older, which is the fastest growing segment of the population and
the largest consumer of long-term care, is expected to increase from 3.1
million in 1990 to approximately 4.1 million during the same period.

    These trends affecting the long-term care industry have created the need for
an increasingly sophisticated distribution system for medical and personal care
products. Rising acuity levels within the patient population require
distributors to handle a broader range of products, including more
sophisticated medical supplies and equipment that are often used in small
quantities. Industry consolidation of long-term healthcare providers into
regional and national chains has created a need for distributors that can
service facilities in different locations with consistent and reliable service.
Finally, cost containment pressures and competitive requirements mandate that
distributors provide products and services to this market on an increasingly
cost-effective basis.

BUSINESS STRATEGY

    Gulf South's principal business objective is to enhance its position as a
leading national distributor of medical and personal care products to the
long-term care industry. The Company believes that the following factors have
been of principal importance in its ability to achieve its present market
position:

         Focus on Long-Term Care Industry. Since its founding more than twelve
    years ago, Gulf South has focused primarily on serving the long-term care
    market. Based on its industry experience and expertise, the Company has
    developed the necessary distribution systems and services that assist
    operators of long-term care facilities to source products, manage inventory
    usage and control costs. The Company believes that its long-standing focus
    on the needs of the long-term care industry has enabled it to develop and
    execute a consistent management strategy and to foster stable, long-term
    relationships with its customers.

         Consistent and Reliable Customer Service. The Company offers customers
    a high level of service and support which it believes differentiates it
    from its competitors, particularly small to medium-sized local and regional
    distributors. The Company's objective is to enable customers to place
    orders easily and conveniently, to fill orders accurately and completely
    and to deliver orders with prompt, consistent and reliable service. As of
    December 31, 1996, the Company estimates that it shipped more than 95% of
    all orders on the same day the order is placed with a fill rate of 98.5%
    and that more than 90% of customer orders are delivered to the customer
    within two days of receipt. In addition, the Company offers customers
    various value-added services, including monthly usage reports, inventory
    control/ancillary billing software programs, next-day invoicing and
    customized programs designed to assist customers to manage inventory usage
    and control costs. The Company centralizes all customer ordering and
    invoicing and the delivery of value-added services through its Jackson
    facility enabling the Company to provide consistent levels of customer
    service to each individual facility within multi-location chains.

         Broad Product Offering at Competitive Prices. Gulf South presently
    offers over 10,000 medical supplies and related products and updates its
    product offerings regularly to meet its customers' changing needs. The
    Company's sales volume, national coverage and stable vendor relationships
    enable it to obtain products from suppliers at favorable negotiated prices.
    Through the breadth of its product offerings and effective use of its
    purchasing leverage with vendors, the Company has the capability to serve
    as a competitively priced, single source of supply to a wide variety of
    long-term care facilities.
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                                      -5-




         National Coverage With a Local Presence. With 18 full-service regional
    distribution centers, each supported by a team of direct sales
    representatives, the Company is able to provide consistent and reliable
    coverage to mid-sized and large chains that operate in different geographic
    areas. The Company also maintains a strong local presence in each region to
    support independent operators and individual facilities within
    multi-location chains.


GROWTH STRATEGY

    The Company believes that the continuing implementation of the business
strategies described above, coupled with a focus on the following growth
strategies, will enhance its ability to expand its sales to existing and new
customers:

         Emphasis on Attracting New Customers. The Company's strategy is to
    increase its emphasis on attracting large regional and national chains as
    well as to target both small chains and independent operators. The Company
    believes that it can increase sales to large regional and national chains
    by adding new distribution centers, expanding its existing distribution
    centers and by hiring additional direct sales or other personnel and
    through national account sales efforts. The Company believes that it can
    increase its penetration of small chains and independent operators,
    particularly in rural areas, by increasing its direct sales force and
    utilizing group purchase organizations. The Company believes that its high
    levels of customer service and value-added support, breadth of its product
    offerings and competitive pricing afford it a competitive advantage over
    the regional and local distributors that typically target these customers.

         Increased Penetration of Existing Customer Base. The Company intends
    to capitalize on opportunities to expand sales to existing customers. The
    Company believes that continuing industry consolidation will result in an
    increase in the number of facilities operated by mid-sized and large chains
    presently served by the Company. In addition, rising acuity levels within
    the patient population of long-term care facilities are expected to
    increase the breadth and amount of products required by the Company's
    existing customers. The Company also believes that cost containment
    pressures will continue to create incentives for facility operators to deal
    increasingly with fewer distributors that, like the Company, can provide
    inventory management and cost control programs.

         Addressing Needs of Emerging Market Segments. The Company intends to
    increase its focus on the home healthcare, hospice and sub-acute,
    rehabilitative and transitional care segments of the long-term care market.
    The Company believes that the home healthcare and sub-acute care segments
    are growing at a faster rate than the nursing home segment of the long-term
    care industry.

         Acquisitions. The Company's strategy is to augment its internal growth
    with the acquisition of medical supply distributors that serve
    complementary markets or that supplement the Company's presence in existing
    markets.  On December 26, 1996, the Company completed its acquisition of
    all of the outstanding capital stock and warrants of Gateway Healthcare
    Corporation, a national supplier of disposable medical surgical supplies to
    the long-term care and alternate care market places primarily located in
    New England and the Mid-Atlantic area, with sales of approximately $67
    million during the twelve-month period prior to its acquisition. On
    February 29, 1996, the Company acquired all the outstanding common stock of
    Bayer Medical Service Systems, Inc., a regional medical supply distributor
    serving the long-term care markets of the Ohio Valley and Florida. Bayer
    Medical Service Systems had revenues of approximately $10.0 million during
    the twelve-month period prior to its acquisition. The Company also acquired
    certain operating assets and liabilities of Express Care, L.P. on April 1,
    1996, Alternative Healthcare Services on July 1, 1996 and TDR Medical, LLC
    on December 10, 1996, serving principally the Southeast, Southern
    California and South Texas long-term care markets, respectively.  See
    "Factors Affecting Future Performance."

    The foregoing discussion contains forward-looking statements which involve
risks and uncertainties, and the Company's actual experience may differ
materially from that discussed above. Factors that may cause such a difference
include, but are not limited to, those discussed in "Factors Affecting Future
Performance."
<PAGE>   6
                                      -6-




CUSTOMERS

    The Company's customers range from independent nursing home operators to
large national chains offering a broad range of healthcare services, as well as
providers of home healthcare and sub-acute, rehabilitative and transitional
care.  Nursing home operators tend to focus on providing custodial or skilled
nursing care, principally to elderly patients. In addition, many of these
facilities are increasingly setting aside a portion of their beds for sub-acute
care patients.  Principal customers of the Company providing this form of
long-term care include Beverly Enterprises, Multicare, Grancare, National
Healthcare and Sun Healthcare Group. Home healthcare providers offer a wide
range of services such as pulmonary and infusion therapy to patients who have
been discharged from hospitals or sub-acute care facilities.  Customers of the
Company providing home healthcare include Vitas Healthcare and Apria
Healthcare. Sub-acute, rehabilitative and transitional care providers generally
serve patients who are recovering from major injury, surgery or illness, but no
longer need the full services of a general acute care hospital. Principal
customers of the Company providing sub-acute, rehabilitative and transitional
care include Sun Healthcare Group.

    The Company believes that approximately 77% of its 1996 net sales were
attributable to customers that focused primarily on providing custodial,
skilled nursing and sub-acute care, principally through nursing homes. The
Company estimates that large nursing home chains (operating more than 50
facilities) and mid-sized nursing home chains (operating between 20 and 50
facilities) accounted for approximately 24.2% of the facilities served by the
Company in 1996 and 50.4% of the Company's 1996 net sales. In 1996, the
Company's largest five customers accounted for approximately 32.2% of net
sales; Beverly Enterprises accounted for 19.6% of net sales for the year ended
December 31, 1996. The Company does not have long-term contracts with any of
its customers. Although the Company has not to date experienced any failure to
collect accounts receivable from its largest customers, an adverse change in
the financial condition of any of these customers, including as a result of a
change in governmental or private reimbursement programs, which would cause the
accounts receivable to become uncollectible or subject to extended payment
terms, could have a material adverse effect upon the Company's results of
operations or financial condition.

CUSTOMER SERVICE/ORDER ENTRY AND FULFILLMENT

    The Company is committed to providing high levels of customer service and
support, the principal basis of which is accurate and complete order
fulfillment and reliable, consistent deliveries. As a result of its efficiency
in order entry and order fulfillment, the Company estimates that, as of
December 31, 1996, it shipped more than 95% of all orders on the same day the
order is placed with a fill rate of 98%. Since approximately 80% of customer
orders are placed by telephone, the efficient handling of incoming calls is
critical to the Company's business. The Company offers to its customers a
toll-free telephone number and fax line and is currently using its EDI ordering
capability to accept electronically transmitted orders from several of its
major customers. All orders are received by 86 customer service representatives
primarily at the Company's Jackson distribution facility who utilize on-line
computer terminals to enter customer orders and to access information about
products, product availability, pricing, promotions and the customer's
purchasing history.  Following entry of an order, the order is electronically
transmitted to the distribution center nearest the customer's facility and a
packing slip for the entire order is printed for order fulfillment. The Company
imposes no minimum dollar amount on orders.

    The Company believes that the reliable and consistent delivery of complete
and accurate orders is more important to its customers than immediate same-day
delivery. Accordingly, each distribution facility stocks the 4,000 most
frequently ordered products, with the Jackson facility stocking an additional
6,000 products. Product back orders average less than 2% of products ordered.
The Company estimates that approximately 60% of its orders are shipped by
United Parcel Service while the remaining orders are shipped by various common
carriers. The Company generally does not charge customers for shipping costs
for orders of $300 or more. Because the Company seeks to service a customer's
entire order from the distribution center nearest the customer's facility, the
Company estimates that 90% of the customers receive their orders within one or
two business days of the order date and 95% of the customers receive their
orders within three business days.  Customer service operations of the Company
are primarily centralized at its Jackson facility, enabling the Company to
provide consistent levels of customer service to all customers, including to
each individual facility operated by a large multi-location chain. The
Company's
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                                      -7-



customer service representatives are provided with detailed product knowledge
and receive ongoing training regarding new products and promotions enabling
them to provide prompt and efficient service and accurately answer customer
inquiries.  From time to time, the Company arranges for manufacturers to make
presentations on new products both to the customer service representatives and
directly to its customers.

    An essential part of the Company's commitment to customer service and
customer relations is the value-added support services developed by the Company
to meet the unique needs of long-term care providers as well as the specialized
needs of individual customers. These services are made available both to large
chains and to independent operators and are generally provided by the Company
without cost to the customer. The principal value-added services currently
provided by the Company include the following:

         Monthly Usage Reports. The Company has been producing monthly usage
    reports for its customers since the early 1980's and has refined such
    reports over time in response to customer needs. The Company believes that
    usage reports are critical to managing inventory consumption and
    controlling costs. These reports identify each product purchased by a
    facility during the month, the quantity purchased, the price per product
    and the total price paid and also provide year-to-date totals. The monthly
    usage reports enable customers to manage supply requirements, maintain
    inventory controls, prepare monthly and yearly forecasts and budgets and
    enable operators of multi-facility chains to track product purchases on
    either a facility-by-facility or chain-wide basis.

         Inventory Control/Ancillary Billing Software Programs. Since 1990, the
    Company has offered software programs which allow a customer to maintain a
    real time inventory count and order products on a just-in-time basis, as
    well as to monitor patients' utilization of products for Medicaid and
    Medicare reimbursement purposes. A product identification number is
    assigned to each product, and when a product is utilized or distributed
    within the facility, the customer enters the product identification number
    into its computer system either manually or by use of a bar code scanner.

         Next-Day Invoicing.  Because the Company seeks to ship each entire
    order at one time from a single distribution center, the Company is able to
    generate and mail a single invoice directly to the customer within one
    business day of the order date. As a result, the customer generally
    receives the invoice concurrently with or within one day of receiving the
    order, facilitating efficient verification of charges and reducing handling
    and administrative costs for the customer.

         Customized Services. The Company frequently works directly with a
    customer to provide services tailored to its specialized needs. The Company
    will generate customized invoices for customers upon request. For those
    customers that use an inventory control/ancillary billing system, the
    Company can provide bar code labels to support the customer's software
    program, making the scanning process simple for those customers. To enable
    multi-facility chains to better manage costs and control product selection,
    the Company provides each of its chain customers with a customized ordering
    guide which contains only those products selected by the chain operator in
    advance to be offered within each of its facilities. The Company presently
    publishes approximately 40 customized ordering guides.

PRODUCTS

    The Company offers a comprehensive selection of over 10,000 medical supplies
and related products consisting largely of name brand items. The breadth of the
Company's product offerings and its special order capabilities enable it to
provide its customers with the convenience of one-stop shopping. The following
chart sets forth the principal categories of products offered by the Company
and the top selling types of products in each category, if appropriate, and
percentage of 1996 net sales in parenthesis:

MEDICAL/SURGICAL SUPPLIES (46.0%)         ENTERAL FEEDING SUPPLIES  (6.4%)
 Wound care supplies                      Nutritional supplements
 Exam gloves                              Pump sets
 Urologicals                              Tubing
 Blood/urine testing supplies
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                                      -8-



PERSONAL CARE ITEMS (11.6%)               DURABLE EQUIPMENT  (4.2%)
 Soaps and shampoos                       Medical Instruments
 Personal hygiene items
 Paper products                           OTC (NON-LEGEND) DRUGS  (3.0%)
 Bedside utensils


RESPIRATORY THERAPY SUPPLIES  (5.8%)      INCONTINENT SUPPLIES (21.8%)
 Oxygen Supplies                          Adult diapers and underpads
 Ventilator supplies
 Trach and suction supplies               OSTOMY SUPPLIES  (1.2%)

    Wound care supplies, adult diapers and underpads and exam gloves were the
Company's top selling product types in 1996, accounting for 13.8%, 21.8% and
11.1%, respectively, of net sales. Some of the product categories which
experienced a growth rate of 50% or more in 1996 included wound care supplies,
exam gloves, enteral feeding supplies and respiratory therapy supplies.

    The Company's Product Task Force regularly evaluates customer response to
product offerings and sales results in order to make informed product
selections and pricing decisions. Product selection is mainly a function of
customer preference, and the Company expects to continue to increase its
product line breadth as customer demand warrants. The Company has increased the
number of products offered from approximately 4,800 in 1989 to over 10,000 in
1996.

SALES AND MARKETING

    At December 31, 1996, the Company employed a direct sales force of 53
professionals who have primary responsibility for maintaining relationships
with existing customers and identifying and soliciting new customers. Once a
customer relationship is established, the sales force serves primarily to
supplement and support sales through the Company's catalogs. Four sales
professionals concentrate exclusively on national accounts, calling on the
corporate offices of the national long-term care chains. The sales force
supports each of the Company's 18 regional distribution centers, enabling the
Company to establish a local sales presence in the markets served by each
center. The Company currently anticipates that it will increase the size of its
direct sales force to approximately 90 sales professionals by the end of 1997.

    The Company trains its sales professionals through an ongoing program of
identifying and solving customer needs, augmenting selling skills and providing
detailed product knowledge. Manufacturers support this program by assisting
from time to time in the training of the Company's sales professionals.

    The Company markets its products to customers primarily through a variety of
catalogs. The Company publishes its standard catalog (approximately 350 pages
in length), which is designed to serve as a basic resource tool for customers.
The standard catalog features approximately 2,500 products and provides
detailed product descriptions, photographs and helpful technical information
relating to products, if appropriate.

    Approximately twice a year, the Company publishes a standard ordering guide
which contains pricing information and easy-to-follow ordering procedures for
the approximately 750 top selling products carried by the Company. The Company
also publishes for certain of its chain customers customized ordering guides
which contain only those products requested to be included by the chain. In
addition, the Company has introduced specialty ordering guides based on product
category, such as home respiratory therapy supplies. The Company guarantees the
published pricing information for the life of each of its ordering guides
(generally six months).

PURCHASING

    The Company believes that effective purchasing is a key element to providing
name brand products at competitive prices.  The Company believes that its high
volume purchases have increased its purchasing power with its primary
suppliers, resulting in volume discounts and rebates, favorable return policies
and promotional allowances.
<PAGE>   9
                                      -9-




    The Company regularly evaluates supplier relationships and considers
alternate sourcing as appropriate to assure competitive costs and quality
standards. No single supplier represented more than 12% of the total cost of
the products purchased by the Company in 1996. The Company's largest suppliers
in 1996 were: Kendall Healthcare Products Company, Baxter Healthcare, Inbrand,
Becton, Dickinson & Co., Ross Labs and Proctor & Gamble.  In 1996, these
suppliers accounted for approximately 35.0% of the cost of the products
purchased by the Company in 1996.  Kendall Healthcare Products Company
accounted for over 9.5% of the total cost of products purchased by the Company
in 1996. As is customary in the industry, the Company generally does not have
any long-term contracts with its suppliers.

    The Company's management information system is used to monitor and manage
its inventory. Generally, the Company has been able to return any unsold or
obsolete inventory to the manufacturer, resulting in negligible inventory
write-offs.  At December 31, 1996, the Company maintained an investment in
inventory of approximately $27.2 million, of which approximately $535,000 (less
than 2%) was over 180 days old. The Company turned its inventory approximately
seven times during 1996. The Company also utilizes its management information
system to minimize its inventory out-of-stock position.

COMPETITION

    The Company faces intense competition from many regional and local
distributors in its markets as well as from several companies that distribute
products to long-term care facilities on a national basis. The Company believes
that there are three principal competitors that distribute products to
long-term care facilities on a national basis, General Medical Corporation
(acquired by McKesson Corp. in January 1997), Medline Industries, Inc. and
Redline Medical Supply Co. In addition, certain national long-term care chains
buy products and supplies directly from manufacturers and distribute such
products directly to their facilities. Although several national hospital
distributors and healthcare manufacturers presently sell to the long-term care
market, to date the long-term care market has not been a primary focus for such
distributors and manufacturers. Barriers to entry for distribution in the
long-term care market are relatively low, and the risk of new competitors
entering the market, particularly in local areas, is high. Certain of the
Company's current competitors, including many national hospital distributors,
have substantially greater capital resources, sales and marketing experience
and distribution capabilities than the Company. In response to competitive
pressures from any of its current or future competitors, the Company may be
required to lower selling prices in order to maintain or increase market share,
and such measures could adversely affect the Company's operating results.

    The Company believes that the principal competitive factors in distributing
products to the long-term care market are the quality and level of customer
service, product pricing, breadth and quality of products offered and
consistency and stability of business relationships with customers. The Company
believes that it competes favorably with respect to each of these factors. In
particular, the Company believes it differentiates itself from the smaller
local and regional distributors with which it competes on account of the
breadth of its product offerings, its ability to acquire goods from suppliers
at favorable prices and its national coverage which enables it to offer
consistent and reliable service to multi-location chains. In addition, the
Company believes that it differentiates itself from most other national
distributors in the long-term care market as a result of its focus on providing
services that can be integrated with customers' internal budgetary and cost
containment systems.

GOVERNMENT REGULATION

    The Company's business is subject to regulation under the federal Food,
Drug and Cosmetic Act and the Occupational Safety and Health Act, as well as
under certain state regulations, because of its labeling, storage and handling
of certain drugs and medical devices. The Company believes that sales of
products that are subject to such regulation are not material in the aggregate.
The Company believes that it is in substantial compliance with such federal and
state laws and regulations and possesses all material licenses and permits
required for the conduct of its business.
<PAGE>   10
                                      -10-




EMPLOYEES

    As of December 31, 1996, the Company employed 642 persons (all on a
full-time basis), of whom 125 were engaged in management, administration and
accounting, 91 were engaged in direct sales, 145 were engaged in customer
service, purchasing and credit collection and 281 were engaged in warehouse and
distribution operations. Of these employees, 177 were located at the Company's
corporate headquarters and distribution center in Jackson. The Company
considers its employee relations to be excellent. No employees are covered by
collective bargaining agreements.


ITEM 2.           PROPERTIES.

    The Company owns or leases offices and warehouses in cities throughout the
United States.  The following table sets forth the general location and certain
information for each of the distribution centers and other facilities owned or
leased by the Company.

<TABLE>
<CAPTION>
DISTRIBUTION CENTER LOCATION                                    LEASED/OWNED
----------------------------                                    ------------
<S>                                                                <C>
Atlanta, GA . . . . . . . . . . . . . . . . . . . . . . .          Leased
Columbus, OH  . . . . . . . . . . . . . . . . . . . . . .          Leased
Dallas, TX  . . . . . . . . . . . . . . . . . . . . . . .          Leased
Dallas, TX* . . . . . . . . . . . . . . . . . . . . . . .          Leased
Harrisburg, PA  . . . . . . . . . . . . . . . . . . . . .          Leased
Indianapolis, IN* . . . . . . . . . . . . . . . . . . . .          Leased
Jackson, MS . . . . . . . . . . . . . . . . . . . . . . .           Owned
Los Angeles, CA . . . . . . . . . . . . . . . . . . . . .          Leased
Madison, WI . . . . . . . . . . . . . . . . . . . . . . .          Leased
Manchester, NH  . . . . . . . . . . . . . . . . . . . . .          Leased
Memphis, TN . . . . . . . . . . . . . . . . . . . . . . .          Leased
Orlando, FL . . . . . . . . . . . . . . . . . . . . . . .          Leased
Orlando, FL*  . . . . . . . . . . . . . . . . . . . . . .          Leased
Phoenix, AZ . . . . . . . . . . . . . . . . . . . . . . .          Leased
Warren, RI* . . . . . . . . . . . . . . . . . . . . . . .          Leased
Raleigh, NC . . . . . . . . . . . . . . . . . . . . . . .          Leased
Richmond, VA  . . . . . . . . . . . . . . . . . . . . . .          Leased
Roanoke, VA . . . . . . . . . . . . . . . . . . . . . . .          Leased
Sacramento, CA  . . . . . . . . . . . . . . . . . . . . .          Leased
San Antonio, TX . . . . . . . . . . . . . . . . . . . . .          Leased
Sellinsgrove, PA* . . . . . . . . . . . . . . . . . . . .          Leased


ADMINISTRATIVE OFFICES
----------------------
Richmond, VA  . . . . . . . . . . . . . . . . . . . . . .          Leased
Sunbury, PA . . . . . . . . . . . . . . . . . . . . . . .          Owned
Madison, MS (headquarters)  . . . . . . . . . . . . . . .           Owned
</TABLE>

*Gateway Healthcare operations which have been, or are scheduled to be,
discontinued.

    The Company believes that its facilities are adequate to carry on its
business as currently conducted.  A number of leases relating to the
above-described properties are scheduled to terminate within the next several
years.  The Company believes that, if necessary, it could find facilities to
replace such leased premises without suffering  a material effect on its
business.

ITEM 3.           LEGAL PROCEEDINGS.

    The Company is a defendant from time to time in lawsuits incidental to its
business. The Company currently is not a party to, and none of its property is
subject to, any material legal proceedings.
<PAGE>   11
                                      -11-




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

    No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise during the fourth quarter of
the Company's fiscal year 1996.


                                    PART II

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

    The Company's Common Stock is traded on the NASDAQ National Market under the
symbol GSMS. The following table sets forth for the periods indicated the high
and low closing sale prices for the Common Stock, which reflect a 2-for-1 stock
split effected in the form of a stock dividend on May 25, 1995:

<TABLE>
<CAPTION>                   
                                     STOCK PRICE
                                     -----------
1995                               HIGH         LOW
----                               ----         ---
<S>                              <C>        <C>
                            
First Quarter . . . . . . . . . .$20 7/8      $16 1/2
Second Quarter  . . . . . . . . . 26           18 1/4
Third Quarter . . . . . . . . . . 32 1/2       23 1/4
Fourth Quarter  . . . . . . . . . 30 3/4       19
                            
1996                        
----                        
                            
First Quarter . . . . . . . . . .$39          $25 3/4
Second Quarter  . . . . . . . . . 49 1/2       35 1/4
Third Quarter . . . . . . . . . . 41 1/2       15
Fourth Quarter  . . . . . . . . . 32 1/4       21 1/4
</TABLE>                    

    On March 11, 1997, the closing price for the Common Stock was $20 7/8 per
share.  The trading price of the Company's Common Stock may be subject to
fluctuations in response to quarter-to-quarter variations in operating results,
changes in earnings estimates by investment analysts or changes in business or
regulatory conditions affecting the Company, its customers or its competitors.
The market price of securities of companies in the healthcare industry have
been, and may continue to be, volatile.  Such fluctuations and volatility may
adversely affect the price of the Company's Common Stock.

    As of March 11, 1997, there were approximately 45 stockholders of record.
The Company believes that shares of the Company's Common Stock held in bank,
money management, institution and brokerage house "nominee" names may account
for at least an estimated 4,500 additional beneficial holders.

    The Company has not paid any cash dividends on its capital stock in the past
four fiscal years and does not anticipate paying cash dividends in the
foreseeable future.  The Company intends to retain any earnings or other cash
resources to finance future growth of its business. In addition, the Company's
revolving line of credit agreement with NationsBank of Tennessee, N. A.
prohibits the payment of dividends on the Company's capital stock without the
prior written consent of the bank. Any future determinations to pay cash
dividends will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial condition
and other factors deemed relevant by the Board of Directors.

RECENT SALES UNREGISTERED SECURITIES

    On February 29, 1996, the Company completed the acquisition of all of the
outstanding common stock of Bayer Medical Service Systems, Inc. ("Bayer"). The
Company issued 151,724 shares (the "Shares") of common stock, $.01
<PAGE>   12
                                      -12-



par value, of the Company to the sole shareholder of Bayer in exchange for the
all of the outstanding common stock of Bayer. The Company claims that the offer
and sale of the Shares were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended based on the fact that the Shares
were sold to a single person and such sale did not involve a public offering.
On August 28, 1996, the Company filed a registration statement on Form S-3
(File No.  333-10939) with the Securities and Exchange Commission covering the
resale of the Shares, and the registration statement became effective on
January 14, 1997.

    In connection with the acquisition on December 26, 1996 of all of the
outstanding capital stock and warrants of Gateway Healthcare Corporation
("Gateway"), The Company issued to the five securityholders of Gateway warrants
(the "Warrants",) to purchase up to 450,000 shares of the Company's common
stock. The Company claims that the offer and sale of the Warrants were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended, based on the fact that the issuance of the Warrants did not involve a
public offering. On January 24, 1997, the Company filed a registration
statement on Form S-3 covering the resale of the shares of common stock
underlying the Warrants. The registration statement became effective on March
7, 1997.
<PAGE>   13
                                      -13-




ITEM 6.  SELECTED FINANCIAL DATA.

                     SELECTED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                 ----------------------------------------------------------------------
                                    1996           1995           1994          1993            1992  
                                 ---------     ----------     -----------   -----------     -----------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED
                                                               OPERATING DATA)
<S>                                            <C>            <C>           <C>             <C>
INCOME STATEMENT DATA (1):
 Net sales  . . . . . . . .      $ 177,710     $  130,094     $    92,151   $    65,119     $    44,659
 Cost of sales  . . . . . .        136,344         97,973          68,122        48,357          33,041
                                 ---------     ----------     -----------   -----------     -----------
 Gross profit   . . . . . .         41,366         32,121          24,029        16,762          11,618
 Selling, general and 
 administrative expenses . . .      23,450         18,418          13,913        10,307           7,552
                  
 Acquisition and merger expenses     2,378            --              --            --              --  
                                 ---------     ----------     -----------   -----------     -----------
 Operating income (2) . . .         15,538         13,703          10,116         6,455           4,066
 Interest expense   . . . .           (229)          (199)           (629)       (2,206)         (1,242)
 Interest income  . . . . .          1,771            163             186           --              --
                                 ---------     ----------     -----------   -----------     -----------
 Income before income taxes         17,080         13,667           9,673         4,249           2,824
 Income taxes (3)   . . . .         (6,386)        (5,507)         (3,877)       (1,619)         (1,030)
                                 ---------     ----------     -----------   -----------     -----------
 Net income (3)   . . . . .      $  10,694     $    8,160     $     5,796  $      2,630     $     1,794
                                 =========     ==========     ===========  ============     ===========

Net income per share (4)  .      $     .69     $      .58     $       .45  $        .29     $       .19

SELECTED OPERATING DATA:
 Number of orders shipped          575,113        384,401         283,350       215,425         165,834
 Average order size   . . .      $     309     $      313     $       298  $        270     $       238

 Number of facilities served        10,730          8,555           6,314         4,390           3,699

BALANCE SHEET DATA (AT PERIOD END) (1):
 Working capital  . . . . .      $ 102,074     $   36,228     $    28,469  $     12,842     $     9,026
 Total assets   . . . . . .        197,971         55,021          41,042        23,576          16,519
 Total debt   . . . . . . .         30,321          3,803           1,147        21,015          19,247
 Stockholders' equity (deficit)    144,299         39,954          30,502        (5,670)         (8,300)
</TABLE>

_______________

(1)      Restated to reflect the share exchange with Bayer Medical Service
         Systems Inc. accounted for as a pooling of interests. See Note 2 of
         Notes to Consolidated Financial Statements.

(2)      Reflects $819 ($513 after tax, or $.03 per share) of legal, accounting
         and other integration costs incurred in connection with the  Bayer
         Medical Service Systems, Inc. share exchange in February 1996 and
         additional integration and exit charges of $771 ($483 after taxes, or
         $.03 per share) pertaining to the acquisition of L&M Medical, Inc. in
         1995 and $778 ($487 after taxes, or $.03 per share) pertaining to the
         Express Care L. P. and Alternative Healthcare Services acquisitions in
         1996.  See Note 2 of Notes to Consolidated Financial Statements.

(3)      The Company elected to be treated as an S corporation for income tax
         purposes from January 1, 1989 through June 25, 1992, and accordingly
         did not pay federal and state (except in certain states) income taxes
         during such periods. The Company distributed S corporation earnings of
         $998 to its shareholders during 1992. The net income data reflects a
         pro forma provision for income taxes during the period from January 1,
         1992 through June 25,1992 as if the Company had been subject to
         federal and state income taxes. Because the Company has been a C
         corporation since June 25,1992, no pro forma adjustment to net income
         for periods subsequent to such date is necessary and, accordingly, the
         net income data set forth above for such subsequent periods reflects
         actual net income.

(4)      Computed by dividing net income applicable to Common Stock (net income
         plus interest requirements, less tax effects, of the 10% Convertible
         Subordinated Debentures (the "Convertible Debentures")) by the
         weighted average number of shares of Common Stock and equivalents
         outstanding. The conversion of the Convertible Debentures was effected
         upon the closing of the Company's initial public offering in March
         1994. For the years ended December 31, 1996, 1995, 1994, 1993 and 1992
         the weighted average number of shares of Common Stock and equivalents
         was 15,419,438, 13,993,595, 13,073,040, 10,442,068 and, 10,200,170,
         respectively.  See Note 1 of Notes to Consolidated Financial
         Statements.  Net income per share and weighted average number of
         shares of Common Stock and equivalents outstanding for each of the
         years ended December 31, 1994, 1993 and 1992 have been restated to
         reflect a two-for-one stock split in the form of a stock dividend
         effected on May 25, 1995.
<PAGE>   14
                                      -14-



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

OVERVIEW

    Gulf South's net sales have grown at a compound annual rate of 41.0% over
the past five years, from $45 million in 1992 to $178 million in 1996.  The
Company primarily attributes this net sales growth to both the addition of new
long-term care customers and the increased penetration of existing customer
accounts, including increased sales to providers of home healthcare and
sub-acute, rehabilitative and transitional care, and to a lesser extent, the
acquisition of six medical supply distributors in 1995 and 1996. The Company's
gross profit has increased from $11.6 million in 1992 to $41.4 million in 1996,
while the Company's gross profit as a percentage of net sales ("gross margin")
has ranged from 23.3% to 26.0% within that period.  The Company believes that
the decline in gross margin from 26.0% in 1992 to 23.3% in 1996 is primarily
attributable to competitive pricing of products sold by the Company in order to
maintain or increase market share, particularly with respect to the Company's
large chain customers.

    Management believes that the Company's current gross margins are
consistent with the Company's long-term strategy to expand sales with
aggressive pricing and to increase operating margins through reductions in
selling, general and administrative expenses as a percentage of increased net
sales. To date, the decrease in gross margins has been offset in part by
participation in volume-based rebate programs offered by vendors.
Notwithstanding these actions, there can be no assurance that the Company will
be able to increase sales through aggressive pricing or to increase operating
margins through controlling selling, general and administrative expenses; or
that participation in vendor programs will offset reductions in gross margin to
a significant extent.

    The Company is actively seeking to attract large chain customers and to the
extent that the Company is successful in attracting such customers, the
Company's operating expenses may increase. In order to effectively serve
additional large chain customers, the Company may be required to increase the
size of its distribution facilities, to expand its order processing and
delivery systems and to hire additional personnel. The Company may also be
required to lower prices to attract and maintain such customers. The Company's
selling, general and administrative expenses have decreased as a percentage of
net sales over the last five years, although such expenses have increased in
dollar amount in order to support higher sales volume over this period.
Consequently, operating income over this period grew at a compound annual rate
of 39.4%, from $4.1 million in 1992 to $15.5 million in 1996.

    Since September 1995, the Company has completed the acquisition of six
medical supply distributors: L&M Medical Inc., Bayer Medical Service Systems,
Inc., Express Care, L.P., Alternative Healthcare Services, TDR Medical, LLC,
and Gateway Healthcare, Inc. See "Item 1: Business - Growth Strategy".  To
augment its internal growth, the Company will consider additional acquisitions
of medical supply distributors that serve complementary markets or that
supplement the Company's presence in existing markets. See "Factors Affecting
Future Performance."

    Economic, regulatory, political and demographic pressures, including cost
containment measures from public and private reimbursement sources, are
resulting in an increase in the demand for long-term care facilities to provide
medical services to patients at lower cost than traditional hospital care. See
"Item 1: Business-- Industry Overview."

    The Company has experienced, and expects to continue to experience,
increasing demand for its products and services in this market, including from
customers in the home healthcare and subacute care segments, which it believes
are growing at a faster rate than the nursing home segment. The Company
believes that sales of enteral feeding, respiratory therapy and wound care
supplies to home healthcare providers and sub-acute care facilities will
represent an increasing proportion of its overall product mix. In order to
maintain or increase market share, particularly with respect to the Company's
large chain customers, the Company offers competitive pricing for its products,
which has in the past resulted in lower gross margins. The Company is actively
seeking to attract large chain customers and to the extent that the Company is
successful, such trend may continue.
<PAGE>   15
                                      -15-




    Certain of the foregoing statements are forward-looking and involve risks
and uncertainties, and the Company's actual experience may differ materially
from that discussed above. Factors that may cause such a difference include,
but are not limited to, those discussed in "Factors Affecting Future
Performance."

RESULTS OF OPERATIONS

    The following table sets forth for the periods indicated information
derived from the statements of income of the Company expressed as a percentage
of net sales for such year and the percentage change in such items compared to
the amount for the prior year.

<TABLE>
<CAPTION>
                                     PERCENTAGE OF NET SALES             PERCENTAGE CHANGE
                                 --------------------------------       ------------------
                                                                         1996        1995
                                                                         OVER        OVER
                                  1996         1995         1994         1995        1994
                                 ------       ------       ------       ------      ------
<S>                                           <C>          <C>          <C>         <C>
Net sales . . . . . . . . .      100.0%       100.0%       100.0%       36.6%       41.2%
Cost of sales . . . . . . .       76.7         75.3         73.9         39.2        43.8
Gross profit  . . . . . . .       23.3         24.7         26.1         28.8        33.7
Selling, general and
administration expenses  . .      13.2         14.2         15.1         27.3        32.4
Acquisition and merger expenses    1.4           -            -            -           -
Operating income  . . . . .        8.7         10.5         11.0         13.4        35.5
Interest expense  . . . . .       (0.1)        (0.1)        (0.7)        15.1       (68.4)
Interest income . . . . . .        1.0          0.1          0.2          -         (12.4)
Income before income taxes         9.6         10.5         10.5         25.0        41.3
Income taxes  . . . . . . .       (3.6)        (4.2)        (4.2)        16.0        42.0
Net income  . . . . . . . .        6.0%         6.3%         6.3%        31.1        40.8
</TABLE>

1996 COMPARED TO 1995

    Net sales increased by $47.6 million, or 36.6%, to $177.7 million in 1996
compared to $130.0 million in 1995. The net sales growth in 1996 was
attributable to internal sales growth through the addition of new customers and
increased sales penetration in existing customer facilities, expansion through
acquisitions of regional medical supply distributors and facility expansion by
existing customers.

    Gross profit increased by $9.2 million, or 28.8%, to $41.4 million in 1996
compared to $32.1 million in 1995, while gross margin decreased to 23.3% from
24.7% over the same period. The decrease in gross margin was primarily due to a
greater mix of higher volume, large chain customers that require more
competitive pricing, but was offset in part by lower selling and servicing
costs as a percentage of net sales. Other factors contributing to the decrease
in gross margin were cost increases associated with high volume, commodity
items, such as latex exam gloves and paper and resin products, and the
Company's aggressive pricing strategy.  In addition, the reduction in gross
margin was also offset in part by vendor performance incentives earned by the
Company through the achievement of certain predetermined sales and purchase
levels, and the taking of prompt pay discounts with certain vendors.

    Selling, general and administrative expenses increased by $5.0 million, or
27.3%, to $23.4 million in 1996 compared to $18.4 million in 1995, and as a
percentage of net sales decreased to 13.2% from 14.2% for the same period.
Selling, general and administrative expenses increased in order to support the
Company's higher sales volume during 1996, while the decrease in selling,
general and administrative expenses as a percentage of net sales was due to
leveraging of the Company's general and administrative expenses through
increased sales volume and the lower selling and servicing costs generally
associated with the Company's greater mix of higher volume, large chain
customers.  Both factors were offset in part by the non-recurring expense
related to the write-off of an uncollectible note receivable.

    During 1996, the Company incurred acquisition and merger expenses of $2.4
million.  Included was $819,000 of legal, accounting and other integration
costs incurred in connection with the Bayer Medical Service Systems, Inc.
<PAGE>   16
                                      -16-



share exchange, which was accounted for as a pooling of interests.  The Company
also incurred integration and exit charges of $771,000 during 1996 pertaining
to the acquisition of L&M Medical, Inc. in 1995, and $778,000 pertaining to
Express Care L. P. and Alternative Healthcare Services acquired in 1996.
Integration and exit charges pertain principally to severance, moving and
relocation costs, operating lease terminations and settlements and other
expenses associated with integration of various systems into those of the
Company.  The Company believes that it has adequate accruals to cover
additional costs in the future relating to these acquisitions.

    Interest expense increased $30,000, or 15.1%, to $229,000 in 1996 compared
to $199,000 in 1995. This increase was attributable to increased borrowings
under the Company's revolving line of credit agreement for working capital
purposes, offset in part by a portion of the net proceeds of the public offering
in June 1996 being used to repay the outstanding balance under the Company's
revolving line of credit.

    Interest income increased $1.6 million to $1.8 million in 1996 compared to
$163,000 in 1995.  This increase was attributable to the net proceeds of the
offering, in excess of the amounts used to pay the outstanding balance of the
Company's revolving credit facility, being invested in short-term
interest-bearing securities.

    Income taxes increased by $879,000 to $6.4 million in 1996 compared to $5.5
million in 1995. This increase was attributable to higher income before taxes,
which was partially offset by a reduction in the effective tax rate from 40.3%
in 1995 to 37.4% in 1996.  The decrease in the effective tax rate was primarily
due to increased tax-exempt income in 1996 as compared to 1995.

1995 COMPARED TO 1994

    Net sales increased by $37.9 million, or 41.2%, to $130.1 million in 1995
compared to $92.2 million in 1994. The net sales growth in 1995 was
attributable to the addition of new customers, facility expansion by existing
customers and increased sales penetration in existing customer facilities.

    Gross profit increased by $8.1 million, or 33.7%, to $32.1 million in 1995
compared to $24.0 million in 1994, while gross margin decreased to 24.7% from
26.1% over the same period. The decrease in gross margin was primarily due to a
greater mix of higher volume, large chain customers that require more
competitive pricing, but was offset in part by lower selling and servicing
costs as a percentage of net sales. Other factors contributing to the decrease
in gross margin were cost increases associated with high volume, commodity
items, such as latex exam gloves and paper and resin products, and the
Company's aggressive pricing strategy. In addition, the reduction in gross
margin was also offset in part by vendor performance incentives earned by the
Company through the achievement of certain predetermined sales and purchase
levels, and the taking of prompt pay discounts with certain vendors.

    Selling, general and administrative expenses increased by $4.5 million, or
32.4%, to $18.4 million in 1995 compared to $13.9 million in 1994, and as a
percentage of net sales decreased to 14.2% from 15.1% for the same period. The
increase in the amount of selling, general and administrative expenses was
primarily attributable to salaries, commissions and other costs associated with
increased staffing levels throughout the Company to support the expansion of
the Company's business during 1995. The decrease in selling, general and
administrative expenses as a percentage of net sales was a result of both the
economies associated with the Company's net sales growth, particularly with
large chain customers where support costs were generally lower, and increased
controls over such expenses.

    Interest expense decreased by $430,000, or 68.4%, to $199,000 in 1995
compared to $629,000 in 1994. This decrease was a result of a portion of the
net proceeds of the Company's initial public offering in March 1994 being used
to repay the Company's outstanding long-term debt.

    Income taxes increased by $1.6 million to $5.5 million in 1995 compared to
$3.9 million in 1994. This increase was attributable to higher taxable income
and an increase in the Company's provision for state income taxes, resulting in
the effective tax rate increasing to 40.3% in 1995 from 40.1% in 1994.
<PAGE>   17
                                      -17-



LIQUIDITY AND CAPITAL RESOURCES

    The Company's principal cash requirement to date has been to fund working
capital in order to support growth of net sales. Through 1996, the Company
funded its working capital requirements principally with cash generated from
operations, proceeds from its bank borrowings and the sale of equity
securities.

    The Company completed a third public offering in June 1996 pursuant to which
the Company received net proceeds of approximately $91.5 million from the sale
by the Company of 2,223,276 shares of its common stock.  A portion of the net
proceeds from the offering were used to repay the outstanding balance under the
Company's revolving credit facility ($9.6 million), with the remaining balance
to be used for general corporate purposes, including the possible acquisition
of one or more medical supply distributors that serve complementary markets or
supplement the Company's presence in existing markets.  As part of the
Company's growth strategy, the Company continually evaluates potential
acquisition candidates.  However, the Company presently has no specific
agreements or commitments with respect to any acquisition.  Pending such uses,
the net proceeds of the offering are invested in short-term interest-bearing
securities.

    The Company's working capital was $102.1 million and its current ratio was
2.9 at December 31, 1996 as compared to working capital of $36.4 million and a
current ratio of 3.4 at December 31, 1995.  Included in working capital are
cash and cash equivalents form the Company's public offering.

    The Company has a revolving credit facility of $15.0 million, of which $10.0
million was available at December 31, 1996. Borrowings bear interest, at the
option of the Company, at prime or LIBOR plus an amount ranging from 1% to 2.5%
per annum.  A facility fee of .125% per annum is charged on the unused portion
of the revolving credit facility.  Substantially all of the Company's assets
would collateralize any borrowings in excess of $7.5 million under the
revolving credit facility, which contains numerous restrictive covenants and
financial ratio requirements.

    During 1996, the Company incurred acquisition and merger expenses of $2.4
million.  See Note 2 of "Notes to Consolidated Financial Statements" and
"Factors Affecting Future Performance".

    The Company has consolidated, or plans to consolidate, certain distribution
facilities into its larger regional distribution centers which has resulted,
and may in the future result, in cash expenditures in excess of those required
in the ordinary course of business.

    The Company made capital expenditures totaling $1.1 million in 1996
principally to purchase telephone and computer equipment, an administrative
office building and for various warehouse improvements.  The Company expects to
make capital expenditures of approximately $1.5 million in 1997 principally in
connection with improvements to or expansion of existing facilities and to
purchase additional telephone, computer and warehouse equipment.

    The Company expects that available cash, borrowings available under its
existing revolving credit facility and funds generated from operations will be
sufficient to fund its operations through December 1997.

    The foregoing statements contain forward-looking statements which involve
risks and uncertainties and the Company's actual experience may differ
materially from that discussed above.  Factors that may cause such a difference
include, but are not limited to, those discussed in "Factors Affecting Future
Performance" as well as future events that have the effect of reducing the
Company's available cash balances, such as unanticipated operating losses or
capital expenditures related to possible future acquisitions.

Factors Affecting Future Performance

    The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control.  These include adverse changes
in general economic conditions and changes in federal and state regulation
affecting the Company's customers.  Accordingly, past trends should not be used
to anticipate future results and trends.  Further, the Company's prior
performance should not be presumed to be an accurate indicator of future
performance.
<PAGE>   18
                                      -18-



    The Company faces intense competition from a variety of regional, local and
national distributors.  Barriers to entry in the long-term care distribution
industry are relatively low, and the risk of new competitors entering the
market, particularly on a local level, is high. In response to competitive
pressures, the Company has in the past lowered, and may in the future lower,
selling prices in order to maintain or increase market share, which has
resulted, and may in the future result, in lower gross margins.  Certain of the
Company's current competitors, including many national distributors, have
substantially greater capital resources, sales and marketing experience, and
distribution capabilities than the Company.  Certain of these national
distributors may have cost advantages over the Company due to their ability to
purchase products in large volumes, the Company may experience significant
pricing pressures from these and other competitors which could adversely affect
the Company's operating results.

    A key element of the Company's growth strategy is to augment its internal
growth with the acquisition of medical supply distributors, and inventory and
facilities of such distributors, that serve complementary markets or that
supplement the Company's presence in existing markets. Certain of these
businesses may be marginally profitable or unprofitable.  In order to achieve
anticipated benefits from these acquisitions, the Company must successfully
integrate the acquired businesses with its existing operations, and no
assurance can be given that the Company will be successful in this regard.  In
the past the Company has incurred one-time costs and expenses in connection
with acquisitions and it is likely that similar one-time costs and expenses may
be incurred in connection with future acquisitions, including the write-off of
unsold inventory and unused assets.  In addition, attractive acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the possible need to obtain regulatory
approval.  There can be no assurance that the Company will be able to complete
future acquisitions.  In order to finance such acquisitions, it may be
necessary for the Company to raise additional funds either through public or
private financings, including bank borrowings.  Any financing, if available at
all, may be on terms which are not favorable to the Company.  The Company may
also issue shares of its Common Stock to acquire such businesses, which may
result in dilution to the Company's existing stockholders.

    The Company depends on a limited number of large customers for a significant
portion of its net sales, including Beverly Enterprises which accounted for
19.6% of net sales for the year ended December 31, 1996.  See "Item 1:
Business- Customers".   Consolidation among long-term care providers and the
growth of the Company's business with large chains could increase such
dependence.  The loss of, or significant declines in the level of purchases by,
one or more of these customers would have a material adverse effect on the
Company's operating results.  Although the Company has not to date experienced
any failure to collect accounts receivable from its largest customers, an
adverse change in the financial condition of any of these customers, including
as a result of a change in governmental or private reimbursement programs,
could have a material adverse effect upon the Company's operating results.  In
addition, the expansion of the Company's business with large chains has in the
past resulted in competitive pricing pressures and lower and lower operating
margins and such pressure on margins may continue in the future.

    A key element of the Company's growth strategy is to increase sales to
existing and new customers, including large chains and independent operators,
by adding one or more new strategic distribution centers or expanding existing
distribution centers and by hiring additional direct sales or other personnel
and through national account sales efforts.  Such efforts will result in
increased operating expenses.  There can be no assurance that the establishment
of new strategic distribution centers, the expansion of existing distribution
centers, the addition of new sales or other personnel or national account sales
efforts will result in additional revenues or operating income.

    As a result of changes occurring in the long-term care market, both the
nature of the Company's customer base as well as products and services required
by its customers are changing.  The failure of the Company's management to
effectively respond to and manage changing business conditions, including
changes in customer requirements and changes to the Company's overall product
mix, could have an adverse effect on the Company's operating results.

    Because the Company believes that its success to date is dependent in part
upon its ability to provide prompt, accurate and complete service to its
customers on a price-competitive basis, any disruption in its day-to-day
operations or material increases in its cost of procuring and delivering
products could have an adverse effect on its operating results.  In order to
provide prompt and complete service to its customers, the Company maintains a
significant investment in product inventory.  Although the Company closely
monitors its inventory exposure through
<PAGE>   19
                                      -19-



a variety of inventory control procedures and policies, there can be no
assurance that such procedures and policies will continue to be effective or
the unforeseen product developments or price changes will not adversely affect
the Company's operating results.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.

    The information required by this item and as listed in Item 14(a)(1) and (2)
of this Report is included in this Report beginning on page F-1.

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

    There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

DIRECTORS

    The information concerning directors of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 1996,
under the heading "Election of Directors" and "Section 16 (a) Beneficial
Ownership Reporting Compliance."

EXECUTIVE OFFICERS

    The information concerning executive directors of the Company required under
this item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's fiscal year ended December 31,
1996, under the heading "Election of Directors" and "Section 16 (a) Beneficial
Ownership Reporting Compliance."

ITEM 11. EXECUTIVE COMPENSATION.

    The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1996, under the heading "Compensation
and Other Information Concerning Directors and Officers."

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

    The information required under this item in incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1996, under the heading "Management
and Principal Stockholders."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the Company's fiscal
year ended December 31, 1996, under the headings "Election of Directors."
<PAGE>   20
                                      -20-





                                   PART IV

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

(a)      1.      Financial Statements.

                 The following financial statements of the Company are included
                 in this Report beginning on Page F-1:

                 Report of Independent Auditors
                 Consolidated Balance Sheets as of December 31, 1996 and 1995
                 Consolidated Statements of Income for the years ended December
                 31, 1996, 1995 and 1994 Consolidated Statements of
                 Stockholders' Equity for the years ended December 31, 1996,
                    1995 and 1994
                 Consolidated Statements of Cash Flows for the years ended
                 December 31, 1996, 1995 and 1994 Notes to Consolidated
                 Financial Statements

         2.      Financial Statement Schedules.

                 The following financial statement schedule of the Company is
                 included in this Report beginning on Page S-1:

                 Schedule II              -- Valuation and Qualifying Accounts.

   All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

         3.      List of Exhibits.

The following exhibits are filed with this Report or are incorporated by
reference:


<TABLE>
<CAPTION>
Exhibit No.                    Description
-----------                    -----------
<S>              <C>
3.1(1)           Amended and Restated Certificate of Incorporation of the 
                 Company.

3.2(1)           Amended and Restated By-laws of the Company.

4.1(1)           Specimen certificate representing the Common Stock.

4.2              Form of Common Stock Purchase Warrant

10.1(1)*         1992 Stock Plan, as amended.

10.1a(2)*        Forms of the Company's Incentive Stock Option Agreement and 
                 Non-Qualified Stock Option Agreement.

10.2(3)          Loan and Security Agreement between the Company and 
                 NationsBank of Tennessee, N. A. dated September 25, 1995.

10.3             Intentionally omitted.
</TABLE>
<PAGE>   21
                                      -21-




<TABLE>
<S>              <C>
10.4(1)          Registration Rights Agreement among the Company, the 
                 Investors, the stockholders listed therein and Healthcare
                 Capital Investments, Inc. dated as of June 25, 1992.

10.5             Intentionally omitted.

10.6(1)*         Form of Non-Competition Agreement.

10.7(4)          Stock Purchase Agreement dated as of November 19, 1996 among 
                 Gulf South Medical Supply, Inc., Gateway Healthcare 
                 Corporation ("Gateway") and the stockholders of Gateway listed
                 on the signature pages thereto ("Gateway Stock Purchase 
                 Agreement").

10.8(5)          Amendment and Waiver Agreement, dated as of December 26, 1996
                 among Gateway, the stockholders of Gateway listed on the 
                 signature pages thereto and Gulf South Medical Supply, Inc., 
                 to the Gateway Stock Purchase Agreement.

10.9*            1997 Stock Plan.

10.10*           Form of the Company's Incentive Stock Option Agreement under 
                 the 1997 Stock Plan.

10.11*           Form of the Company's Non-Qualified Stock Option Agreement 
                 under the 1997 Stock Plan.

11.1             Statement re: computation of per share earnings.

23.1             Consent of Ernst & Young LLP.

24.1             Power of Attorney (included on page 28).

27               Financial Data Schedule                                       
</TABLE>

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

         (1)     Incorporated herein by reference to the exhibits (of the same
                 exhibit number) to the Company's Registration Statement on
                 Form S-1 (File No. 33-75170).

         (2)     Filed as Exhibits 4.5 and 4.6, respectively, to the Company's
                 Registration Statement on Form S-8 (File No. 33-83714) and
                 incorporated herein by reference.

         (3)     Incorporated herein by reference to the exhibit (of the same
                 exhibit number) to the Company's Annual Report on Form 10-K
                 for the year ended December 31, 1995.

         (4)     Filed as Exhibit 2.1 to the Company's Current Report on Form
                 8-K dated December 26, 1996 filed January 9, 1997.

         (5)     Filed as Exhibit 2.2 to the Company's Current Report on Form
                 8-K dated December 26, 1996 filed January 9, 1997.

       *         Indicates a management contract or any compensatory plan,
                 contract or arrangement required to be filed as an exhibit
                 pursuant to Item 14(c).
<PAGE>   22
                                      -22-




Reports on Form 8-K.

         Current Report on Form 8-K dated November 19, 1996 reporting, under
         Item 5, the Company's announcement that it had entered into a certain
         Stock Purchase Agreement pursuant to which it intended to acquire all
         of the outstanding capital stock and stock warrants of Gateway
         Healthcare Corporation.

         Current Report on Form 8-K dated December 26, 1996 reporting, under
         Item 2, the Company's completion of the acquisition of all of the
         outstanding capital stock and warrants of Gateway Healthcare
         Corporation.

Exhibits.

         The Company hereby files as exhibits to this Report those exhibits
         listed in Item 14(a)(3), above.

Financial Statement Schedules.

         The Company hereby files as financial statement schedules to this
         Report the financial statement schedule listed in Item 14(a)(2),
         above, which is attached hereto.
<PAGE>   23
                                      -23-



                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Jackson, Mississippi on March 21, 1997.
     
                                   GULF SOUTH MEDICAL SUPPLY, INC.
                                   
                                   By:    /s/  Thomas  G. Hixon 
                                          -------------------------------------
                                          Thomas G. Hixon
                                          President and Chief Executive Officer

    We, the undersigned officers and directors of Gulf South Medical Supply,
Inc., hereby severally constitute and appoint Thomas G. Hixon and Guy W.
Edwards, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities to do all things in our names and on our behalf in such capacities
to enable Gulf South Medical Supply, Inc. to comply with the provisions of the
Securities Exchange Act of 1934, as amended, and all requirements of the
Securities Exchange Commission.

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

<TABLE>
<CAPTION>
        SIGNATURE                               TITLE(S)                               DATE
        ---------                               --------                               ----
<S>                              <C>                                               <C>   
/s/ Thomas G. Hixon              President, Chief Executive Officer, and          
-------------------------------  Chairman of the Board                                            
Thomas G. Hixon                  (principal executive officer)                      March 21, 1997
                                                                                                  
                                                                                  
/s/ Guy W. Edwards               Senior Vice President, Chief Financial Officer,  
-------------------------------  Treasurer, Secretary and Director (principal                      
Guy W. Edwards                   financial and accounting officer)                  March 21, 1997
                                                                                                   
                                                                                  
/s/ David L. Bogetz              Director                                           March 21, 1997  
---------------------------------                                                                                
David L. Bogetz                                                                   
                                                                                  
/s/ Melvin L. Hecktman           Director                                           March 21, 1997
------------------------------                                                                     
Melvin L. Hecktman                                                                
                                                                                  
/s/ William W. McInnes           Director                                           March 21, 1997
-----------------------------                                                                     
William W. McInnes                                                                

</TABLE>
<PAGE>   24




                         INDEX TO FINANCIAL STATEMENTS

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

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

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

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 
and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           F-5

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

Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . .           F-8


                                          INDEX TO FINANCIAL STATEMENT SCHEDULES



Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . .           S-1

</TABLE>

All other schedules are omitted since the required information is inapplicable
or has been presented in the financial statements and related notes.





                                      F-1
<PAGE>   25


                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Gulf South Medical Supply, Inc.

We have audited the accompanying consolidated balance sheets of Gulf South
Medical Supply, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996.  Our audit
also included the financial statement schedule listed in the index under Item
14(a).  These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gulf South
Medical Supply, Inc. and subsidiaries as of December 31, 1996, and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.  Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.





                                                       /s/  ERNST & YOUNG LLP




Jackson, Mississippi
February 7, 1997





                                      F-2
<PAGE>   26




                        GULF SOUTH MEDICAL SUPPLY, INC.
                          CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                   ----------------------
                                                                                      1996          1995
                                                                                   --------       ---------
ASSETS
Current assets:
<S>                                                                                <C>           <C>
  Cash and cash equivalents   . . . . . . . . . . . . . . . . . . . . . . . .      $ 76,054       $   2,147

  Trade accounts receivable, less allowance for doubtful accounts of $1,651         
    in 1996 and $1,717 in 1995 .  . . . . . . . . . . . . . . . . . . . . . .        48,404          28,742
  Inventories   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        27,189          16,874
  Prepaid income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,501           1,032
  Prepaid expenses and other  . . . . . . . . . . . . . . . . . . . . . . . .         1,113           1,836
  Deferred income taxes (Note 2 and 4)  . . . . . . . . . . . . . . . . . . .         1,485             664
                                                                                   --------       ---------
    Total current assets  . . . . . . . . . . . . . . . . . . . . . . . . . .       155,746          51,295
Property and equipment:
  Land  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           567             567
  Building  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,270             600
  Equipment   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         3,127           1,853
                                                                                   --------       ---------
                                                                                      4,964           3,020
  Accumulated depreciation  . . . . . . . . . . . . . . . . . . . . . . . . .        (1,092)           (882)
                                                                                   --------       ---------
                                                                                      3,872           2,138

Other assets:
    Goodwill (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .        34,824            -
    Deferred income taxes (Note 2 and 4)  . . . . . . . . . . . . . . . . . .         1,965           1,141
  Notes receivable from affiliate (Note 5)  . . . . . . . . . . . . . . . . .          -                413
  Other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,564              34
                                                                                   --------       ---------
                                                                                     38,353           1,588
                                                                                   --------       ---------
  Total assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $197,971       $  55,021
                                                                                   ========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable:
    To bank   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $   -              1,403
    Others (Note 2 and 3)   . . . . . . . . . . . . . . . . . . . . . . . . .        25,321            -
  Trade accounts payable  . . . . . . . . . . . . . . . . . . . . . . . . . .        14,381           9,913
  Accrued expenses and other current liabilities  . . . . . . . . . . . . . .         8,970           1,351
  Current portion of long-term debt   . . . . . . . . . . . . . . . . . . . .         5,000           2,400
                                                                                   --------       ---------
    Total current liabilities   . . . . . . . . . . . . . . . . . . . . . . .        53,672          15,067

Stockholders' equity:
Preferred stock, $.01 par value:
    Authorized shares -- 1,000,000
    Issued and outstanding shares - none
Common stock, $.01 par value:
    Authorized shares -- 30,000,000
    Issued and outstanding shares - 16,264,923 in 1996 and 13,918,096 in 1995           163             139
    Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       115,679          22,052
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        28,457          17,763
                                                                                   --------       ---------
    Total stockholders' equity  . . . . . . . . . . . . . . . . . . . . . . .       144,299          39,954
                                                                                   --------       ---------
    Total liabilities and stockholders' equity  . . . . . . . . . . . . . . .      $197,971       $  55,021
                                                                                   ========       =========
                                                                                                          
</TABLE>


                            See accompanying notes.





                                      F-3
<PAGE>   27





                        GULF SOUTH MEDICAL SUPPLY, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)




<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                        ----------------------------------------------
                                                             1996             1995             1994
                                                        -----------      -----------      ------------
<S>                                                     <C>              <C>              <C>
Net sales . . . . . . . . . . . . . . . . . . . .       $   177,710      $   130,094      $     92,151
Cost of sales . . . . . . . . . . . . . . . . . .           136,344           97,973            68,122
                                                        -----------      -----------      ------------
Gross profit  . . . . . . . . . . . . . . . . . .            41,366           32,121            24,029
Selling, general and administrative
     expenses (Note 2)  . . . . . . . . . . . . .            23,450           18,418            13,913
Acquisition and merger expenses (Note 2)  . . . .             2,378             -                 -
                                                        -----------      -----------      ------------
Operating income  . . . . . . . . . . . . . . . .            15,538           13,703            10,116 
Interest expense  . . . . . . . . . . . . . . . .              (229)            (199)             (629)  
Interest income . . . . . . . . . . . . . . . . .             1,771              163               186    
                                                        -----------      -----------      ------------
Income before income taxes  . . . . . . . . . . .            17,080           13,667             9,673
Income taxes (Note 4) . . . . . . . . . . . . . .            (6,386)          (5,507)           (3,877)
                                                        -----------      -----------      ------------
Net income  . . . . . . . . . . . . . . . . . . .       $    10,694      $     8,160      $      5,796
                                                        -----------      -----------      ------------
Net income per share  . . . . . . . . . . . . . .       $       .69      $       .58      $        .45
                                                        -----------      -----------      ------------
                                                                                             
</TABLE>





                            See accompanying notes.





                                      F-4
<PAGE>   28





                        GULF SOUTH MEDICAL SUPPLY, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                                    
                                                                                                          TOTAL     
                                            COMMON STOCK                                               STOCKHOLDERS'
                                        --------------------      PAID-IN     RETAINED     TREASURY       EQUITY    
                                          SHARES      AMOUNT      CAPITAL     EARNINGS      STOCK       (DEFICIT)
                                        ----------    ------      --------    --------     --------     --------
<S>                                  <C>           <C>         <C>         <C>           <C>         <C>
Balance at January 1, 1994  . . . . .   10,200,000     $102       $  3,396    $ 3,480      $(13,000)    $ (6,022)
  Acquisition - pooling of interest        151,724        1             24        327          --            352
     (Note 2)  . . . . . . . . . . . .                     
  Net income for 1994 . . . . . . . .         --        --            --        5,796          --          5,796
  Public offering of common stock . .    3,240,000       32         23,350       --            --         23,382
  Retirement of treasury stock  . . .   (6,120,000)     --         (13,000)      --          13,000         --
  Conversion of convertible                                
    debentures into common stock  . .    6,120,000      --           6,500       --            --          6,500
  Issuance of common stock from                            
      exercise of options . . . . . .      137,010        2             37       --            --             39
  Tax benefit of stock options                             
    exercised . . . . . . . . . . . .         --        --             455       --            --            455
                                        ----------     ----       --------    -------      --------     --------
 Balance at December 31, 1994  . . . .  13,728,734      137         20,762      9,603          --         30,502
  Net income for 1995 . . . . . . . .         --        --            --        8,160          --          8,160
  Issuance of common stock from                            
      exercise of options . . . . . .      189,362        2            110       --            --            112
  Tax benefit of stock options                             
    exercised . . . . . . . . . . . .         --        --           1,180       --            --          1,180
                                        ----------     ----       --------    -------      --------     --------
 Balance at December 31, 1995  . . . .  13,918,096      139         22,052     17,763          --         39,954
  Net income for 1996 . . . . . . .           --        --           --        10,694          --         10,694
  Public offering of common stock . .    2,223,276       22         91,441       --            --         91,463
  Issuance of common stock from                            
      exercise of options . . . . . .      123,551        2            569       --            --            571
  Tax benefit of stock options                             
    exercised . . . . . . . . . . . .         --        --           1,617       --            --          1,617
                                        ----------     ----       --------    -------      --------     --------
                                                           
Balance at December 31, 1996  . . . .   16,264,923     $163       $115,679    $28,457      $   --       $144,299
                                        ==========     ====       ========    =======      ========     ========
</TABLE>


                            See accompanying notes.





                                      F-5
<PAGE>   29




                        GULF SOUTH MEDICAL SUPPLY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                     -------------------------------------
                                                      1996           1995           1994
                                                    --------       --------       --------
OPERATING ACTIVITIES
<S>                                                  <C>            <C>            <C>
Net income  . . . . . . . . . . . . . . . . .        $10,694        $ 8,160        $ 5,796
Adjustments to reconcile net income to net
  cash provided by operating activities:
  Depreciation and amortization . . . . . . .            492            327            223

  Deferred income tax expense (credits) . . .            239            (99)          (173)
  Provision for doubtful accounts . . . . . .            924            869            525
  Note receivable from affiliate  . . . . . .            378           --             --
 Changes in operating assets and liabilities
  net of assets acquired and liabilities
  assumed of Gateway Healthcare Corporation,
  Express Care, L.P., Alternative Healthcare
  Services and TDR Medical LLC in
  1996 and L&M Medical, Inc. in 1995:
    Increase in trade accounts receivable   .         (8,345)        (8,940)        (5,798)
    Increase in inventories   . . . . . . . .         (4,231)        (6,101)        (2,958)
      Decrease (increase) in prepaid income taxes,
      prepaid expenses and other  . . . . . .            315         (2,249)          (382)
    Increase (decrease) in trade accounts payable     (2,012)         2,495          1,820
    Increase in accrued expenses  . . . . . .          1,461             56            459
                                                    --------       --------       --------
Net cash used in operating activities . . . .            (85)        (5,842)          (488)

INVESTING ACTIVITIES
Transaction costs related to the purchase of
   Gateway Healthcare Corporation, net of cash
   acquired . . . . . . . . . . . . . . . . .           (732)          --            --
Purchase of Express Care, L.P., Alternative
   Healthcare Services, and TDR Medical LLC
   in 1996 and L&M Medical, Inc. in 1995  . .         (4,452)        (3,749)         --
Purchases of building and equipment . . . . .         (1,117)          (539)          (359)
Decrease (increase) in other assets . . . . .         (1,473)            (2)             3
                                                    --------       --------       --------
Net cash used in investing activities . . . .         (7,774)        (4,290)          (356)

FINANCING ACTIVITIES
Principal payments on note payable to bank  .         (1,403)          --             --
Principal payment on notes payable-others . .        (11,465)          --             --
Principal payments on long-term debt  . . . .           --             --           (7,103)
Net borrowings (payments) under
   revolving line of credit . . . . . . . . .          2,600         (2,656)        (6,927)
Proceeds from issuance of common stock  . . .         91,463           --           23,382
Proceeds from exercise of stock options . . .            571            112             39
                                                    --------       --------       --------
Net cash provided by financing activities . .         81,766          2,768          9,391
                                                    --------       --------       --------
Net increase (decrease) in cash and cash
   equivalents  . . . . . . . . . . . . . . .         73,907         (7,004)         8,547
Cash and cash equivalents at beginning of year         2,147          9,151            604
                                                    --------       --------       --------
Cash and cash equivalents at end of year  . .         76,054          2,147          9,151
                                                    ========       ========       ========
</TABLE>

                                   continued





                                      F-6
<PAGE>   30




                        GULF SOUTH MEDICAL SUPPLY, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                     --------------------------------------
                                                       1996           1995           1994
                                                     -------        -------        -------
NON-CASH TRANSACTIONS:
<S>                                                  <C>            <C>     <C>    <C>
Issuance of notes for the purchase of
   Gateway Healthcare Corporation . . . . . .        $25,321        $    --        $  --
                                                     =======        =======        =======
Conversion of convertible subordinated
   debentures . . . . . . . . . . . . . . . .        $   --         $   --         $ 6,500
                                                     =======        =======        =======
Tax benefit of stock options exercised  . . .        $ 1,617        $ 1,180        $   455
                                                     =======        =======        =======
                                                                                         

Cash paid for:
Interest  . . . . . . . . . . . . . . . . . .        $   202        $  177         $ 1,026
                                                     =======        =======        =======
Federal and state income taxes  . . . . . . .
                                                     $ 4,903        $ 5,372        $ 3,518
                                                     =======        =======        =======
</TABLE>




                            See accompanying notes.





                                      F-7
<PAGE>   31




                        GULF SOUTH MEDICAL SUPPLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
                               DECEMBER 31, 1996

1. ACCOUNTING POLICIES

Consolidation

    The accompanying consolidated financial statements include Gulf South
Medical Supply, Inc. and subsidiaries (the "Company").  All intercompany
transactions have been eliminated in consolidation.

Nature of Business

    The Company is a national distributor of medical supplies and related
products to the long-term care industry.

Use of Estimates

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

Cash Equivalents

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

Inventories

    Inventories, which consist primarily of medical supplies and related
products, are stated at the lower of cost (average cost method) or market.

Property and Equipment

    Property and equipment is stated at cost. Depreciation of property and
equipment is provided by straight-line and accelerated methods over the
estimated useful lives, which is 31 years for the buildings and from 3 to 7
years for the equipment.

Goodwill

    The excess of the cost of acquisitions over the fair value of the net
assets acquired (goodwill) is amortized on a straight-line basis over their
estimated useful lives, principally at 30 years (See Note 2).  Management
assesses the recoverability of goodwill based on undiscounted cash flows.
Accumulated amortization was $147 and $30 at December 31, 1996 and 1995,
respectively.





                                      F-8
<PAGE>   32




Revenue Recognition

    Revenue is recognized when product is shipped to customers. Credit is
extended based upon an evaluation of the customer's financial condition and
generally does not require collateral. Substantially all of the Company's
accounts receivables are due from companies in the long-term care industry
located throughout the United States. Credit losses are provided for in the
financial statements and have consistently been within management's
expectations.

Stock Compensation

    The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.

Income Taxes

    Deferred income taxes, which are provided on the liability method, relate
to temporary differences between assets and liabilities recognized differently
for financial reporting purposes and for income tax purposes.

Net Income Per Common Share

    Net income per common share is computed by dividing net income applicable
to common stock (interest expense, net of income taxes, on the 10% convertible
subordinated debentures has been eliminated in 1994 ), based on the weighted
average number of shares outstanding during each year presented (15,419,438 in
1996, 13,993,595 in 1995 and 13,073,040 in 1994). Common equivalent shares
include the conversion of the 10% convertible subordinated debentures in 1994.
Common equivalent shares relating to the stock options and warrants outstanding
during the years ended  December 31, 1996, 1995 and 1994, when dilutive, have
been calculated using the treasury stock method based on the average market
value of the common stock during 1996, 1995 and 1994.





                                      F-9
<PAGE>   33




ACQUISITIONS

    On December 26, 1996, the Company acquired all of the outstanding common
stock of Gateway Healthcare Corporation ("Gateway") for $26,077, including
transaction costs of $756, in notes payable to the former shareholders of
Gateway and warrants for 450,000 shares of the Company's common stock (see
notes 3 and 6).  The Company also acquired certain operating assets and
liabilities of Express Care, L.P. ("Express Care") on April 1, 1996,
Alternative Healthcare Services ("AHS") on July 1, 1996 and TDR Medical, LLC
("TDR") on December 10, 1996 (collectively, "Others") in separate transactions
totaling $4,670.  These acquisitions have been accounted for using the purchase
method of accounting.  The total purchase price has been allocated on the basis
of fair values of the assets acquired and liabilities assumed.  The total
purchase price was allocated to the assets acquired and liabilities assumed as
follows:

<TABLE>
<CAPTION>
                                                       Gateway          Others
                                                       -------          ------
 <S>                                                   <C>              <C>
 Cash  . . . . . . . . . . . . . . . . . . . . . . .   $    24          $  -
 Accounts receivable   . . . . . . . . . . . . . . .    10,906            1,300
 Inventories   . . . . . . . . . . . . . . . . . . .     4,928            1,156
 Prepaid expenses  . . . . . . . . . . . . . . . . .        61              302
 Property and equipment  . . . . . . . . . . . . . .       690              222
 Other assets  . . . . . . . . . . . . . . . . . . .        53             -
 Deferred income taxes   . . . . . . . . . . . . . .     3,025             -
 Goodwill  . . . . . . . . . . . . . . . . . . . . .    30,311            3,489
 Notes payable to others   . . . . . . . . . . . . .   (11,465)            -
 Accounts payable  . . . . . . . . . . . . . . . . .    (5,331)          (1,149)
 Accrued exit and integration expenses   . . . . . .    (3,677)            (600)
 Accrued expenses  . . . . . . . . . . . . . . . . .    (3,448)             (50)
                                                       -------          -------
                                                       $26,077          $ 4,670
                                                       ========         =======
</TABLE>                                              

    Accordingly, the results of operations of the Company include Gateway,
Express Care, AHS and TDR from the dates acquired.  The operations of Express
Care, AHS and TDR were not material to the Company's operations for 1996, 1995
and 1994.  Gateway, Express Care, AHS and TDR were distributors of medical
supplies and related products serving principally the East, Southeast, Southern
California and South Texas long-term care markets prior to being acquired by
the Company.  Accrued exit and integration expenses principally relate to
severance, moving, relocation and lease termination expenses pertaining to the
closure of five Gateway distribution centers and conversion of Gateway's
systems. Included in the accrued severance expenses were administrative,
clerical, sales and warehouse personnel costs. 

    Unaudited pro forma results of operations of the Company including Gateway
for the periods prior to its acquisition by the Company were as follows:

<TABLE>
<CAPTION>
                                Period ended  
                                December 26,       Year ended December 31,
                                ------------       -----------------------
                                   1996              1995           1994
                                   ----              ----           ----
<S>                               <C>              <C>              <C>
Net sales . . . . . . . . . . .   $248,544         $177,831      $125,367
Gross profit  . . . . . . . . .    150,793           42,134        30,809 
Interest expense  . . . . . . .      2,249            2,897         3,249
                                                        
Income before income taxes  . .     13,563           10,877         6,278
                                                         
Net income  . . . . . . . . . .      8,159            6,210         3,964
                                                                        
Net income per share  . . . . .        .53              .44           .30
</TABLE>                        
                                




                                      F-10
<PAGE>   34




ACQUISITIONS (CONTINUED)

    Pro forma results do not purport to be indicative of actual results had the
acquisition been made at January 1, 1994 or the results that may occur in the
future.

    On February 29, 1996, the Company completed the acquisition of all of the
outstanding common stock of Bayer Medical Service Systems, Inc. ("Bayer"). The
Company issued 151,724 shares of its common stock in exchange for the
outstanding common stock of Bayer. The share exchange was accounted for as a
pooling of interests and accordingly, the Company's consolidated financial
statements have been restated to include accounts and operations of Bayer for
all periods prior to the share exchange. Separate results of operations for the
two months in 1996 and the two years prior to the share exchange with Bayer are
as follows:

<TABLE>
<CAPTION>
                            Year ended December 31,
                            -----------------------
                         1996          1995        1994
                         ----          ----        ----
<S>                    <C>           <C>          <C>
Net sales
     Gulf South        $175,185      $120,287     $83,376
     Bayer                2,525         9,807       8,775
                       --------      --------     -------
     Combined          $177,710      $130,094     $92,151
                       ========      ========     =======

Gross profit
     Gulf South        $ 40,939      $ 29,752     $21,282
     Bayer                  427         2,369       2,747
                       --------      --------     -------
     Combined          $ 41,366      $ 32,121     $24,029
                       ========      ========     =======

Net income
     Gulf South        $ 10,693      $  8,567     $ 5,728
     Bayer                    1          (407)         68
                       --------      --------     -------
     Combined          $ 10,694      $  8,160     $ 5,796
                       ========      ========     =======
</TABLE>


    The Company had expenses of $2,378 during 1996 in connection with the
acquisitions described above and the L&M Medical, Inc. acquisition in 1995.
Included therein was $819 of legal, accounting and other integration costs
incurred in the Bayer share exchange, $771 of integration and exit charges
pertaining to L&M Medical, Inc. acquired in 1995 and $778 pertaining to the
Express Care and AHS acquisitions. Integration and exit charges pertain
principally to severance, moving and relocation costs, operating lease
terminations and settlements and other expenses associated with integration of
various systems into those of the Company.

3. CREDIT FACILITIES AND NOTES PAYABLE

    The Company has a $15.0 million revolving credit facility which matures
September 25, 1998, of which $10 million and $12.6 million was available at 
December 31, 1996 and 1995, respectively. Borrowings bear interest at prime or
at LIBOR plus 1% to 2.5% per annum.  A facility fee of .125% per annum is
charged on the unused portion of the revolving credit facility.  Borrowings
under the revolving credit facility up to $7.5 million are unsecured.
Substantially all of the Company's assets would collateralize any borrowings in
excess of $7.5 million.  The revolving credit facility contains numerous
restrictive covenants and financial ratio requirements.

    Notes payable-other consists of $25,321 payable to the former shareholders 
of Gateway.





                                      F-11
<PAGE>   35




4. INCOME TAXES

    Income tax expense consists of the following:

<TABLE>
<CAPTION>
                                                                1996         1995        1994
                                                               -------     --------     -------
<S>                                                            <C>          <C>           <C>
Current:
 Federal  . . . . . . . . . . . . . . . . . . . . . . . . .     $5,125       $4,561      $3,378
 State    . . . . . . . . . . . . . . . . . . . . . . . . .      1,022        1,045         672
                                                                ------       ------      ------
                                                                 6,147        5,606       4,050
Deferred (credits):                                                                      
 Federal  . . . . . . . . . . . . . . . . . . . . . . . . .        211          (86)       (151)
 State    . . . . . . . . . . . . . . . . . . . . . . . . .         28          (13)        (22)
                                                                ------       ------      ------
                                                                   239          (99)       (173)
                                                                ------       ------      ------
                                                                $6,386       $5,507      $3,877
                                                                ======       ======      ======
</TABLE>


    The components of deferred income tax assets are as follows:
<TABLE>
<CAPTION>
                                                                  1996         1995
                                                                 ------       ------
<S>                                                              <C>          <C>  
Current:
 Accounts receivable  . . . . . . . . . . . . . . . . . . .      $  935        $500
 Inventories  . . . . . . . . . . . . . . . . . . . . . . .         470          80
 Accrued expenses . . . . . . . . . . . . . . . . . . . . .          80          84
                                                                -------        ----
 Current deferred tax asset . . . . . . . . . . . . . . . .       1,485         664
Non-current:                                                
 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . .         550         -
 Property and equipment . . . . . . . . . . . . . . . . . .         215         -
 Net operating loss . . . . . . . . . . . . . . . . . . . .       1,200         -
                                                                -------        ----
 Non-current deferred tax asset . . . . . . . . . . . . . .       1,965         664
                                                                -------        ----
Total deferred tax asset  . . . . . . . . . . . . . . . . .     $ 3,450        $664
                                                                =======        ====
</TABLE>


    The Company has net operating loss carryforwards, which have certain
restrictions as to the amount that may be utilized in any given year,
applicable to Gateway, which expire at various dates through 2011.

    The difference between income taxes at the Company's effective tax rate and
income taxes (credits) at the statutory federal tax rate are as follows:
<TABLE>
<CAPTION>
                                                                  1996           1995         1994
                                                                 -------       -------      --------
<S>                                                              <C>          <C>           <C>
Statutory federal income taxes  . . . . . . . . . . . . . .      $ 5,807       $ 4,683      $  3,288
State income taxes, net . . . . . . . . . . . . . . . . . .          693           678           429
Tax-exempt interest . . . . . . . . . . . . . . . . . . . .         (442)           -             -        
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .          328         (146)           160
                                                                 -------       -------      --------
                                                                 $ 6,386      $  5,507      $  3,877
                                                                 =======      ========      ========
</TABLE>





                                      F-12
<PAGE>   36




5. RELATED PARTY TRANSACTIONS

    The Company had the following receivables from a company ("related
company") whose stockholders included certain executive officers of the
Company.

<TABLE>
<CAPTION>
                                                                      1996       1995      1994
                                                                      ----       ----      ----
    <S>                                                               <C>        <C>       <C>
    Account receivable  . . . . . . . . . . . . . . . . . . . . . . . $  -       $332      $163
    Note receivable   . . . . . . . . . . . . . . . . . . . . . . . . $  -       $413      $413
</TABLE>                                                                    

    The Company acquired the related company during 1996 for the assumption of
its debt. The related company was subsequently acquired by a customer of the
Company for the assumption of such debt, excluding amounts owed to the Company.
As a result, the Company charged off $378 of the note receivable in connection
with the sale.


6. STOCK OPTION PLAN AND WARRANTS OUTSTANDING

    The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, compensation expense of $31 and $76 has been accrued applicable
to certain options exercisable at December 31, 1996 and 1995, respectively.

    Under the Company's 1992 Stock Plan, 1,300,000 shares of common stock have
been reserved for grant to key management personnel and to members of the Board
of Directors.  The options granted have ten year terms with vesting periods
of either three or five years from either the date of grant or the first
employment anniversary date.  At December 31, 1996 and 1995, 224,888 and
416,050 shares, respectively, were available for grant under the 1992 plan.

    Pro forma information regarding net income and net income per share is
required by FASB Statement No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that Statement.  The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995:  risk-free interest rate of
6.5%; no dividend yield; volatility factor of the expected market price of the
Company's common stock of .418 and .340, respectively; and a weighted-average
expected life of the options of 3 years.

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





                                      F-13
<PAGE>   37




6. STOCK OPTION PLAN AND WARRANTS OUTSTANDING (CONTINUED)

    For purposes of pro forma disclosures, the estimated fair value of the
options granted in 1996 and 1995 is amortized to expense over the options'
vesting period.  The Company's pro forma information follows (in thousands
except for earnings per share information):

<TABLE>
<CAPTION>
                                              1996          1995
                                              ----          ----
<S>                                      <C>           <C>
Pro forma net income                     $   10,314    $  8,019
Pro forma net income per share           $      .67    $    .57
</TABLE>

    A summary of the Company's stock option activity and related information is
as follows:

<TABLE>
<CAPTION>
                                                                   Weighted-Average
                                                  Shares            Exercise Price
                                                  ------            --------------
<S>                                               <C>                    <C>
Outstanding at December 31, 1994                  546,948                $ .76
    Granted                                       200,000                20.78
    Exercised                                     189,364                  .58
                                                  -------                   
Outstanding at December 31, 1995                  557,584                 8.00
    Granted                                       202,562                28.93
    Exercised                                     123,550                 4.69
    Forfeited                                      11,400                16.75
                                                  -------                      
Outstanding at December 31, 1996                  625,196                15.00
                                                  =======                      
</TABLE>


    The weighted-average fair value of options granted during 1996 and 1995 was
$10.39 and $6.56, respectively.

    Following is a summary of the status of options outstanding at December 31,
1996:


<TABLE>
<CAPTION>
                                      Outstanding Options               Exercisable Options
                           ------------------------------------------------------------------          
                                            Weighted
                                            Average      Weighted                   Weighted
                                           Remaining      Average                    Average
          Exercise                        Contractual    Exercise                   Exercise
        Price Range            Number         Life         Price        Number        Price
     ----------------------------------------------------------------------------------------
      <S>                  <C>             <C>        <C>           <C>           <C>
      $.2118 - $.4853      238,334         6.3 years  $     .32       206,204        $   .33
       $6.46 - $8.00        19,362         7.6 years  $    7.80         8,162        $  7.52
     $20.375 - $22.41      169,500         8.1 years  $   20.86        54,900        $ 20.97
      $28.50 - $31.35      198,000         9.2 years  $   28.93        38,000        $ 28.95
</TABLE>

    The Company granted warrants for 450,000 shares of its common stock on
January 2, 1997 at an exercise price of $25.90 in connection with the purchase
of Gateway (see Note 2).  All of the warrants were exercisable upon the date of
grant and expire January 2, 2002.

7. OTHER MATTERS

    One customer accounted for 20.0%, 16.6% and 10.1% of net sales for the
years ended December 31, 1996, 1995 and 1994, respectively.





                                      F-14
<PAGE>   38




7. OTHER MATTERS (CONTINUED)

    The Company leases certain vehicles, computers and office equipment under
operating leases. Lease periods range from two to six years. The Company also
leases warehouse space in various states under operating leases with lease
periods ranging from three to five years. Minimum future rental payments under
noncancelable operating leases having remaining terms in excess of one year as
of December 31, 1996, by year and in the aggregate, are as follows:

<TABLE>
         <S>                                                                               <C>       
         1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $1,609
         1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           908
         1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           440
         2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           377
         2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           227
                                                                                           ------
         Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . .        $3,561
                                                                                           ======
</TABLE>

         Rental expense under the operating leases was $1,449 in 1996, $1,054
in 1995 and $680 in 1994.

    Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.  Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.  Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of.  The
effect of this adoption was not material to the Company's financial position or
results of its operations.

    The carrying amounts reported in the balance sheet for cash and cash
equivalents, notes payable to bank and notes payable-others approximate the
fair value at December 31, 1996 and 1995.

    The Company is involved from time to time in claims and routine litigation
incidental to its business. Management is of the opinion, based on the advice
of counsel, that the outcome of any presently pending matters will not have a
material adverse effect on the financial position or results of the operation
of the Company.





                                      F-15
<PAGE>   39
                        GULF SOUTH MEDICAL SUPPLY, INC.
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                 YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                            BALANCE AT     CHARGED TO    WRITE-OFF    BALANCE AT
                                           BEGINNING OF     COST AND        OF          END OF
            DESCRIPTION                       PERIOD         EXPENSE     ACCOUNTS       PERIOD
            -----------                       ------         -------     --------       ------
<S>                                           <C>           <C>           <C>           <C>    
Year ended December 31, 1996:
 Allowance for doubtful accounts ......       $ 1,717       $   924       $   990       $ 1,651
                                              =======       =======       =======       =======
 Reserve for inventory obsolescence ...       $   199       $  --         $  --         $   199
                                              =======       =======       =======       =======

Year ended December 31, 1995:
 Allowance for doubtful accounts ......       $ 1,203       $   869       $   355       $ 1,717
                                              =======       =======       =======       =======
 Reserve for inventory obsolescence ...       $   199       $  --         $  --         $   199
                                              =======       =======       =======       =======

Year ended December 31, 1994:
 Allowance for doubtful accounts ......       $   907       $   525       $   229       $ 1,203
                                              =======       =======       =======       =======
 Reserve for inventory obsolescence ...       $   199       $  --         $  --         $   199
                                              =======       =======       =======       =======
</TABLE>




                                      S-1
<PAGE>   40



                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit No.                                            Description
-----------                                            -----------
         <S>              <C>
         3.1(1)           Amended and Restated Certificate of Incorporation of the Company.

         3.2(1)           Amended and Restated By-laws of the Company.

         4.1(1)           Specimen certificate representing the Common Stock.

         4.2              Form of Common Stock Purchase Warrant

         10.1(1)*         1992 Stock Plan, as amended.

         10.1a(2)*        Forms of the Company's Incentive Stock Option Agreement and Non-Qualified Stock Option
                          Agreement.

         10.2(3)          Loan and Security Agreement between the Company and NationsBank of Tennessee, N. A. dated
                          September 25, 1995.

         10.3             Intentionally omitted.

         10.4(1)          Registration Rights Agreement among the Company, the Investors, the stockholders listed therein
                          and Healthcare Capital Investments, Inc. dated as of June 25, 1992.

         10.5             Intentionally omitted.

         10.6(1)*         Form of Non-Competition Agreement.

         10.7(4)          Stock Purchase Agreement dated as of November 19, 1996 among Gulf South
                          Medical Supply, Inc., Gateway Healthcare Corporation ("Gateway") and the
                          stockholders of Gateway listed on the signature pages thereto ("Gateway Stock
                          Purchase Agreement").

         10.8(5)          Amendment and Waiver Agreement, dated as of December 26, 1996 among Gateway, the stockholders
                          of Gateway listed on the signature pages thereto and Gulf South Medical Supply, Inc., to the
                          Gateway Stock Purchase Agreement.

         10.9*            1997 Stock Plan.

         10.10*           Form of the Company's Incentive Stock Option Agreement under the 1997 Stock Plan.

         10.11*           Form of the Company's Non-Qualified Stock Option Agreement under the 1997 Stock Plan.

         11.1             Statement re: computation of per share earnings.

         23.1             Consent of Ernst & Young LLP.

         24.2             Power of Attorney (included on page 28).

         27               Financial Data Schedule
</TABLE>
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<PAGE>   41
         (1)     Incorporated herein by reference to the exhibits (of the same
                 exhibit number) to the Company's Registration Statement on
                 Form S-1 (File No. 33-75170).

         (2)     Filed as Exhibits 4.5 and 4.6, respectively, to the Company's
                 Registration Statement on Form S-8 (File No. 33-83714) and
                 incorporated herein by reference.

         (3)     Incorporated herein by reference to the exhibit (of the same
                 exhibit number) to the Company's Annual Report on Form 10-K
                 for the year ended December 31, 1995.

         (4)     Filed as Exhibit 2.1 to the Company's Current Report on Form
                 8-K dated December 26, 1996 filed January 9, 1997.

         (5)     Filed as Exhibit 2.2 to the Company's Current Report on Form
                 8-K dated December 26, 1996 filed January 9, 1997.


         *       Indicates a management contract or any compensatory plan,
                 contract or arrangement required to be filed as an exhibit
                 pursuant to Item 14(c).