<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                                   FORM 10-K

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

                        SECURITIES EXCHANGE ACT OF 1934

                 For the fiscal year ended   DECEMBER 31, 1996
                                             -----------------

                       Commission file number    0-19600
                                                --------


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


           MASSACHUSETTS                            04-2828817
---------------------------------------   ---------------------------------
(State of jurisdiction of incorporation   (IRS employer identification no.)
 or organization)

                                        
        18881 VON KARMAN AVENUE, SUITE 1750, IRVINE, CALIFORNIA   92612
       ----------------------------------------------------------------
        (Address of principal executive offices)              (zip code)

      Registrant's telephone number, including area code:  (714) 442-2100
                                                           --------------

       Securities registered pursuant to Section 12(b) of the Act:  NONE
                                                                    ----

          Securities registered pursuant to Section 12(g) of the Act:

                    COMMON STOCK, PAR VALUE $0.10 PER SHARE
                    ---------------------------------------
                               (Title of class)
                                        
Indicate by check "X" whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X  No 
                                       ---   ---

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 21, 1997 was $39,853,899.  On March 21, 1997, there were
7,220,178 shares of the Registrant's Common Stock outstanding.

    Documents incorporated by reference:  INFORMATION CALLED FOR IN PART III OF
THIS FORM 10-K IS INCORPORATED BY REFERENCE TO THE REGISTRANT'S DEFINITIVE PROXY
STATEMENT WITH RESPECT TO THE 1997 ANNUAL MEETING OF STOCKHOLDERS, TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A.

                                       1
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<TABLE>
<CAPTION>
                               TABLE OF CONTENTS

PART I                                                     Page
                                                           ----
<S>                                                        <C>
          
Item 1      Business                                          3
Item 2      Properties                                       11
Item 3      Legal Proceedings                                11
Item 4      Submission of Matters to a Vote of Security      12
            Holders
            Executive Officers of the Registrant             12
PART II   
Item 5      Market for Registrant's Common Equity and        14
            Related Stockholder Matters
Item 6      Selected Financial Data                          16
Item 7      Management's Discussion and Analysis of          17
            Financial Condition
            and Results of Operations
Item 8      Financial Statements and Supplementary Data      20
Item 9      Changes in and Disagreements with                20
            Accountants on Accounting
            and Financial Disclosure
          
PART III  
Item 10     Directors and Executive Officers of the          21
            Registrant
Item 11     Executive Compensation                           21
Item 12     Security Ownership of Certain Beneficial         21
            Owners and Management
Item 13     Certain Relationships and Related                21
            Transactions
          
          
PART IV   
Item 14     Exhibits, Financial Statement Schedules and      22
            Reports on Form 8-K
            Index to Financial Statements                  F-1
 
 
</TABLE>

                                       2
<PAGE>
 
                                     PART I
                                        
ITEM 1.  BUSINESS.
------------------

      CORE, INC. ("CORE" or the "Company") is a national provider of managed
disability and health care benefits management services to Fortune 500 companies
and other self-insured employers, third-party administrators and insurance
carriers. The Company's services include managed disability services using
CORE's proprietary WorkAbility(R) disability management software, specialty
physician and behavioral health review services and health care benefits
utilization review and case management services. The Company's services are
designed to assist its clients monitor and control disability and health care
benefits costs without compromising the quality of health care services provided
to the patient.

      CORE's managed disability services include monitoring the appropriateness
of disability durations under short and long-term disability plans and workers'
compensation programs in order to reduce unnecessary absenteeism and its related
costs of wage replacement, hiring and training replacement personnel and lost
productivity. These services are based on CORE's WorkAbility program, a
proprietary software program developed over a ten-year period through the
statistical analysis of disability utilization data. CORE's WorkAbility managed
disability program provides an objective, medically based method for
recommending and monitoring employee's return-to-work dates. The WorkAbility
program is designed to obtain and analyze relevant medical and work-related
information with the initial onset of the employee's absence and thus assure
that the employee, attending physician and employer all have reasonable and
consistent expectations as to the projected return-to-work date.

      CORE's independent physician review programs provide pre-certification,
concurrent and appellate physician review services for use with utilization
management programs of the Company's insurance company and self-insured
corporate clients. The Company believes its more than 250 Board certified
physician reviewers comprise the largest independent physician review service in
the country. CORE's behavioral health review program provides comparable review
service by psychiatric specialists in sub-specialties such as adult and child
psychiatry, alcoholism and chemical dependency. The Company also provides
utilization review services designed to evaluate the medical necessity and
appropriateness of health care services prescribed for participants in health
care and medical plans. In cases of high cost injuries or illness, CORE also
renders case management services for individual cases to assure that cost-
effective treatment alternatives are utilized.

      This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and the
Company's actual results could differ materially from those contemplated by such
statements.  Such statements reflect management's current views, are based on
many assumptions and are subject to risks and uncertainties.  Some important
factors the Company believes could cause such results to differ include the
Company's reliance on its WorkAbility program, the Company's dependence on key
clients, risks associated with the Company's growth strategy, increases or
changes in government regulation and competition.  The foregoing list of factors
are not intended to represent a complete list of the general or specific risks
that may affect the Company.  It should be recognized that other risks may be
significant, presently or in the future.

HISTORY OF CORE

      The Company was incorporated in Massachusetts in April 1984 under the name
Peer Review Analysis, Inc. ("PRA") to provide physician-intensive utilization
management services to commercial insurance companies and self-insured
employers.  PRA became a publicly-held entity in December 1991 with the
completion of an initial public offering.

      In March of 1995, PRA completed its merger (the "CMI/PRA Merger")
involving Core Management, Inc., a Delaware corporation ("CMI"). CMI offers a
broad range of disability management, health care utilization review and
analysis and consulting services, and CMI's Integrated Behavioral Health
Division ("IBH") specializes in utilization review of and case management
services with respect to mental health and substance abuse cases.  CMI was
incorporated in 1990 to acquire the health and disability cost management
services business (including the WorkAbility program) of Health Data Institute,
Inc., a subsidiary of Baxter International, Inc.  IBH became a subsidiary of CMI
in a March 1993 acquisition.  The CMI/PRA Merger was treated as a pooling of
interests for accounting purposes.  The description herein of the business of
the Company includes the operations of both PRA and CMI from the inception of
both companies.

                                       3
<PAGE>
 
      In July 1995, the Company changed its name from Peer Review Analysis, Inc.
to CORE, INC.  On October 2, 1995, CORE acquired all the capital stock of Cost
Review Services, Inc., a workers' compensation bill audit firm.  The Company's
executive offices are located at 18881 Von Karman Avenue, Suite 1750, Irvine,
California 92612, and its telephone number at that address is (714) 442-2100.

      WorkAbility is a registered trademark of the Company.

INDUSTRY OVERVIEW

      In recent years, large corporations have begun to recognize the magnitude
of the annual cost of occupational and non-occupational injuries and illnesses,
which according to a 1991 publication exceeded $2,200 per employee, or 8% of
total payroll costs. These expenses present a significant challenge to corporate
productivity. The Company estimates that total U.S. costs due to injury and
illness-related workplace absence are approximately $260 billion per year.

      According to an industry source, workers' compensation expenditures grew
at an average annual rate of over 10% from 1982 through 1991, and the Company
believes this growth is continuing. The Company estimates that workers'
compensation costs were approximately $60 billion in 1994. Despite the general
awareness of this high level of workers' compensation costs, expenditures for
group disability (including short-term disability and long-term disability
plans), sick pay and family leave represent a far larger share of total
expenditures at approximately $200 billion in 1994. Two driving factors behind
the increase in group disability and workers' compensation expenditures are
workplace and legislative changes. Work-related changes that have contributed to
rising benefits costs include the aging of the active workforce, increased
volatility in hiring and layoffs (which often results in increased benefits
utilization) and increased diagnoses of repetitive stress-related injuries. Also
contributing to rising disability benefit costs and awareness are legislative
changes such as the Family Medical Leave Act and the Americans with Disabilities
Act, which mandate accommodation for family circumstances and disabled workers,
which both have a growing impact on accommodation and lost time issues.

      In response to these rising costs, a variety of insurance companies,
managed care organizations and self-insured employers have used various cost
reduction techniques, often borrowed from group health managed care, including
securing pricing concessions from providers, using case management tools, and
implementing "gatekeepers" as a means to control utilization. However, these
managed care initiatives focus almost entirely on medical costs generated after
a disability claim is received, not on the more significant productivity (lost
time) impacts of employee ill health. Furthermore, work absence duration, and
consequently disability payments, have traditionally been driven by the decision
of the treating physician. While workers' compensation cases are typically
attended by an occupational specialist, employees with non-occupational
disabilities tend to utilize their own primary care physician who have little or
no interaction with the employer and limited sensitivity to productivity (lost
time) issues.

      As traditional managed care tools become standard industrywide, they are
generating diminishing marginal savings for employers, who must find more
aggressive and sophisticated utilization review mechanisms to yield further
savings. In addition, the new-found awareness of the additional costs associated
with workplace absence has brought with it an increasing demand for cost saving
strategies that address both health care expenditures and the productivity
impact of an employee's ill health. Corporate downsizing and global competition
have focused Corporate America on achieving real productivity gains. With the
importance of each remaining job magnified, employers are actively looking for
new tools to help control workplace absence. Until recently, recognition and
management of these productivity costs have been impaired by their difficulty in
measurement, the fragmentation of responsibilities for disability programs
within human resources and risk management departments of most corporations and
the historical focus on group health managed care.

      While a small group of companies is emerging that are applying managed
care principles to the workers' compensation industry, historically there have
been few, if any, companies focusing on the provision of managed care techniques
to the broader disabilities market. With the support of its analytic and
physician services, CORE's products provide employers with an integrated and
comprehensive approach to disability benefits management.

                                       4
<PAGE>
 
SERVICES AND PRODUCTS

      CORE offers services and products designed to assist the Company's
clients control and monitor disability, workers' compensation and health care
costs without compromising the quality of care or services available to
patients. The Company's services include: (i) managed disability services using
CORE's WorkAbility products and services, (ii) specialty physician and
behavioral health review services using more than 250 CORE-affiliated board
certified physicians and (iii) utilization review ("UR") and case management
services.

      For the years ended December 31, 1995 and 1996, managed disability
services accounted for approximately 26% and 44%, respectively, of CORE's
revenue, specialty physician and behavioral health review services represented
approximately 43% and 32%, respectively, of revenue and UR and case management
services represented approximately 31% and 24%, respectively, of revenue.
Managed disability services, which include the Company's WorkAbility program as
well as its bill audit and analytic consulting services, accounted for
approximately 55% of the Company's 1995 total revenue increase and approximately
88% of the Company's revenue increase for 1996.  See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Managed Disability Services

      The Company estimates that total direct and indirect disability
expenditures are approximately $260 billion annually, of which approximately $60
billion is attributable to workers' compensation costs. CORE's managed
disability services include monitoring of the appropriateness of disability
durations under short and long-term disability plans and workers' compensation
programs in order to reduce unnecessary absenteeism and the costs associated
with such absences. The cost of absenteeism includes wage replacement, the costs
of hiring and training replacement personnel and lost productivity. The
Company's managed disability services are based on the WorkAbility program, a
proprietary software program developed and maintained through the statistical
analysis of disability utilization data. CORE's WorkAbility program provides an
objective, medically based method for managing disability and employees' return-
to-work dates. The WorkAbility program is designed to obtain and analyze
relevant medical and work-related information with the initial onset of the
employee's absence and thus assure that the employee, attending physician and
employer all have reasonable and consistent expectations as to the projected
return-to-work date.

      Among the characteristics of CORE's WorkAbility program which
differentiate it from other disability review programs are the following:

      Day One Intervention. Unlike retrospective disability review which is
      triggered only after an extended employee absence or after significant
      costs have been incurred, the WorkAbility program is designed to interact
      with the treating physician immediately upon occurrence of the disability
      event. Early intervention permits establishment of an appropriate return-
      to-work date prior to a significant absence.

      Proprietary Database. CORE began developing its WorkAbility program in
      1986. The program uses a database of more than 350,000 disability and
      workers' compensation records collected by CORE over ten years. From this
      data base, the Company has developed protocols with over 10,000 clinical
      endpoints. As a result, the WorkAbility protocols and projected return-to-
      work dates are in most instances based on an historical record of
      similarly situated patients rather than theoretical models. As the
      WorkAbility program is utilized, the database is growing.

      Clinical Credibility. WorkAbility assists the Company in establishing
      clinical credibility with the attending physician by comparing CORE's
      database of similar medical episodes with the patient's medical and job
      profile. This information can be shared with the attending physician to
      assist in the development of an effective treatment plan and in
      determining the appropriate return-to-work schedule. The WorkAbility
      program, supported by the Company's more than 250 Board certified
      physicians, allows a treating physician to talk to a CORE physician
      specialist for peer review of complex diagnoses and treatment plans.

      Concurrent Review. In addition to the initial recommendation of an
      appropriate return-to-work date, WorkAbility services include ongoing
      review of patient status to assure the expected date remains accurate. At
      these intervals, new information may be gathered about the treatment or
      the illness or injury requiring an adjustment to the return-to-work date.

                                       5
<PAGE>
 
      Complete Workforce Coverage. The WorkAbility program is designed to cover
      all workplace absences, not just the longer term and more costly absences.
      The program also provides consistent return-to-work dates for clinical
      conditions whether the condition causing the absence is a result of a
      workers' compensation workplace injury or an injury outside of the
      workplace covered by a disability plan.

      The WorkAbility program is operated primarily by registered nurse
reviewers using an automated review system to assess each disability claim in
the early stages of an employee's absence. Under the WorkAbility program, the
attending physician or office staff (depending on the severity of the case) uses
a toll-free number to contact CORE and speaks to a trained WorkAbility program
nurse reviewer who enters information on the diagnosis and severity of the
condition into CORE's proprietary WorkAbility system. Each case is then reviewed
by the nurse using the WorkAbility program's computerized medical protocols,
which consider such factors as the employee's age and general health, job
requirements, symptoms and severity of the condition, diagnosis of the attending
physician, treatment plan, medical procedure(s) performed and comorbid factors
which may affect the duration of the disability.

      Using the WorkAbility program, the nurse reviewer considers these various
factors and recommends an appropriate length of disability duration based on the
specifics of the case. To assure consistency, reviews are guided by program
standards based on both statistical and clinical analysis and, in certain
circumstances, are referred to physicians for further review. The WorkAbility
program can assign specific lengths of disability for more than 10,000 clinical
descriptions, or "endpoints." If CORE and the attending physician agree with
respect to the anticipated disability duration, a letter stating the expected
return-to-work date is sent to the employee and physician on the date the review
is completed. The employer is notified of the return-to-work date
electronically. If the employee's physician disagrees with the suggested length
of disability assigned by CORE's nurse reviewer (as occurs in less than 15% of
the cases), the case is referred to a WorkAbility physician advisor who will
discuss the case with the treating physician. In the event that they cannot
reach agreement, the case is referred to the employer for consultation to
determine whether or not an independent medical examination should be requested.
If the employee's condition or medical treatment changes during the absence or
the employee is not ready to return to work on the expected date, a request for
an extension of the disability leave is reviewed on a case by case basis using
the WorkAbility program and additional information provided by the attending
physician or patient.

      The Company's WorkAbility program includes return-to-work case management
for high intensity, potentially high cost disability cases. This service is
focused on returning the patient to work as soon as clinically appropriate
through intensive involvement by a dedicated nurse case manager with the
patient, the health care providers and the workplace. Depending on the client's
benefits structure, the Company's return-to-work case managers can negotiate
services, coordinate on-site activities and channel the patient to appropriate
treatments or providers.

      The WorkAbility program has the capability to collect and report
information relating to the ongoing disability claims history of each employee
and documents all case reviews, thus allowing the identification of employee
disability patterns and physician treatment patterns. The WorkAbility program is
also able to identify prospective high cost disability events which can be
monitored in more detail through return-to-work case management. In addition,
the Company believes that the data transfer capabilities of the WorkAbility
program can also substantially improve the efficiency of its clients' claims
administration function. Electronic transfer of data required by the employer or
disability program administrator can minimize errors and reduce paperwork,
allowing faster processing of disability payments to employees.

      The WorkAbility On-line Medical Protocols ("WOMP") were developed and are
maintained by CORE and are licensed by the Company to third parties as a
separate product. These WorkAbility protocols are updated annually to, among
other things, reflect recent advancements in medical technology and procedures
and to update the recommended disability durations using the collective
experiential data collected by CORE through its services to clients. The
WorkAbility system automatically provides to the Company's clients monthly and
quarterly management reports which monitor disability benefits utilization
trends and identify potential problem areas.

      In general, CORE's WorkAbility services are advisory only. The attending
physician and the patient remain responsible for determining the work-absence
period and all other aspects of the plan of treatment.  Generally, the employer
or other payor is responsible for making all decisions with respect to the
payment or denial of benefits under the applicable benefits plan.  Certain
clients, including Bell Atlantic Corporation, have delegated to CORE the
authority to decide whether an employee is eligible for benefits under the
client's plan.

      In order to assist employers identify and quantify the direct and indirect
costs associated with disability benefits and, to a lesser extent, health care
benefits, CORE also provides data analysis and consulting services to large
corporate

                                       6
<PAGE>
 
clients. These services include in-depth customized information concerning their
disability and health care costs and utilization experience. Health care costs,
disability costs and workers' compensation costs are often under separate
departments in a large employer (human resources, benefits and risk management)
which has historically impaired corporations' ability to recognize the magnitude
of, and to manage, these costs. The basic objectives of CORE's analytic services
are to help employers and insurers obtain better value for their disability,
workers' compensation and health care expenditures with a company's specific
goals in mind. CORE assists in identifying the best means to reduce the total
costs of these benefits or slow the rate of increase, enhance the
appropriateness and quality of care, predict future benefit costs and increase
the return on investment from managed care programs. CORE's consulting service
can coordinate and analyze information on a company-wide basis and use the
client's information and CORE's proprietary disability and medical cost data
analysis methodologies to simulate changes in a benefit plan's structure and the
resulting impacts on overall benefit program cost. For example, CORE serves as a
data partner to several Fortune 500 companies and provides quarterly "CORE
Impact Reports" on integrated claims experience of the client covering
disability, workers' compensation and group health benefits.

      The Company's workers' compensation bill audit services involve auditing
medical bills, pharmacy bills and hospital bills for medical services or
products received by the client which are subject to applicable state fee
schedules. The bills are audited to determine whether the services or products
which are the subject of the medical bill are from legitimate medical providers,
contain the proper procedural codes and are billed accurately based on the
procedure codes. Finally, an audit report is prepared stating the result of such
audit with a recommendation for payment.

Specialty Physician and Behavioral Health Review

      CORE's independent physician review programs provide pre-certification,
concurrent and appellate physician review services for use with existing
utilization management programs of clients, including insurance carriers that
service the group health, disability and workers' compensation markets, and
other managed care companies. The Company believes its more than 250 Board
certified physician reviewers comprise the largest independent physician review
organization in the country. The Company's consulting relationship with this
large base of physicians has positioned the Company to offer an appeal review
service, which is mandated under several state laws and generally requires
specialty-matched reviews. The Company believes that appellate review is one of
the few growing sectors of the otherwise mature utilization management industry.

      When a client's nurse reviewer determines that a case does not meet the
client's established criteria, the nurse reviewer will forward a referral to
CORE's physician reviewer. The referral describes the principal diagnosis of the
patient and the reason for referral for physician review. In most instances the
reason for referral is based upon a question of medical necessity or therapeutic
benefit of a proposed treatment plan. CORE's independent physician reviews the
case information, which will have been previously entered into CORE's data
processing systems, and then telephones the attending physician to ascertain any
additional clinical data, the attending physician's rationale for the proposed
treatment plan or the proposed length of hospital stay. Based on discussions
with the attending physician, including, when appropriate, discussions of
possible alternative treatment plans, and using clinical judgment as well as
criteria based on national norms, CORE's physician makes a recommendation
concerning the appropriateness of the proposed or revised treatment plan.

      CORE then notifies its client of its recommendation regarding the medical
necessity or appropriateness under the client's health care benefit plan of the
proposed treatment plan, hospitalization or length of stay. If the proposed
hospitalization is not certifiable as such under the plan, the payor typically
denies or reduces the payment of benefits for the proposed hospitalization. The
decision of the payor may be appealed by the patient or the attending physician.
In such event a second Company physician of the same specialty who was not
involved in the original decision will review the case on the merits of the
clinical criteria or any additional information.

      Reviews under the Company's specialty physician review program are managed
from CORE's offices, and the majority of all review decisions are completed
within 24 hours of referral. In most instances, CORE's services are advisory in
nature. Determinations as to the payment or denial of benefits are typically
made by the third party payor, and decisions as to the patient's medical
treatment are made by the patient and the attending physician.

      CORE's behavioral health review program provides review services similar
to the Company's specialty physician review services by psychiatrists who are
supported by a team of multi-specialty physicians. CORE's independent
psychiatrists include specialists in various psychiatric sub-specialties such as
adult psychiatry, child psychiatry and addictionology, including alcoholism and
chemical dependency. CORE believes that its multi-specialty psychiatrists

                                       7
<PAGE>
 
(including those in its Integrated Behavioral Health Division) and CORE's
emphasis on intensive specialty review distinguish it from psychiatric review
performed by other utilization management firms and better addresses the more
subjective nature of many behavioral health reviews.

      The Company is certified by the Utilization Review Accreditation
Commission ("URAC") to perform various utilization review functions. URAC is a
nationally recognized organization that has developed standards to encourage the
availability of effective, efficient and consistent utilization review of health
care services throughout the United States. One of URAC's key objectives is to
establish standards for the procedures used to process appeals of utilization
review determinations. Many of the Company's clients rely on CORE's specialty
physician and behavioral health review services to comply with URAC's appellate
procedures.

Utilization Review and Case Management

      The Company provides medical and behavioral health utilization review and
case management services to Fortune 500 companies and other self-insured
employers, third-party administrators ("TPAs") and an insurance carrier. The
Company's services are designed to evaluate the medical necessity and
appropriateness of health care services prescribed for participants in health
care benefits plans, including hospital admissions, proposed length of hospital
stay, use of outpatient facilities and other treatment alternatives. In cases of
high cost diseases, conditions or catastrophic illnesses, CORE may also render
case management services of individual cases in order to assure that cost-
effective treatment alternatives are utilized. Clients may elect to contract for
all of the services offered under the programs or, in the alternative, may elect
to contract for only certain portions of services offered.

      CORE provides its utilization review services and case management services
through a staff consisting primarily of registered nurses and physicians.
Clients which utilize CORE's utilization review programs advise their
participants of review requirements including the requirement to contact CORE
within a specified period of time. From these contacts, CORE's medical and
behavioral health review staff gathers the necessary personal and medical
information and enters this information into CORE's review system. Based on this
information and using CORE's review criteria, CORE conducts its review.

      CORE's review criteria and procedures are structured so that a nurse
reviewer or nurse case manager can initially review the majority of cases
presented. If a hospital admission or outpatient service fails to meet
established criteria, a CORE employed or retained physician (or other doctoral
level practitioner such as a Doctor of Chiropractic or Doctor of Psychology)
reviews the case and may contact the patient's doctor to obtain additional
information or otherwise discuss the proposed treatment plan. Upon completion of
the medical review, CORE notifies the participant, the attending physician and
other affected providers of the outcome of such review. CORE also notifies its
client as to whether the proposed hospitalization and length of stay or
outpatient service appears to be medically necessary and appropriate under the
terms of the benefit plan. CORE provides both an expedited and standard appeals
process to patients or plan members in instances where a non-certification
determination is made by CORE. CORE's utilization review appellate process
utilizes the Company's relationships with more than 250 Board certified
physicians to provide specialty matched physician review.

CLIENTS AND MARKETING

      CORE has over 200 customers across the country, including 36 Fortune 500
companies. Revenues from Fortune 500 companies accounted for approximately 48%
of total revenues in 1996.  The following is a selected list of CORE's clients
which, the Company believes, is representative of its overall client base:

<TABLE> 
<CAPTION> 


<S>                                             <C>  
Bell Atlantic Corporation                        CIGNA Insurance Company
Chrysler Motor Corporation                       Hughes Electronics Corporation (owned by General Motors)
Reliastar Financial Corp.                        CNA Insurance Company
Champion International Corporation               Lockheed Martin Corporation
Blue Cross/Blue Shield of Ohio                   PCS Health Systems, Inc.
Liberty Mutual Insurance Company, Inc.           General Electric Corporation

</TABLE> 
      CORE markets its services primarily to national, direct accounts,
including self-insured employers, and through group health and disability
insurance carriers and third party administrators. The Company's marketing
strategy is to use its senior management team and a small sales and marketing
staff to focus on potential sales to a limited number of large sales prospects.
The Company has also entered into distribution agreements with Reliastar
Financial Corp., CIGNA and other

                                       8
<PAGE>
 
insurance companies pursuant to which these companies offer CORE's WorkAbility
services to their customers. For providing WorkAbility services, the Company is
paid fees by the insurance companies. Also, the Company is active in conferences
addressing disability management issues the Company's clients and prospective
clients face, including acting as a host or a co-host to several conferences in
1996.

      During 1996, Bell Atlantic Corporation represented 13% of total revenues
while in 1995 no single client represented more than 10% of total revenues.
During the years ended December 31, 1995 and 1996, the Company's five largest
clients represented 30% and 36%, respectively, of total revenue, and its ten
largest clients represented 51% and 53%, respectively, of total revenue.

      CORE typically enters into service agreements with its clients. These
agreements have automatically renewable successive terms of between one and
three years, but are generally terminable upon 60 to 90 days notice. They do not
generally provide for minimum payments and are usually non-exclusive. Certain
contracts include provisions that the fees payable to CORE can vary based upon
CORE's performance and the savings achieved by the client under the contract.

      For many of its programs, CORE charges its clients a "capitated fee,"
i.e., a fixed per employee per month fee. The amount of this fee varies
depending on the size of the client and the number and type of review programs
selected by the client. For other services, CORE charges fees on an hourly
rather than a capitated basis. In most cases, CORE's services are advisory in
nature. Notwithstanding the outcome of CORE's review, decisions as to the
payment or denial of benefits and eligibility or coverage under the benefit plan
are typically made by the administrator of the participant's health care plan,
not by CORE. Decisions as to the patient's medical treatment are always made by
the patient and the attending physician, not by CORE.

INFORMATION SYSTEMS

      CORE's key products and services--the WorkAbility program, physician
review services and utilization review and case management programs--are
supported by administrative software that was developed and is maintained by in-
house staff. Each of these software programs incorporates E-mail and other
external data exchange features for client and remote user communications. These
software programs were developed at different times and, although designed with
similar features and on similar platforms, are not yet fully integrated.

      CORE has recently completed an upgrade and expansion of its wide area
network (WAN) to expand capability in multiple office operation of its computer
and telephone systems and to expand direct computer connections with clients and
remote users. Another initiative within information systems development is to
utilize available information technology to significantly enhance the
productivity of all CORE's key products and services including, specifically,
the integration of imaging, network FAX and computer integrated telephone
technology into the workflows will provide major efficiencies and further
enhanced quality in CORE's product lines.

      The WorkAbility system has also undergone significant architecture
redesign to allow for client server operation and rapid feature development. The
enhanced product, "WorkAbility Plus," utilizes software architecture that
provides maximum flexibility in attaching industry-standard databases to support
growth and varying client needs. The Company believes that this new architecture
will support the integration of UR and physician review services into a single
software centered around the WorkAbility system. Concurrent with this planned
integration is the development of new medical necessity protocols focused on
common occupational injuries and disease.

      Funding for the development of CORE's WorkAbility software (version 1) was
provided by Chrysler Motor Corporation ("Chrysler") in exchange for a perpetual,
non-exclusive, non-transferable license to use such software. Ownership of the
WorkAbility software has been retained by CORE, which has the exclusive right to
market the software to others. Pursuant to the terms of its agreement with
Chrysler, CORE is paying Chrysler 25% of certain licensing fees paid to CORE
with respect to the WorkAbility software until the total of such payments equal
140% of the development costs (approximately $2.8 million). Only limited
payments have been paid by CORE through December 31, 1996. In addition, in the
event that CORE fails to attempt to market the software to third parties,
Chrysler will have certain rights to market and license the software
independently.

                                       9
<PAGE>
 
GOVERNMENT REGULATION; REIMBURSEMENT; HEALTH CARE REFORM

      A number of states, including several of those in which the Company
transacts business, have extensive licensing and other requirements applicable
to the Company's business. Additionally, the Company's clients, including
insurance companies, are subject to regulations that indirectly affect the
Company.

      The laws of many states regulate the provision of health care utilization
management services. These regulations generally require the provider of
utilization management services to be reasonably accessible by telephone to
doctors and patients, to have adequately qualified personnel, to provide
physicians and patients a procedure to appeal determinations of non-
reimbursement, and to maintain the confidentiality of patient records. Other
states regulate the provision of claims administration services and preferred
provider organizations which may indirectly affect CORE. CORE believes it is in
compliance with all applicable regulations governing the provision of managed
health care services in the states where CORE is subject to such regulations, as
currently in force and as currently interpreted.

      CORE's operations depend upon its continued good standing under applicable
laws and regulations. To date, the cost of compliance has not been material.
Such laws and regulations, however, are subject to amendment or new
interpretation by authorities in each jurisdiction. If amended regulations or
new interpretations of federal or state laws or regulations arise, CORE, may
have difficulty complying without significant expense or changes in operations.
The Company is unable to predict what additional government regulations, if any,
directly or indirectly affecting its business may be promulgated. Although the
Company believes that it is currently in compliance with applicable regulations
in those states in which it is subject to regulation, the Company's business
could be adversely affected by a revocation of or failure to obtain required
licenses and governmental approvals, a failure to comply with applicable
regulations or significant changes in regulations applicable to its clients.

      In addition to existing government health care regulation, there have been
numerous initiatives at the federal and state levels, as well as by third-party
payors, for comprehensive reforms affecting the payment for and availability of
health care services. The Company believes that such initiatives will continue
during the foreseeable future. The Company is unable to predict what, if any,
reform initiatives may be adopted, or what effect, if any, their adoption may
have on the Company.

COMPETITION

      CORE presently competes in two different markets: (i) health care
utilization management and (ii) managed disability and workers' compensation.
The managed health care market is fragmented but is consolidating rapidly as
national health care reform and other forces drive independent utilization
review and cost management firms into niche markets or to consolidation with
large insurance carriers and provider groups.

      The health care utilization management market is highly competitive.
Competitors include large established insurance carriers and large managed care
organizations. Some of the competitors are significantly larger and have greater
financial and marketing resources than CORE. CORE competes on the basis of
quality, cost-effectiveness and service.

      The managed disability and workers' compensation market is a developing
market which is also competitive. Competitors include both new companies focused
solely on the workers' compensation market and established disability insurance
carriers who have traditionally dealt with disability from an underwriting
rather than an employee productivity perspective. CORE competes on the basis of
quality and cost-effectiveness in this market, and the Company believes that its
proprietary disability management protocols and database of clinically defined
disability episodes give it a significant competitive advantage.

EMPLOYEES AND PHYSICIAN CONSULTANTS

      In addition to its available staff of approximately 300 physician
consultants (250 of whom are Board certified) covering the major medical
specialties, CORE has approximately 400 employees.  Generally, CORE's physician
consultants are paid by CORE on a per hour or per case review basis. Almost all
of CORE's physicians are retained by the Company as independent contractors and
also maintain active practices. The majority of the Company's physicians work
between 5 and 20 hours per week for the Company. Compensation to CORE's
reviewers is not related to any cost savings achieved by CORE's clients.

                                       10
<PAGE>
 
ITEM 2.  PROPERTIES.
--------------------

      The Company occupies its executive headquarters in Irvine, California
pursuant to a lease for approximately 14,000 sq. feet which expires in September
2000. The Company also leases facilities of approximately 18,000 sq. feet in
Boston, Massachusetts under a lease that expires in May 2000, and approximately
22,500 sq. feet in Burlington, Massachusetts under leases that expire in
December 2001 and April 2002.  Additionally, the Company leases a facility of
approximately 16,000 sq. feet in Los Angeles, California under a lease that
expires in June 1998, as well as approximately 18,000 sq. feet in Silver Spring,
Maryland under a lease that expires in June 2001, approximately 1,300 sq. feet
in Chicago, Illinois under a lease that expires in May 1998, approximately 7,400
sq. feet in Austin, Texas under a lease that expires in September 1999 and
approximately 2,400 sq. feet in Forth Worth, Texas under a lease that expires in
July 1998.


ITEM 3.  LEGAL PROCEEDINGS.
---------------------------

      The Company is not currently a party to or aware of any material pending
litigation or material legal proceedings.

      Generally, the review services provided by the Company are advisory in
nature, and final determination as to payment or nonpayment of benefits are not
made by the Company.  Certain clients, including Bell Atlantic Corporation, have
delegated to CORE the authority to decide whether an employee is eligible for
benefits under the client's plan.  Determinations as to the medical care
provided to a patient are always made by the patient or the attending physician
and are not made by CORE. However, due to the significant number of claims in
the medical malpractice field in general, it is possible that a patient may
assert claims against the Company for damages due to adverse medical
consequences. New or existing legal theories by which patients or physicians may
attempt to assert liability against the Company or other companies engaged in
the industry are developing and are expected to continue to develop. Although
the Company believes that its procedures result in reasonable and accurate
determinations of coverage, there can be no assurance that claims will not be
made or that the Company's procedures for limiting liability will be effective.
The Company maintains professional liability insurance and such other coverages
as the Company believes are reasonable in light of the Company's experience to
date. However, there can be no assurance that such insurance will be sufficient
to protect the Company from liability which might adversely affect the Company's
business, operating results or financial condition or will continue to be
available to the Company at reasonable cost or at all.

                                       11
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------

      A Special Meeting in lieu of the Annual Meeting of Stockholders of CORE
was held on October 21, 1996 in Irvine, California.

      The vote to elect two persons as Class II Directors of the Company was as
follows:
<TABLE>
<CAPTION>
 
Number of Votes Cast               For            Withheld Authority
--------------------               ---            ------------------
<S>                             <C>            <C>
 
      Richard H. Egdahl, M.D       5,899,303      139,175
      John Pappajohn               5,900,103      138,375
</TABLE>

      Accordingly, Dr. Egdahl and Mr. Pappajohn were elected as Class II
Directors to serve for a three year term until the 1999 annual stockholders
meeting and until their successors are duly elected and qualified.  Class I
Directors (Leslie Alexandre and Stephen Caulfield) whose terms are scheduled to
expire at the 1998 annual stockholders meeting of stockholders and Class III
Directors (George C. Carpenter IV and Craig C. Horton) whose terms are scheduled
to expire at the 1997 annual meeting of stockholders have terms as directors
that continued after the October 1996 Special Meeting in lieu of the Annual
Meeting.

      The vote to approve amendments to the Company's 1991 Stock Option Plan to
increase the number of shares issuable under the Plan from 600,000 to 1,200,000
and to change the formula pursuant to which non-employee directors of the
Company are granted options under the Plan was as follows:
<TABLE>
<CAPTION>
 
                               
                               Number of Shares
                               ----------------
<S>                         <C>
      For                         3,448,892
      Against                       900,515
      Abstain                        19,463
      Delivered Non-Vote          1,669,608
</TABLE>

      The vote to amend Article 3 of the Company's Restated Articles of
Organization to increase the number of authorized shares of common stock from
10,000,000 to 30,000,000 was as follows:
<TABLE>
<CAPTION>
 
                               
                               Number of Shares
                               ---------------
<S>                         <C>
      For                         5,104,086
      Against                       917,429
      Abstain                        15,963
      Delivered Non-Vote              1,000
 
</TABLE>

EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of CORE's executive officers:
<TABLE>
<CAPTION>
 
Name                   Age         Position
----                   ---         ---------
<S>                    <C>      <C>
George C. Carpenter     38         Chairman of the Board of Directors
                                     and Chief Executive Officer
Craig C. Horton         42         President and Chief Operating Officer
William E. Nixon        36         Executive Vice President, Chief Financial 
                                     Officer, Treasurer and Clerk
Fredric L. Sattler      52         Executive Vice President
Ophelia Galindo         39         Corporate Vice President, Product Management
                                     and Technical Development
</TABLE>
      Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve at the discretion of the Board of Directors.

                                       12
<PAGE>
 
      George C. Carpenter IV was appointed a Class III Director, and was elected
the Chairman of the Board of Directors and Chief Executive Officer of the
Company effective with the Company's March 24, 1995 merger involving Core
Management, Inc. (the "CMI/PRA Merger").  Mr. Carpenter served as the Chief
Executive Officer and a Director of Core Management, Inc., a Delaware
corporation ("CMI") and now a wholly-owned subsidiary of the Company, since its
formation in 1990.  In addition, Mr. Carpenter served as the Chairman, Chief
Executive Officer, Secretary and a Director of Core Management, Inc., a
California corporation and wholly-owned subsidiary of CMI ("CMI-California"),
from its formation in 1990.  As a result of the reorganization of CMI-California
and Integrated Behavioral Health, a California corporation and wholly-owned
subsidiary of CMI ("IBH") in March 1993, Mr. Carpenter was appointed as a
director of IBH.  From 1988 to 1990, Mr. Carpenter served as a Vice President,
Operations of The Health Data Institute, Inc., a provider of utilization review,
case management and analytic services and a developer of related software, a
subsidiary of Baxter International, Inc.

      Craig C. Horton was appointed a Class III Director in March 1995 effective
with the CMI/PRA Merger, and was elected the President and Chief Operating
Officer of the Company by on March 30, 1995.  Mr. Horton served as the President
and a Director of CMI and CMI-California from their respective formations in
1990, and also served as the acting Chief Financial Officer of CMI from 1994 to
1995.  In December 1994, Mr. Horton was named as a Director and Chief Executive
Officer of IBH.  From 1988 to 1990, Mr. Horton was Vice President, Operations of
The Health Data Institute, Inc., a subsidiary of Baxter International, Inc.

      William E. Nixon is the Executive Vice President, Chief Financial Officer,
Treasurer and Clerk of the Company.  Mr. Nixon joined the Company in December
1988 as Controller.  In June 1989, Mr. Nixon became Assistant Treasurer; in
September 1990, he was elected Vice President, Finance and Administration; in
September 1991, he assumed his position as Treasurer.  In December 1993, Mr.
Nixon was elected Chief Financial Officer of the Company.  In December 1994, Mr.
Nixon was elected Executive Vice President and in March 1995, he was elected
Clerk.  Prior to his employment with the Company, from 1985 to 1988, Mr. Nixon
served as a Senior Accountant at Gray, Gray and Gray, a public accounting firm.

      Fredric L. Sattler became an Executive Vice President of the Company in
January 1996.  Prior to his employment with the Company, Mr. Sattler was
employed as Vice President of National Benefit Resources of Minneapolis,
Minnesota in 1995 and as Vice President of NovaCare of King of Prussia,
Pennsylvania from 1994 to 1995.  From 1981 to 1994 Mr. Sattler held various
offices with Northwestern National Life Insurance Co. (now known as Reliastar
Financial Corp.) and its affiliates, including Vice President of Health Care
Management (1987 to 1994) and President and Chief Executive Officer (1991 to
1994) of NWNL Health Management Corp., a health management organization (HMO)
management company, wholly-owned by Northwestern National Life Insurance Co.

      Ophelia Galindo was elected the Corporate Vice President, Product
Management and Technical Development of the Company by the Board on March 30,
1995.  Formerly, Ms. Galindo was employed by CMI, beginning in February 1986 as
a senior consultant; in June 1994, Ms. Galindo was promoted by CMI to be its
Vice President, Disability Analysis.

                                       13
<PAGE>
 
                                    PART II
                                        
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
--------------------------------------------------------------------------------

PRICE RANGE OF COMMON STOCK

      The Company's Common Stock is traded on the Nasdaq National Market tier of
The Nasdaq Stock Market ("Nasdaq - NNM") under the symbol: "CORE."  The
following table shows the range of high and low sales prices per share for the
shares of Common Stock on the Nasdaq - NNM for the calendar quarters indicated
as reported by Nasdaq.  Over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
 
                           HIGH      LOW
                           ----      ---
<S>                    <C>       <C>
1995
       First quarter     $ 4 1/2   $2 7/8
       Second quarter          4    2 3/8
       Third quarter       8 1/2    2 7/8
       Fourth quarter     10 3/8    7 3/8
 
1996
       First quarter      13 3/8    8 3/8
       Second quarter     17 1/4       11
       Third quarter      15 1/2        8
       Fourth quarter     12 5/8    6 7/8
 
</TABLE>

      On March 21, 1997, the closing sale price of the Company's Common Stock,
as quoted on the Nasdaq - NNM, was $6 3/8 per share.

      As of March 21, 1997, there were approximately 164 record holders of the
Company's Common Stock and over 2,000 beneficial owners.  There are no
outstanding shares of the Company's Preferred Stock and, accordingly, no market
for said shares.

DIVIDEND POLICY

      The Company has never paid a cash dividend.  Inasmuch as the Company
intends to retain earnings for the operation and expansion of its business, the
Company does not intend to pay dividends on its Common Stock for the foreseeable
future.  The Company's bank credit line prohibits the payment of dividends on
the Common Stock.  Future dividend policy will be determined by the Company's
Board of Directors in light of the then prevailing financial condition of the
Company and other relevant factors.

                                       14
<PAGE>
 
RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------

      In 1996, the Company sold the following shares of Common Stock which were
not registered under Securities Act at the time of issuance.  Except as
otherwise noted, such shares were sold to present and former employees or
consultants upon the exercise of stock options.

      These shares of Common Stock were not registered under the Securities Act
at the time of sale issuance and, in reliance upon the exemption contained in
Section 4(2) of the Securities Act for transactions by an issuer not involving
any public offering.
<TABLE>
<CAPTION>
 
                                            NUMBER OF      PURCHASE PRICE 
  DATE       SECURITY        PURCHASER        SHARES          PER SHARE
--------------------------------------------------------------------------------
 
<C>       <S>           <C>                <C>         <C>
 3/22/96  Common Stock       S. Gerson          1,000          $ 3.13
  5/8/96  Common Stock      K. Masters          3,216*         $ 7.46
  6/4/96  Common Stock       W. Kaczor          6,700*         $ 3.73
  6/6/96  Common Stock       W. Butler          6,700*         $ 3.73
 6/10/96  Common Stock      K. Masters          4,824*         $ 3.73
 8/15/96  Common Stock       J. Snyder         10,720*         $ 3.73
 9/12/96  Common Stock    A. Pappajohn (1)     18,107              (2)
10/24/96  Common Stock       S. Bushey             21          $8.625
 11/4/96  Common Stock       P. Mosher             22          $8.625
 11/5/96  Common Stock        P. Houle             20          $8.625
11/19/96  Common Stock    S. Caulfield (3)     10,000          $ 3.28
11/22/96  Common Stock   A. Stephenson             28          $8.625
</TABLE>

________________

*     These such shares were subsequently registered on a Form S-8 filed by the
      Company on November 27, 1996.

(1)   Exercised by A. Pappajohn as transferee of Warrant originally issued by
      Integrated Behavioral Health and assumed by the Company in connection with
      the March 1995 merger involving the Company and Core Management, Inc.
      ("CMI") pursuant to the terms of the Agreement and Plan of Reorganization,
      dated December 19, 1994, between the Company and CMI.

(2)   The Warrant provided for the purchase of up to 26,800 shares of common
      stock at an exercise price of $3.73.  The terms of the Warrant permitted a
      cashless exercise of the warrant, resulting in the issuance of 18,107
      shares to the warrantholder.

(3)   Mr. Caulfield is a Director of the Company and the shares were sold to him
      pursuant to his exercise of a Stock Option Agreement granted on March 24,
      1995 with respect to his services as a Director.

                                       15
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA.
---------------------------------

      The following selected financial data are derived from the consolidated
financial statements of the Company.  The financial statements for the years
ended December 31, 1992, 1993, 1994, 1995 and 1996 have been audited by Ernst &
Young LLP, independent auditors.  The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and related notes, and other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
 
                                                        Year ended December 31,
                                        ----------------------------------------------------
                                            1992       1993       1994       1995      1996
                                        ----------------------------------------------------
                                             (In thousands, except per share amounts)
<S>                                       <C>        <C>        <C>      <C>      <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                   $16,415    $16,316    $16,746   $20,769   $28,806
Cost of services                            10,371     10,714     11,305    12,839    17,741
                                           -------------------------------------------------
         Gross profit                        6,044      5,602      5,441     7,930    11,065
 
Operating expenses:
   General and administrative                4,875      5,096      4,265     4,787     6,285
   Sales and marketing                       2,272      1,787      1,563     1,499     1,744
   Merger costs                                215      1,182      1,114       994
   Corporate relocation                        394        163
   Non-recurring write-off of AmHealth                                                 1,920
    acquisition
   Depreciation and amortization               637      1,067        915       905     1,338
   Write-off of goodwill                                           2,294
                                           -------------------------------------------------
         Total operating expenses            8,393      9,295     10,151     8,185    11,287
                                           -------------------------------------------------

Loss from operations                        (2,349)    (3,693)    (4,710)     (255)     (222)
 
Other income (expense):
   Interest income                             480        396        296       240       385
   Interest expense                           (143)      (108)      (158)     ( 83)      (35)
   Other income (expense)                                  29       (127)       19        16
                                           -------------------------------------------------
                                               337        317         11       176       366
                                           -------------------------------------------------
 
Income (loss) before income taxes           (2,012)    (3,376)    (4,699)     ( 79)      144
Provision for income taxes                       2
                                           -------------------------------------------------
Net income (loss)                          $(2,014)   $(3,376)   $(4,699)  $  ( 79)  $   144
                                           =================================================
Net income (loss) per common share         $( 0.54)    $(0.73)    $(1.01)   $(0.02)    $0.02
                                           =================================================
Weighted average number of common shares
   and equivalents outstanding               3,751      4,611      4,668     4,755     6,274
                                           =================================================
 
 
                                                                  December 31,
                                           -------------------------------------------------  
                                              1992       1993       1994      1995      1996
                                           -------------------------------------------------
                                                            (In thousands)
BALANCE SHEET DATA:
Cash and cash equivalents                  $   369    $ 1,683    $     0   $ 1,006   $ 4,282
Working capital                              7,659      6,597      4,612     3,152    15,781
Total assets                                16,934     15,972     12,504    11,869    27,844
Long-term debt and capital lease               270        223        121       817       344
 obligations
Stockholders' equity                        11,481     12,237      7,553     7,648    24,456
</TABLE>

                                       16
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
         OF OPERATIONS.
         --------------

OVERVIEW

     CORE is a national provider of managed disability and health care benefits
management services.  The Company was incorporated in 1984 under the name Peer
Review Analysis, Inc. ("PRA") to provide physician-intensive utilization
management services to commercial insurance companies and self-insured
employers.  PRA became a publicly-held entity in December 1991 with the
completion of an initial public offering.  In March 1995, PRA completed the
CMI/PRA Merger with Core Management, Inc. ("CMI"). CMI provides managed
disability services, including benefits analysis and consulting services and
health care benefits utilization review and case management services.  CMI's
utilization review and case management services with respect to mental health
and substance abuse cases were acquired in an acquisition in March 1993.  The
CMI/PRA Merger has been accounted for as pooling of interests, and consequently
the financial statements of the Company have been retroactively restated to
include the financial position and results of operations of CMI for all periods
presented.  In July 1995,  the Company changed its name to CORE, INC. and in
October 1995, the Company acquired Cost Review Services, Inc. ("CRS"), a
provider of bill audit and case management services in the workers' compensation
market.

     The Company provides managed disability services (which consist of the
Company's WorkAbility program as well as its bill audit and analytic consulting
services), specialty physician and behavioral health review services and health
care benefits utilization review and case management services. These services
are provided principally to self-insured employers, third-party administrators
and insurance carriers, and the Company is typically compensated for these
services either on a per review (i.e., per case), hourly or per enrollee basis.
In a limited number of cases, the Company's compensation varies with cost
savings realized by the client as a result of the Company's services. Also
included in managed disability services revenue is a limited amount (2% for the
year ended December 31, 1996) of licensing revenue attributable to license
grants by the Company of the medical protocol portion of the WorkAbility
software program.

CURRENT DEVELOPMENTS

     On August 9, 1996, the Company completed a public offering of 2,000,000
shares of Common Stock through a group of underwriters managed by Smith Barney
Inc. and Cowen & Company. The public offering price was $8.00 per share. On
September 3, 1996, the Company issued an additional 248,800 shares of its Common
Stock to cover over-allotments in connection with the public offering. CORE
intends to use the net proceeds from this offering for investments in its
operating capacity and for working capital and general corporate purposes.

RESULTS OF OPERATIONS

     The following table sets forth certain statement of operations data for the
periods indicated expressed as a percentage of revenues:
<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31,
                                     -------------------------    
                                       1994     1995    1996
                                     -------------------------
 
<S>                                 <C>      <C>      <C>
Revenue                               100.0%   100.0%    100.0%
Cost of services                       67.5     61.8      61.6
Gross profit                           32.5     38.2      38.4
General and administrative expense     25.5     23.0      21.8
Sales and marketing expense             9.3      7.2       6.1
</TABLE>

                                       17
<PAGE>
 
      The following table sets forth the contribution to total revenues of each
of the Company's principal service lines for the periods indicated:
<TABLE>
<CAPTION>
 
                                                          YEAR ENDED DECEMBER 31,
                                        --------------------------------------------------------   
                                                1994               1995               1996
                                        --------------------------------------------------------
                                          AMOUNT   PERCENT   AMOUNT   PERCENT   AMOUNT   PERCENT
                                        --------------------------------------------------------
                                                          (Dollars in thousands)
<S>                                     <C>         <C>      <C>       <C>      <C>       <C>
Managed disability (including
   WorkAbility(R), analytic and bill      
    audit)                                $ 3,252     19.5%  $ 5,476     26.4%  $12,532     43.5%    
Specialty physician and behavioral
   health review                            7,425     44.3     8,845     42.6     9,176     31.9
Utilization review and case management      6,069     36.2     6,448     31.0     7,098     24.6
                                          ------------------------------------------------------ 
                                          $16,746    100.0%  $20,769    100.0%  $28,806    100.0%
                                          ======================================================
 
Years Ended December 31, 1996 and 1995
</TABLE>

      Revenues increased by $8,037,000 (39%) from $20,769,000 in 1995 to
$28,806,000 in 1996. Approximately $7,056,000 (88%) of the Company's increase in
revenues came from growth in managed disability services. Approximately 47% of
the revenue increase for the year is attributable to revenues generated from
Bell Atlantic Corporation, to whom the Company began providing managed
disability services effective August 1, 1996. Additionally, with the acquisition
of CRS in October 1995, the year 1996 represented CORE's first full year of
servicing the workers' compensation market with bill audit services. The balance
of the increase in revenues can be largely attributed to the number of referrals
processed in each of the Company's principal service lines which increased over
the prior year comparative period

      For 1996, the Company's top five clients represented 36% of revenues
compared to 30% during 1995.  Bell Atlantic accounted for approximately 13% of
revenues for 1996.  No other single client represented more than 10% of total
revenues in 1996 or 1995.

      Cost of services for the Company include direct expenses associated with
the delivery of its review and managed care services, including salaries for
professional, clerical and license support staff, the cost of physician reviewer
consultants and telephone expense. Cost of services increased $4,902,000 (38%)
from $12,839,000 in 1995 to $17,741,000 in 1996. The increase is primarily the
result of additional payroll costs associated with processing a higher volume of
referrals and increased staffing levels required to service new and growing
WorkAbility clients.  CORE's gross profit performance for the years ended 1995
and 1996 is unchanged at approximately 38%, despite the addition of a
significant customer during 1996.  Typically, when a major client such as Bell
Atlantic Corporation is implemented the Company expends a significant amount of
resources during the implementation which can result in lower gross profit
margins during the implementation period.  Consequently, the Company's results
of operations for any one quarter may not be indicative of results to be
expected for any other quarter or for a particular fiscal year.

      General and administrative expenses include the cost of executive,
administrative and information services personnel, rent and other overhead
items.  General and administrative expenses increased $1,497,000 (31%) from
$4,787,000 in 1995 to $6,284,000 in 1996.  Expenses increased due primarily to
higher costs associated with additional staffing in the information services
areas to support the growth of the Company.  Additionally, rent and other
general and administrative expenses have increased due to the opening of the
Silver Spring, Maryland operating center in July, 1996.  General and
administrative expenses, as a percentage of revenues, decreased from 23% for
1995 to 22% for 1996.  This improvement is generally due to greater economies of
scale related to higher revenues.

      Sales and marketing expenses include, but are not limited to, salaries for
sales and account management personnel and travel expenses. Sales and marketing
expenses also include costs designed to increase revenues, such as participation
in and attendance at industry trade shows and conferences. Sales and marketing
increased $245,000 (16%) from $1,499,000 in 1995 to $1,744,000 in 1996.  The
increase is primarily due to increased travel expenses in the account management
department and increased staffing to support the marketing department. The
Company's sales and marketing strategy has historically focused the efforts of
an industry known senior management team and a smaller sales and marketing staff
on fewer but significantly larger sales prospects.  During 1996, the Company
maintained this approach, however has added staffing to increase its
distribution sales effort which is aimed at intermediaries, e.g., insurance
companies and TPAs, who

                                       18
<PAGE>
 
provide sales leverage and access to companies with 1,000-5,000 employees,
thereby, broadening the Company's target market.

      Depreciation and amortization expenses increased $433,000 (48%) from
$905,000 in 1995 to $1,338,000 in 1996.  The increase is largely attributable to
increased depreciation expense on assets purchased for the new operating center
in Silver Spring, Maryland to service the Bell Atlantic Corporation contract as
well as increased amortization expense on the goodwill acquired in the purchase
of CRS.

      In connection with the termination of the AmHealth Acquisition Agreement
entered into by the Company with AmHealth, Inc. ("AmHealth") on May 10, 1996 and
terminated on July 24, 1996, the Company incurred a one-time charge to earnings
of $0.9 million for the write-off of transaction costs related to the proposed
AmHealth acquisition.  Additionally, in connection with the proposed
acquisition, the Company made a $1.0 million loan to AmHealth (the "AmHealth
Loan").  Because there is substantial doubt about AmHealth's ability to repay
the AmHealth Loan, the Company wrote-off the AmHealth Loan during the year ended
December 31, 1996 resulting in an additional non-recurring charge to earnings of
$1.0 million.

      Other income consists primarily of interest income, which represents
amounts earned by the Company on investments held, as reduced by interest
expense, which primarily relates to borrowings under lines of credit.  During
1996, other income increased $190,000 (108%) from $176,000 in 1995 to $366,000
in 1996 due to an increase in funds available for investment following the
public offering in August 1996 and the Company significantly reducing its use of
its lines of credit.

Years Ended December 31, 1995 and 1994

      Revenues increased by $4,023,000 (24%) from $16,746,000 in 1994 to
$20,769,000 in 1995.  The volume of reviews processed in each of the Company's
three principal service lines increased.    These increases were primarily
attributable to the addition of new clients and an increase in review volume
from existing clients.  Approximately $2,224,000 (55%) of the Company's increase
in revenues during 1995 came from the growth in managed disability services,
including WorkAbility, analytic and bill audit services.  During 1995, CORE
added Hughes Electronics Corporation as a key WorkAbility client and increased
its services to smaller corporate clients under the Company's distribution
relationship with CIGNA Insurance.  Additionally, with the acquisition of CRS in
October 1995, CORE expanded its ability to service the workers' compensation
market with bill audit services.  CRS revenues represented 21% of the Company's
1995 increase in revenues.  CORE's specialty physician and behavioral health
review services grew by $1,420,000 (19%) in 1995.  This growth was due primarily
to increased demand for specialty-matched physician reviews across a broad range
of markets, including but not limited to the group health, workers' compensation
and disability management markets.  During 1995 the Company's top five clients
represented 30% of revenues, compared to 37% during 1994.  No single client
represented more than 10% of total revenues in 1995.

      Cost of services increased by $1,534,000 (14%) from $11,305,000 for 1994
to $12,839,000 for 1995.  This increase is primarily the result of additional
payroll and physician review costs associated with processing a higher volume of
referrals and increased staffing levels required to service new and growing
WorkAbility clients.  During 1995, CORE's cost of services increased by only 14%
to service a 24% increase in revenue.  Accordingly, gross profit performance
improved from 33% in 1994 to 38% in 1995.  This improvement is generally due to
efficiencies obtained as the result of the CMI/PRA Merger, which included a
consolidation of facilities and management staff, a consolidation of the
companies' benefit plans and greater economies of scale related to higher
revenues.

      General and administrative expenses increased $522,000 (12%), from
$4,265,000 for 1994 to $4,787,000 for 1995, due principally to higher costs
associated with additional staffing in the information services area to support
the growth of the Company.  General and administrative expenses as a percentage
of revenue decreased from 25% in 1994 to 23% in 1995.  This improvement is
generally due to efficiencies obtained as the result of the CMI/PRA Merger,
which included a consolidation of facilities and management staff, a
consolidation of the previously separate companies' benefit plans and greater
economies of scale related to higher revenues.

      Sales and marketing expenses decreased $64,000 (4%), from $1,563,000 in
1994 to $1,499,000 in 1995.  This decrease was due to the net effect of a
reduction in the Company's sales staff and associated expenses during 1995 as a
result of the CMI/PRA Merger and increased marketing related expenditures such
as hosting and co-hosting a number of

                                       19
<PAGE>
 
conferences across the country that addressed various market-specific issues
that the Company's clients and prospective clients are facing.

      Restructuring costs of $558,000 consist of charges for the Company's plan
of termination and exit plan.  In conjunction with the CMI/PRA Merger completed
on March 24, 1995, the Company reduced its workforce where overlapping functions
existed.  The Company also reduced its sales and marketing workforce to better
address the marketing strategy of the Company.  The termination of employees as
a result of these actions caused the recognition of severance and outplacement
costs for the quarter ended March 31, 1995.  The Company also abandoned excess
leased space at its Burlington, Massachusetts location, and a charge was
recorded for the costs of future rental expense on the abandoned space.

      Merger costs and expenses of $436,000 recorded during 1995 consist
primarily of professional fees, investment advisor services and printing
expenses associated with the completed CMI/PRA Merger.  This was a $678,000
decrease from the $1,114,000 recorded during 1994.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

      For the year ended December 31, 1996, the Company's cash and cash
equivalents increased by $3,276,000. For this period, operating activities used
$632,000 primarily due to increases in accounts receivable of $1,558,000 and
other current assets of $548,000, offset by net income of $144,000 and
depreciation and amortization of $1,564,000. The Company's investing activities
used $12,140,000 of cash, primarily due to net purchases of investments
available-for-sale of $6,887,000 and $4,590,000 used to fund equipment and
furniture purchases and leasehold improvements.  Approximately  40% of the
equipment and furniture purchases and leasehold improvements is attributable to
the opening of a new operating center in Silver Spring, Maryland. The Company's
financing activities provided $16,047,000 for this period primarily due to the
proceeds from the secondary public offering of $16,821,000.  A portion of the
public offering proceeds were used to pay for offering costs of approximately
$500,000.

      The Company leases its facilities and certain office equipment.  Lease
commitments, which relate substantially to space rental, for the years ended
December 31, 1997 and December 31, 1998 are approximately $1.9 million and $1.7
million, respectively.  All obligations held by the Company under lease
commitments expire on various dates through April 2002 and total $6.6 million as
of December 31, 1996.

      The Company has net operating loss carryforwards for income tax purposes
of approximately $6 million as of December 31, 1996, which can be used to reduce
future obligations for federal and state income taxes. The amount of net
operating loss carryforwards that can be utilized in any future year are limited
due to "equity structure shifts" in 1995 involving "5% shareholders" (as these
terms are defined in Section 382 of the Internal Revenue Code), which resulted
in a more than 50 percentage point change in ownership. The utilization of these
net operating loss carryforwards may be subject to further limitation provided
by the Internal Revenue Code of 1986 and similar state provisions. See Note 9 of
Notes to Consolidated Financial Statements of the Company.

      The Company plans to finance its operations and working capital
requirements with the proceeds of the August, 1996 offering, earnings from
operations, investments on hand and other sources of available.  The Company
presently believes that these resources will be sufficient to meet its liquidity
and funding requirements through at least the year 1997.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-----------------------------------------------------

      The financial statements and supplementary data of CORE called for by this
item appear under the caption Index to Financial Statements (page F-1 hereof).
Such information is included elsewhere herein.


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

      Not applicable.

                                       20
<PAGE>
 
                                   PART III
                                        
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------------------------------------------------------------

      Pursuant to General Instruction G(3) to Form 10-K, information required
under this item is incorporated by reference from the Registrant's definitive
proxy statement with respect to the 1997 Annual Stockholders Meeting, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A.

      Certain information as it pertains to executive officers, is included at
the end of Part I of this Form 10-K.



ITEM 11. EXECUTIVE COMPENSATION.
--------------------------------

      Pursuant to General Instruction G(3) to Form 10-K, information required
under this item is incorporated by reference from the Registrant's definitive
proxy statement with respect to the 1997 Annual Stockholders Meeting, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A.



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

      Pursuant to General Instruction G(3) to Form 10-K, information required
under this item is incorporated by reference from the Registrant's definitive
proxy statement with respect to the 1997 Annual Stockholders Meeting, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------

      Pursuant to General Instruction G(3) to Form 10-K, information required
under this item is incorporated by reference from the Registrant's definitive
proxy statement with respect to the 1997 Annual Stockholders Meeting, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A.

                                       21
<PAGE>
 
                                    PART IV
                                        
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
---------------------------------------------------------------------------

        (a) Financial Statements, Financial Statement Schedules and Exhibits.
            -----------------------------------------------------------------

        1.  Financial Statements.  The information called for by this item
            ---------------------
            appears under the caption Index to Financial Statements (page F-1
            hereof). Such information is incorporated by reference herein.

        2.  Financial Statement Schedules.  The information called for by this
            ------------------------------
            item appears under the caption Index to Financial Statements (page
            F-1 hereof). Such information is incorporated by reference herein.

        3.  Exhibits.
            ---------

Exhibit
Number  Description
------  -----------

2.1     Second Agreement and Plan or Reorganization by and between Core
        Management, Inc., Registrant and PRA Sub, Inc. dated as of December 19,
        1994. Filed as Appendix I to Prospectus and Joint Proxy Statement in
        Amendment No. 5 to Registrant's Registration Statement on Form S-4
        (Registration No. 33-73906), filed February 14, 1995, and incorporated
        herein by reference.

2.2     Capital Stock Purchase Agreement, by and between Registrant, Cost Review
        Services, Inc., Larry Bertrand Wallace and Leigh B. Goodwin, dated
        October 2, 1995 (without exhibits). Filed as exhibit 2.1 to Registrant's
        Current Report on Form 8-K, filed October 16, 1995, and incorporated
        herein by reference.

2.3     Asset Purchase Agreement, dated May 10, 1996, by and among Registrant,
        AmHealth Clinics Corp. and AmHealth, Inc. (including Schedules 1.2, 2.8
        and 2.10 and excluding other Exhibits and Schedules) (the "AmHealth
        Asset Purchase Agreement"). Filed as exhibit no. 2.4 to Registrant's
        Registration Statement on Form S-1 (Registration No. 333-03639), filed
        May 13, 1996, and incorporated herein by reference.

2.4     Notice of termination of AmHealth Asset Purchase Agreement, dated July
        24, 1996. Filed as exhibit no. 2.6 to Registrant's Amendment No. 3 to
        Registration Statement on Form S-1 (Registration no. 333-03639), filed
        July 25, 1996, and incorporated herein by reference.

3.1     Restated Articles of Organization of the Registrant, dated November 22,
        1991, as further amended by Articles of Amendment, dated March 24, 1995,
        July 28, 1995 and October 28, 1996.  Filed as exhibit no. 4.1 to
        Registrant's Quarterly Report on Form 10-Q, filed November 13, 1996, and
        incorporated herein by reference.

3.2     By-Laws of the Registrant, as amended.  Filed as exhibit no. 3.2 to
        Registrant's Annual Report on Form 10-K, filed March 30, 1993, and
        incorporated herein by reference.

4.1     Specimen Common Stock certificate.  Filed as exhibit no. 4.1 to
        Registrant's Annual Report on Form 10-K, filed April 1, 1996, and
        incorporated herein by reference.

10.1    Software License Agreement, dated August 26, 1986, between Chrysler
        Corporation ("Chrysler") and The Health Data Institute ("HDI"). Filed as
        exhibit no. 10.59 to the Registrant's Registration Statement on Form S-4
        (Registration No. 33-73906), filed January 10, 1994, and incorporated
        herein by reference.

10.2    Amendment No. 1 to Software License Agreement, dated December 23, 1987,
        between Chrysler and HDI. Filed as exhibit no. 10.60 to the Registrant's
        Registration Statement on Form S-4 (Registration No. 33-73906), filed
        January 10, 1994, and incorporated herein by reference.

10.3    Technical Service Agreement, dated April 13, 1987, between Chrysler and
        HDI. Filed as exhibit no. 10.61 to the Registrant's Registration
        Statement on Form S-4 (Registration No. 33-73906), filed January 10,
        1994, and incorporated herein by reference.

                                       22
<PAGE>
 
Exhibit
Number  Description
------  -----------

10.4    Technical Service Agreement, dated May 1, 1987, between Blue Cross and
        Blue Shield of Michigan and HDI. Filed as exhibit no. 10.62 to the
        Registrant's Registration Statement on Form S-4 (Registration No. 33-
        73906), filed January 10, 1994, and incorporated herein by reference.

10.5    Medical Care Management Agreement, dated January 1, 1989, between
        Hoechst Celanese Corporation and HDI (without Exhibits) and Addendum to
        Managed Care Agreement, effective August 1, 1989, and Amendment to
        Agreement, effective December 1, 1991. Filed as exhibit no. 10.5 to the
        Registrant's Annual Report on Form 10-K, filed April 1, 1996, and
        incorporated herein by reference.

10.6    Amended and Restated Agreement for Utilization Management Services,
        dated as of November 1, 1991, between Core Management, Inc., a
        California corporation ("Core-California") and Northwestern National
        Life Insurance Company (without schedules and exhibits). Filed as
        exhibit no. 10.58 to the Registrant's Registration Statement on Form S-4
        (Registration No. 33-73906), filed January 10, 1994, and incorporated
        herein by reference.

10.7    Management Services Agreement, dated as of September 1, 1994, between
        Integrated Behavioral Health, CMI and Behavioral Care of America, Inc.
        (without Exhibits). Filed as exhibit no. 10.90 to Amendment No. 3 to the
        Registrant's Registration Statement on Form S-4 (Registration No. 33-
        73906), filed February 2, 1995, and incorporated herein by reference.

10.8    Registrant's Amended and Restated 1986 Stock Option Plan. Filed as
        exhibit no. 10.11 to the Registrant's Registration Statement on Form S-1
        (Registration No. 33-43418), filed October 18, 1991, and incorporated
        herein by reference.

10.9    Amendment to Amended and Restated 1986 Stock Option Plan. Filed as
        exhibit no. 19.1 to the Registrant's Quarterly Report on Form 10-Q,
        filed November 16, 1992, and incorporated herein by reference.

10.10   Registrant's Amended and Restated 1991 Stock Option Plan.  Filed as
        exhibit no. 4.3 to the Registrant's Registration Statement on Form S-8
        (Registration No. 333-15261), filed October 31, 1996, and incorporated
        herein by reference.

10.11   Form of Stock Option Agreement, granted January 21, 1991.  Filed as
        exhibit no. 10.25 to the Registrant's Registration Statement on Form S-1
        (Registration No. 33-43418), filed October 18, 1991, and incorporated
        herein by reference.

10.12   Form of Stock Option Agreement, granted March 17, 1992, to certain
        employees. Filed as exhibit no. 19.2 to the Registrant's Quarterly
        Report on Form 10-Q, filed May 15, 1992, and incorporated herein by
        reference.

10.13   Form of Stock Option Agreement, granted December 14, 1992, to non-
        employee directors.  Filed as exhibit no. 19.3 to Registrant's Annual
        Report on Form 10-K, filed March 30, 1993, and incorporated herein by
        reference.

10.14   Form of Stock Option Agreement, dated as of May 17, 1993, between
        Registrant and William E. Nixon. Filed as exhibit no. 10.5 to
        Registrant's Quarterly Report on Form 10-Q, filed June 30, 1993, and
        incorporated herein by reference.

10.15   Form of Stock Option Agreement, granted January 16, 1994, to non-
        employee directors. Filed as exhibit no. 10.45 to the Registrant's
        Annual Report on Form 10-K, filed March 31, 1994, and incorporated
        herein by reference.

10.16   Form of Stock Option Agreement, granted March 23, 1995, to non-employee
        directors for services in 1994 and through March 23, 1995, including
        schedule of optionees. Filed as Exhibit No. 10.1 to Registrant's
        Quarterly Report on Form 10-Q, filed November 14, 1995, and incorporated
        herein by reference.

10.17   Form of Stock Option Agreement for 19,500 shares to vest quarterly over
        three years granted March 24, 1995, to non-employee directors, including
        schedule of optionees. Filed as Exhibit No. 10.2 to Registrant's
        Quarterly Report on Form 10-Q, filed November 14, 1995, and incorporated
        herein by reference.

                                       23
<PAGE>
 
Exhibit
Number  Description
------  -----------

10.18   Form of Stock Option Agreement for 4,875 shares, granted March 24, 1995
        to non-employee directors, including schedule of optionees.  Filed as
        Exhibit No. 10.3 to Registrant's Quarterly Report on Form 10-Q, filed
        November 14, 1995, and incorporated herein by reference.

10.19   Form of Stock Option Agreement, granted April 27, 1995, to executive
        officers, including schedule of executive officer optionees.  Filed as
        Exhibit No. 10.4 to Registrant's Quarterly Report on Form 10-Q, filed
        November 14, 1995, and incorporated herein by reference.

10.20   Form of Stock Option Agreement, granted April 27, 1995, for consulting
        and other services, including schedule of optionees. Filed as Exhibit
        No. 10.5 to Registrant's Quarterly Report on Form 10-Q, filed November
        14, 1995, and incorporated herein by reference.

10.21   Form of Stock Option Agreement for 12,375 shares of Registrant's common
        stock granted November 8, 1995 to four non-employee directors.  Filed as
        exhibit no. 10.58 to the Registrant's Annual Report on Form 10-K, filed
        April 1, 1996, and incorporated herein by reference.

10.22   Incentive Stock Option Agreement, dated December 8, 1995, between
        Registrant and Fredric L. Sattler.  Filed as exhibit no. 10.50 to the
        Registrant's Annual Report on Form 10-K, filed April 1, 1996, and
        incorporated herein by reference.

10.23   Form of Stock Option Agreement, granted March 29, 1996, to officers,
        including schedule of officer optionees.  Filed as exhibit no. 10.31 to
        Registrant's Registration Statement on Form S-1 (Registration No. 333-
        03639), filed May 13, 1996, and incorporated herein by reference.

10.24   Form of Stock Option Agreement, granted March 29, 1996, for consulting
        services, including schedule of optionees. Filed as exhibit no. 10.32 to
        Registrant's Registration Statement on Form S-1 (Registration No. 333-
        03639), filed May 13, 1996, and incorporated herein by reference.

10.25   Core Management, Inc. Employee Stock Option Plan. Filed as exhibit no.
        10.65 to the Company's Registration Statement on Form S-4 (Registration
        No. 33-73906), filed January 10, 1994, and incorporated herein by
        reference.

10.26   Forms of Stock Option Agreement under Core Management, Inc. Employee
        Stock Option Plan.  Filed as exhibit no. 10.66 to the Registrant's
        Registration Statement on Form S-4 (Registration No. 33-73906), filed
        January 10, 1994, and incorporated herein by reference.

10.27   Form of Non-Employee Director Stock Option Agreement of Core Management,
        Inc. Filed as exhibit no. 10.67 to the Company's Registration Statement
        on Form S-4 (Registration No. 33-73906), filed January 10, 1994, and
        incorporated herein by reference.

10.28   Warrant to Purchase Stock of CMI, dated February 23, 1994, in favor of
        Silicon Valley Bank. Filed as exhibit no. 10.75 to Amendment No. 1 to
        the Registrant's Registration Statement on Form S-4 (Registration No.
        33-73906), filed June 8, 1994, and incorporated herein by reference.

10.29   Registration Rights Agreement, dated February 23, 1994, between CMI and
        Silicon Valley Bank. Filed as exhibit no. 10.81 to Amendment No. 1 to
        the Registrant's Registration Statement on Form S-4 (Registration No.
        33-73906), filed June 8, 1994, and incorporated herein by reference.

10.30   Form of Warrant Agreement, dated June 1, 1994, between CMI and John
        Pappajohn.  Filed as exhibit no. 10.83 to Amendment No. 1 to the
        Registrant's Registration Statement on Form S-4 (Registration No. 33-
        73906), filed June 8, 1994, and incorporated herein by reference.

10.31   Employment Agreement, dated November 19, 1993, between the Registrant
        and William E. Nixon. Filed as exhibit no. 10.49 to Registrant's
        Registration Statement on Form S-4 (Registration No. 33-73906), filed
        January 10, 1994, and incorporated herein by reference.

                                       24
<PAGE>
 
Exhibit
Number  Description
------  -----------

10.32   Employment Agreement, dated December 1, 1995, between Registrant and
        Fredric L. Sattler. Filed as exhibit no. 10.49 to the Registrant's
        Annual Report on Form 10-K, filed April 1, 1996, and incorporated herein
        by reference.

10.33   401(k) Plan. Filed as exhibit no. 10.34 to the Registrant's Registration
        Statement on Form S-1 (Registration No. 33-43418), filed October 18,
        1991, and incorporated herein by reference.

10.34   Form of Indemnification Agreement.  Filed as exhibit no. 10.35 to the
        Registrant's Registration Statement on Form S-1 (Registration No. 33-
        43418), filed October 18, 1991, and incorporated herein by reference.

10.35   Office Lease, dated December 30, 1992, between Registrant and Copley
        Place Associates Nominee Corporation (without exhibits). Filed as
        exhibit no. 19.5 to Registrant's Annual Report on Form 10-K, filed March
        30, 1993, and incorporated herein by reference.

10.36   First Amendment to Office Lease, dated June 3, 1993, between the
        Registrant and Copley Place Associates Nominee Corporation.  Filed as
        exhibit no. 10.2 to Registrant's Quarterly Report on Form 10-Q, filed
        November 10, 1993, and incorporated herein by reference.

10.37   Agreement of Sublease, dated April 1, 1993, between Eastman Kodak
        Company and Core-California. Filed as exhibit no. 10.53 to the
        Registrant's Registration Statement on Form S-4 (Registration No. 33-
        73906), filed January 10, 1994, and incorporated herein by reference.

10.38   Second Amendment to Agreement of Sublease, dated May 17, 1995, between
        Eastern Kodak Company and Core-California. Filed as exhibit no. 10.45 to
        Registrant's Annual Report on Form 10-K, filed April 1, 1996, and
        incorporated herein by reference.

10.39   Lease, dated January 1, 1991, between Core-California and One Wheeler
        Road Associates.  Filed as exhibit no. 10.55 to the Registrant's
        Registration Statement on Form S-4 (Registration No. 33-73906), filed
        January 10, 1994, and incorporated herein by reference.

10.40   First Amendment to Lease, dated November 28, 1995, between Core-
        California and One Wheeler Road Associates (without Exhibit). Filed as
        exhibit no. 10.47 to Registrant's Annual Report on Form 10-K, filed
        April 1, 1996, and incorporated herein by reference.

10.41   Office Building Lease, dated September 21, 1995, by and between
        McDonnell Douglas Realty Company and Registrant, including Exhibits and
        including Addendum to Lease Agreement. Filed as exhibit no. 10.48 to
        Registrant's Annual Report on Form 10-K, filed April 1, 1996, and
        incorporated herein by reference.

10.42   Sublease, dated May 23, 1996, between AT&T Corp., as Sublandlord, and
        Registrant, as Subtenant, for premises in Silver Spring, Maryland
        (without Exhibits). Filed as exhibit no. 10.63 to Registrant's Amendment
        No. 3 to Registration Statement on Form S-1 (Registration No. 333-
        03639), filed July 25, 1996, and incorporated herein by reference.
 
10.43   Loan and Security Agreement, dated December 29, 1995, by and among
        Registrant, Core Management, Inc., a Delaware corporation ("CMI") and
        Cost Review Services, Inc., as borrowers, and Silicon Valley Bank
        ("SVB"), including Schedule to Loan and Security Agreement. Filed as
        exhibit no. 10.51 to Registrant's Annual Report on Form 10-K, filed
        April 1, 1996, and incorporated herein by reference.

10.44   Amendment to Loan Agreement, dated March 25, 1996, by and among
        Registrant, Core Management, Inc., a Delaware corporation, and Cost
        Review Services, Inc., as borrowers, and Silicon Valley Bank. Filed as
        exhibit no. 10.56 to Registrant's Registration Statement on Form S-1
        (Registration No. 333-03639), filed May 13, 1996, and incorporated
        herein by reference.

                                       25
<PAGE>
 
Exhibit
Number  Description
------  -----------

10.45   Collateral Assignment, Patent Mortgage and Security Agreement, dated
        December 29, 1995, by and between Registrant and SVB (without Exhibits).
        Filed as exhibit no. 10.52 to Registrant's Annual Report on Form 10-K,
        filed April 1, 1996, and incorporated herein by reference.

10.46   Cross-Corporate Continuing Guaranty of Registrant, CMI and CRS, dated
        December 29, 1995 in favor of SVB.  Filed as exhibit no. 10.53 to
        Registrant's Annual Report on Form 10-K, filed April 1, 1996, and
        incorporated herein by reference.

10.47   Continuing Guaranty of Integrated Behavioral Health and Core-California,
        dated December 29, 1995, in favor of SVB. Filed as exhibit no. 10.54 to
        Registrant's Annual Report on Form 10-K, filed April 1, 1996, and
        incorporated herein by reference.

10.48   AmHealth, Inc.'s Secured Floating Rate Promissory Note, in the
        principal amount of $500,000, dated January 10, 1996, payable to
        Registrant.  Filed as exhibit no. 10.55 to Registrant's Annual Report on
        Form 10-K, filed April 1, 1996, and incorporated herein by reference.

10.49   AmHealth, Inc.'s Secured Floating Rate Promissory Note, in the
        principal amount of $250,000, dated February 9, 1996, payable to
        Registrant.  Filed as exhibit no. 10.56 to Registrant's Annual Report on
        Form 10-K, filed April 1, 1996, and incorporated herein by reference.

10.50   AmHealth, Inc.'s Secured Floating Rate Promissory Note, in the principal
        amount of $250,000, dated March 15, 1996, payable to Registrant. Filed
        as exhibit no. 10.57 to Registrant's Annual Report on Form 10-K, filed
        April 1, 1996, and incorporated herein by reference.

11.1    *  Statement re: Computation of Income (Loss) Per Common Share.
 
21.1    *  Subsidiaries of the Registrant.
 
23.1    *  Consent of Ernst & Young LLP, independent auditors.
 
27      *  Financial Data Schedule

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

* Filed herewith


(b)     Reports on Form 8-K.
        --------------------

        The Company did not file any reports on Form 8-K during the year ended
December 31, 1996.

                                       26
<PAGE>
 
                                  SIGNATURES

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

                                     CORE, INC.

Date:  March 27, 1997                By:  /s/ George C. Carpenter IV
                                        ------------------------------------
                                          George C. Carpenter IV
                                          Chairman of the Board and
                                            Chief Executive Officer


Date:  March 27, 1997                By:  /s/  William E. Nixon
                                        ------------------------------------
                                          William E. Nixon
                                          Chief Financial Officer, Executive
                                            Vice President and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>

<S>                            <C>                                  <C> 
/s/ George C. Carpenter IV      Chairman of the Board of Directors    March 27, 1997
------------------------------     and Chief Executive Officer
George C. Carpenter IV             
 
/s/ William E. Nixon            Chief Financial Officer, Executive    March 27, 1997
------------------------------     Vice President and Treasurer
William E. Nixon                
 
/s/ Pamela Ochs-Piasecki        Chief Accounting Officer              March 27, 1997
------------------------------
Pamela Ochs-Piasecki
 
/s/ Leslie Alexandre            Director                              March 27, 1997
------------------------------
Leslie Alexandre
 
/s/ Stephen C. Caulfield        Director                              March 27, 1997
------------------------------
Stephen C. Caulfield
 
/s/ Richard H. Egdahl, M.D.     Director                              March 27, 1997
------------------------------
Richard H. Egdahl, M.D.
 
/s/ Craig C. Horton             Director                              March 27, 1997
------------------------------
Craig C. Horton
 
/s/ John Pappajohn              Director                              March 27, 1997
------------------------------
John Pappajohn
</TABLE>

                                       27
<PAGE>
 
                                   CORE, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

CORE Audited Financial Statements
---------------------------------
<S>                                                                                               <C>
 
Report of Independent Auditors                                                                    F-2
 
Consolidated Balance Sheets - December 31, 1995 and 1996                                          F-3
 
Consolidated Statements of Operations - Years ended December 31, 1994, 1995 and 1996              F-5
 
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1994, 1995 and 1996    F-6
 
Consolidated Statements of Cash Flows - Years ended December 31, 1994, 1995 and 1996              F-7
 
Notes to Consolidated Financial Statements                                                        F-8
 

Financial Statements Schedules
------------------------------

Schedule II - Valuation and Qualifying Accounts                                                   F-18

</TABLE> 

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

                                      F-1
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS


BOARD OF DIRECTORS AND STOCKHOLDERS
CORE, INC.


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

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CORE,
INC. at December 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

                                                      ERNST & YOUNG LLP



Boston, Massachusetts
February 14, 1997

                                      F-2
<PAGE>
 
                                   CORE, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                DECEMBER 31,
                                              1995         1996
                                         -------------------------
<S>                                       <C>          <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents              $ 1,005,807  $ 4,281,994
   Cash pledged as collateral                 106,000      192,000
   Investments available-for-sale           1,531,610    8,435,531
   Accounts receivable, net of
    allowance for doubtful                  
      accounts of $170,337 in 1995 and
       $221,925 in 1996                     2,987,356    4,545,738  
   Notes receivable from officers              35,507      106,926
   Prepaid expenses and other current         
    assets                                    460,103      891,932
                                           -----------------------
Total current assets                        6,126,383   18,454,121

Property and equipment, net                 3,155,234    6,445,420
Cash pledged as collateral                    192,000      
Deposits and other assets                     178,402      699,901
Goodwill, net of accumulated
 amortization of $17,000 in 1995
 and $87,400 in 1996                        1,929,885    2,035,604
Intangibles, net of accumulated 
 amortization of $448,626 in 1995
 and $401,307 in 1996                         286,927      208,693
                                          ------------------------
Total assets                              $11,868,831  $27,843,739
                                          ========================
</TABLE> 
See accompanying notes.

                                      F-3
<PAGE>
 
                                  CORE, INC.
                    CONSOLIDATED BALANCE SHEETS - CONTINUED

<TABLE>
<CAPTION>
 
 
                                                  DECEMBER 31,
                                              1995           1996
                                        -----------------------------
<S>                                      <C>            <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                      $    846,156   $    743,143
    Accrued expenses                           822,694        656,726
    Accrued payroll                            184,795        465,520
    Accrued vacation                           376,561        543,597
    Accrued restructuring costs                130,498         41,636
    Deferred income taxes                       68,316         68,316
    Notes payable                              155,994         58,099
    Current portion of obligations to          
     former shareholders                       298,509         50,000   
    Current portion of capital lease           
     obligations                                91,159         46,498
                                        -----------------------------
Total current liabilities                    2,974,682      2,673,535
 
 
Long-term obligations to former
     shareholders, net of current
     portion                                   745,106         50,000
Note payable                                                  256,690
Capital lease obligations, net of               
     current portion                            71,969         37,275
Deferred rent, net of current portion          279,317        220,539
Deferred income taxes                          149,500        149,500
 
Commitments and contingencies
 
Shareholders' equity
Preferred stock, no par value,
    authorized 500,000 shares;
    no shares outstanding
Common stock, $0.10 par value per
    share; authorized
    30,000,000 shares; issued and              
    outstanding 4,794,403 and
    7,172,711 at December 31, 1995 and
    1996, respectively                         479,440        717,271
Additional paid-in capital                  18,052,547     34,465,146
Deferred compensation                          (51,120)       (38,640)
Cumulative unrealized gain on
    investments available-for-sale              30,975         31,983
     
Accumulated deficit                        (10,863,585)   (10,719,560)
                                        -----------------------------
Total stockholders' equity                   7,648,257     24,456,200
                                        -----------------------------
Total liabilities and stockholders'       $ 11,868,831   $ 27,843,739
 equity
                                        =============================
</TABLE>
See accompanying notes.

                                      F-4
<PAGE>
 
                                  CORE, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                        ----------------------------------------- 
                                              1994          1995          1996
                                        -----------------------------------------
 
<S>                                       <C>           <C>           <C>
Revenues                                  $16,746,290   $20,768,521   $28,805,590
Cost of services                           11,305,323    12,838,971    17,740,901
                                        -----------------------------------------
Gross profit                                5,440,967     7,929,550    11,064,689
 
Operating expenses:
     General and administrative             4,182,206     4,772,863     6,284,651
     Sales and marketing                    1,562,823     1,499,120     1,744,386
     Restructuring costs                                    557,515
     Merger costs and expenses              1,114,406       436,104
     Provision for doubtful accounts           83,050        14,375
     Depreciation and amortization            914,480       904,900     1,338,122
     Non-recurring write-off of                                         
      AmHealth acquisition                                              1,919,871
     Write-off of goodwill                  2,294,150
                                        -----------------------------------------
          Total operating expenses         10,151,115     8,184,877    11,287,030

Loss from operations                       (4,710,148)     (255,327)     (222,341)
 
Other income (expense):
     Interest income                          296,218       239,590       385,394
     Interest expense                        (158,362)      (83,410)      (35,512)
     Realized gain (loss) on sale of         
      investments available-for-sale         (157,774)        9,123        16,003
     Other income                              30,480        10,851           481
                                        -----------------------------------------
                                               10,562       176,154       366,366
                                        -----------------------------------------
Net income (loss)                         $(4,699,586)  $   (79,173)  $   144,025
                                        ========================================= 
Net income (loss) per common share             $(1.01)       $(0.02)        $0.02
                                        =========================================
Weighted average number of common           
     shares and equivalents outstanding     4,668,000     4,755,000     6,274,000
                                        =========================================

 
</TABLE>
See accompanying notes.

                                      F-5
<PAGE>
 
                                  CORE, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                                         TOTAL
                                  COMMON STOCK     ADDITIONAL PAID-     DEFERRED     UNREALIZED  GAIN    ACCUMULATED   STOCKHOLDERS'
                             SHARES       AMOUNT     IN  CAPITAL      COMPENSATION  (LOSS)INVESTMENTS      DEFICIT        EQUITY
                             ------------------------------------------------------------------------------------------------------
  
<S>                          <C>          <C>         <C>             <C>            <C>              <C>              <C>
BALANCE AT DECEMBER 31,       
  1993                        4,640,645    $464,064    $17,857,373                                     $ (6,084,826)    $12,236,611 

Exercise of stock options        99,298       9,930         45,146                                                           55,076
Unrealized loss on 
  investments available 
  for-sale                                                                                $(39,408)                         (39,408)

Net loss                                                                                                (4,699,586)      (4,699,586)

                              -----------------------------------------------------------------------------------------------------
 
BALANCE AT DECEMBER 31,       
  1994                        4,739,943     473,994     17,902,519                         (39,408)     (10,784,412)      7,552,693
Exercise of stock options        54,460       5,446         85,628                                                           91,074
Deferred compensation
  related to stock options
  issued                                                    64,400         $(64,400)
Amortization of deferred
  compensation                                                               13,280                                          13,280
Unrealized gain on 
  investments 
  available-for-sale                                                                        70,383                           70,383
Net loss                                                                                                    (79,173)        (79,173)

                              -----------------------------------------------------------------------------------------------------
 
BALANCE AT DECEMBER 31,       
  1995                        4,794,403     479,440     18,052,547          (51,120)        30,975      (10,863,585)      7,648,257
Exercise of stock options       129,508      12,951        349,416                                                          362,367
Issuance of common stock 
  from public offering  
  (net of offering costs)     2,248,800     224,880     16,063,183                                                       16,288,063
Amortization of deferred
  compensation                                                               12,480                                          12,480
Unrealized gain on 
  investments
  available-for-sale                                                                         1,008                            1,008
Net income                                                                                                  144,025         144,025
                              -----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,       
  1996                        7,172,711    $717,271    $34,465,146         $(38,640)      $ 31,983     $(10,719,560)    $24,456,200
                              =====================================================================================================
 
</TABLE>
 
See accompanying notes.

                                      F-6
<PAGE>
 
                                  CORE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE> 
<CAPTION> 
                                                   YEAR ENDED DECEMBER 31,
                                        ------------------------------------------
                                              1994          1995          1996
                                        ------------------------------------------
<S>                                       <C>           <C>           <C>
OPERATING ACTIVITIES:
Net income (loss)                         $(4,699,586)  $   (79,173)  $    144,025
Adjustments to reconcile net income
 (loss) to net cash provided by
    (used in) operating  activities:
       Depreciation                           878,934       837,316      1,189,488
       Amortization                           100,693       148,836        374,799
       Write-off of goodwill                2,294,150
       Provision for doubtful accounts         83,050        14,375
       Loss on sale/disposal of               (29,174)
        property and equipment
       Realized loss on permanent             157,774
        decline in fair market value of
            investments
       Realized gain on sale of                              (9,123)       (16,003)
        investments available-for-sale
       Compensation expense related to         28,078        13,280         12,480
        issuance of stock options
       Decrease in obligations to                                         (261,225)
        former shareholders
       Changes in operating assets and
        liabilities:
           (Increase) decrease in            (446,157)      258,269     (1,558,382)
            accounts receivable
           (Increase) decrease in             (72,045)      164,571       (547,829)
            prepaid expenses and other
            current assets
          Increase (decrease) in cash         301,367      (301,367)
           overdraft
          Increase (decrease) in             (514,692)     (607,675)        31,140
           accounts payable and accrued
           expenses
                                        ------------------------------------------
Net cash provided by (used in)             (1,917,608)      439,309       (631,507)
 operating activities
 
INVESTING ACTIVITIES:
     Additions to property and equipment     (539,521)   (1,278,720)    (4,589,839)
     Disposals of property and equipment        2,432         4,688
     Additions to goodwill                                                (176,119)
     Decrease (increase) in cash             (296,815)      464,884        106,000
      pledged as collateral
     Refunds of (additions to) deposits        23,168       (19,056)      (521,499)
     Increase in notes receivable from        (12,000)      (23,507)       (71,419)
      officers
     Purchase of Cost Review Services,                   (1,510,024)
      Inc., net of cash acquired
     Payments on non-compete                                (50,000)
      obligations to former shareholders
     Purchases of investments                (248,204)   (3,985,892)   (23,612,768)
      available-for-sale
     Sales of investments                                 8,392,306     16,725,858
      available-for-sale
                                        ------------------------------------------                  
Net cash provided by (used in)             (1,070,940)    1,994,679    (12,139,786)
 investing activities
 
FINANCING ACTIVITIES:
     Net (repayments) borrowings under      1,200,000    (1,200,000)
      revolving line of credit
     Proceeds from issuance of                200,000
      officer's notes
     Payments on officer's notes                           (200,000)
     Payments on obligations to former                                    (682,390)
      shareholders
     Issuance of notes payable                133,754       179,997        328,518
     Payments on notes payable               (199,373)     (208,085)      (169,723)
     Payments on capital lease                (56,319)      (91,167)       (79,355)
      obligations
     Proceeds from issuance of common                                   16,288,063
      stock, net of offering costs
     Issuance of common stock upon             26,998        91,074        362,367
      exercise of stock options and
      warrants
                                        ------------------------------------------
Net cash provided by (used in)              1,305,060    (1,428,181)    16,047,480
 financing activities                   ------------------------------------------
                                         
Net increase (decrease) in cash and        (1,683,488)    1,005,807      3,276,187
 cash equivalents
Cash and cash equivalents at beginning      1,683,488           --       1,005,807
 of year
                                        ------------------------------------------  
Cash and cash equivalents at end 
 of year                                $        --     $ 1,005,807   $  4,281,994
                                        ==========================================
 
Supplemental disclosure of cash flow
 information:
Interest paid                             $   147,543   $    83,322   $     55,697
                                        ==========================================
Noncash investing activities:
Capital lease obligation incurred                       $    25,266
                                        ==========================================
 
</TABLE> 
 
See accompanying notes.

                                      F-7
<PAGE>
 
                                   CORE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1996

1.  ORGANIZATION AND PURPOSE

CORE, INC. ("CORE" or the "Company") is a national provider of disability and
workers' compensation management services, physician-intensive health care cost
containment and health care utilization management services and programs to
large employers, commercial health and accident insurance companies, third-party
administrators of health insurance programs, self-insured employers and other
groups.

On March 24, 1995, the Company issued approximately 1,928,000 shares of its
common stock in exchange for all of the outstanding common stock of Core
Management, Inc. ("CMI"). In addition, outstanding employee stock options to
purchase CMI stock were converted into options to purchase approximately 160,000
shares of CORE. CMI is an independent provider of disability, medical and
behavioral health services which are designed to help its clients monitor and
control health care, workers' compensation and disability costs incurred both in
the aggregate and on a case by case basis without sacrificing the quality of
care or services available to patients.  The merger has been accounted for as a
pooling of interests and accordingly, the Company's consolidated financial
statements have been restated to include the accounts and operations of CMI for
all periods prior to the merger.  In connection with the merger, the Company
adopted a plan to restructure management and eliminate redundant positions and
to abandon excess lease space.  In connection with certain elements of the
restructuring plan, the Company recorded a restructuring charge of $557,515
which included approximately $438,000 for severance costs and $120,000 for
abandoned lease space.  The restructuring charge was added to an existing
accrual for severance costs of approximately $58,000 as of December 31, 1994.
In accordance with Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring), prior period
financial statements were not restated.  The restructuring plan eliminated 11
employees in the regional operations, general and administrative, sales and
marketing and account management departments.  During 1995, severance payments
charged against the liability for 10 terminated employees in the regional
operations amounted to approximately $424,000 and lease payments for abandoned
lease space charged against the liability amounted to $120,000.  During 1996,
severance payments charged against the liability amounted to $56,000.  Of the
initial restructuring charges, approximately $16,000 of severance payments
remained in accrued restructuring costs at December 31, 1996.  Separate net
sales, net income and related per share amounts of the merged entities are
presented in the following table.  In addition, the table includes pro forma net
income and net income per share amounts which reflect the elimination of the
non-recurring merger costs and expenses in 1994 and 1995.
<TABLE>
<CAPTION>
 
                                       1994          1995
                                 ---------------------------
<S>                                <C>           <C>
Net sales:
   CORE                            $ 7,959,834   $10,401,801
   CMI                               8,786,456    10,366,720
                                 ---------------------------
Total net sales                    $16,746,290   $20,768,521
                                 ===========================
Net income (loss):
   CORE                            $  (691,185)  $ 1,046,258
   CMI                              (2,893,995)     (131,812)
                                 ---------------------------
Pro forma net income (loss)         (3,585,180)      914,446
Merger costs and expenses            1,114,406       993,619
                                 ---------------------------
Net loss as reported               $(4,699,586)  $   (79,173)
                                 ===========================
Net income (loss) per share:
   Pro forma                       $     (0.77)  $      0.19
                                 ===========================
   As reported                     $     (1.01)  $     (0.02)
                                 ===========================
</TABLE>

                                      F-8
<PAGE>
 
                                  CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


1. ORGANIZATION AND PURPOSE (CONTINUED)

On October 2, 1995, the Company acquired all of the outstanding shares of Cost
Review Services, Inc. ("CRS") for approximately $2,790,000 payable in cash plus
contingent consideration.  CRS  provides workers' compensation medical cost
containment and case management services and programs to commercial workers'
compensation insurance companies and third-party administrators of workers'
compensation programs.  The acquisition was accounted for as a purchase and the
acquisition cost consisted of the following:
<TABLE>
<CAPTION>
 
<S>                                       <C>
Cash paid to former CRS shareholders      $1,640,000
Obligations to former CRS shareholders     1,150,000
Acquisition costs incurred                   200,000
                                          ----------
                                          $2,990,000
                                          ==========
</TABLE>

The contingent consideration of $1,150,000 is payable in cash and will be
computed based on agreed upon net revenue targets from January 1996 through
December 1998, and is subject to downward adjustment based on certain earnings
before interest and taxes percentages.  The contingent consideration will be
payable beginning in March 1997.  The contingent consideration is not included
in the acquisition cost total above and will be accounted for as period expense
when the future earnings requirements have been met. The purchase resulted in
goodwill of approximately $1,950,000 which is being amortized on a straight-line
basis over 27.5 years.  Amortization of goodwill during 1995 and 1996 amounted
to $17,000 and $70,400, respectively.  In accordance with the stock purchase
agreement, certain adjustments have been recorded against obligations due to
former CRS shareholders.  The Company also agreed to pay the former CRS
shareholders $150,000 in installments of $50,000 in 1995, 1997 and 1998 in
exchange for covenants not-to-compete.  These payments are being amortized over
the three year term of the agreements. Acquisition costs include $100,000
pertaining to administrative costs and $100,000 pertaining to restructure costs.
In connection with the purchase, the Company adopted a plan to restructure the
accounting and administrative departments of CRS and consolidate the functions
within the Company's Boston, Massachusetts office.  In connection with certain
elements of the restructuring plan, the Company adjusted its purchase price by
$100,000 to reflect an accrual for facility consolidation costs of $25,000 and
severance costs of $75,000.  The restructuring plan eliminated 4 employees in
the accounting and administrative departments.  During 1995, severance payments
charged against the liability for the employees amounted to approximately
$42,000.  During 1996, severance payments of $24,000 and payments of $9,000 on
abandoned lease space were made.  Of the initial restructuring charges, $25,000
remained in accrued restructuring costs at December 31, 1996.

The consolidated financial statements include the operating results of CRS from
the date of acquisition.  The following pro forma information has been prepared
assuming that this acquisition had taken place at the beginning of 1994.  The
proforma information includes adjustments of $57,000 for interest expense that
would have been incurred to finance the purchase, $92,000 to decrease interest
income due to having fewer dollars to invest as a result of the purchase,
$54,000 for the amortization of intangibles arising from the transaction and
$138,000 to eliminate the provision for income taxes due to the filing of a
consolidated tax return.  Such pro forma amounts are not necessarily indicative
of what the actual consolidated results of operations might have been if the
acquisition had been effective at the beginning of fiscal 1994.
<TABLE>
<CAPTION>
 
                                          Year ended December 31,
                                      -----------------------------
                                            1994           1995
                                      -----------------------------
<S>                                     <C>            <C>
Net sales                                $20,680,000    $24,847,000
Net earnings (loss)                      $(4,670,000)   $   338,000
Net earnings (loss) per common share     $     (1.00)   $      0.07
</TABLE>

                                      F-9
<PAGE>
 
                                   CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


1.  ORGANIZATION AND PURPOSE (CONTINUED)

On August 9, 1996, the Company completed an underwritten public offering of
2,000,000 shares of Common Stock at a price of $8.00.  On September 3, 1996, the
Company issued an additional 248,800 shares at a price of $8.00 per share of its
Common Stock to cover over-allotments in connection with the public offering.
CORE intends to use the net proceeds from its offering for investments in its
operating capacity and for working capital and general corporate purposes.

2.  ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.  All significant inter-company transactions have
been eliminated in consolidation.

RISKS AND UNCERTAINTIES
Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit risk principally consist of cash and cash equivalents, investments
available-for-sale, and trade receivables.

The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.  Investments
available-for-sale represents the investment of excess cash in commercial paper,
corporate bonds and United States Government securities.

The Company provides its services to companies throughout the United States in
various industries, including, but not limited to the healthcare industry.
Management does not believe significant credit risk exists at December 31, 1996.

Significant Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

INVESTMENTS

Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."  Under the FAS 115, debt securities that the Company has
both the positive intent and ability to hold to maturity are classified as held-
to-maturity securities and are carried at amortized cost.  Debt securities that
the Company does not have the positive intent or ability to hold to maturity and
equity securities are classified as available-for-sale and are carried at fair
market value.  Increases or declines in fair market value of available-for-sale
securities judged to be other than temporary are recorded as a component of
other income.  Temporary declines are reported as a separate component of
stockholders' equity.

PRECONTRACT COSTS

Precontract costs incurred for a specific anticipated contract are deferred if
the costs can be directly associated with the contract and the recoverability
from the gross profits on the sales generated by the contract is probable.  The
anticipated gross profit must be sufficient to absorb deferred precontract costs
as well as future period costs.  Precontract costs are amortized on a straight-
line basis over the contract period, generally not longer than three years.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost.  Major additions and betterments are
capitalized while repairs and maintenance expenditures which do not improve or
extend the life of the respective assets are expensed when incurred.

                                      F-10
<PAGE>
 
                                   CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


2. ACCOUNTING POLICIES (CONTINUED)

DEPRECIATION AND AMORTIZATION

Leasehold improvements are depreciated using the straight-line method.  For
computer equipment and office furniture and equipment placed in service prior to
fiscal 1993, depreciation is computed using the 150% declining balance method.
Effective January 1, 1993, the Company began depreciating newly-acquired
computer equipment and office furniture and equipment using the straight-line
method.  The effect of the change was not material to the 1993 financial
results.  The estimated useful lives of the related assets are as follows:
<TABLE>
<CAPTION>

<S>                             <C>    
Computer and office equipment    3-7 years
Software                         3-5 years
Furniture and fixtures           7 years
Leasehold improvements           Shorter of lease term or estimated useful life
</TABLE>

 SOFTWARE DEVELOPMENT COSTS
 

 Certain costs of software, developed for internal use, are capitalized
 subsequent to the favorable assessment of technological feasibility.  Costs
 incurred for maintenance and customer support are charged to expense as
 incurred. The Company capitalized software development costs of $180,000 and
 $664,000 during the years ended December 31, 1995 and 1996, respectively.
 Amortization in the amount of $81,252 and $110,165 is included in cost of
 services for the years ended December 31, 1995 and 1996, respectively.
 Software development costs are amortized using the straight-line method.

 GOODWILL AND CUSTOMER CONTRACTS

 Customer contracts are amortized using the straight line method over ten years.
 Recoverability of all intangible assets, including goodwill arising from
 business acquisitions, is reviewed annually or sooner if events or changes in
 circumstances indicate that the carrying amount may exceed fair value.

 REVENUE RECOGNITION

 Revenue is recognized on a capitated (fixed per employee per month), hourly or
 per case basis, in accordance with the specific terms of each contract.
 Typically, revenue is recognized during the contract period as services are
 provided.  Licensing fees are primarily based on use by the customer and are
 recognized as revenue when they are earned.  Deferred revenue represents
 amounts received on contracts in advance of services being performed.

 The majority of the contracts with clients permit cancellation upon 60 to  90
 days' notice.

 INCOME TAXES

 The Company provides for income taxes under the liability method prescribed by
 Statement of Financial Accounting Standards No. 109, "Accounting for Income
 Taxes."  Under this method, deferred income taxes are recognized for the future
 tax consequences of differences between the tax and financial accounting of
 assets and liabilities at each year end.  Deferred income taxes are based on
 enacted tax laws and statutory tax rates applicable to the periods in which the
 differences are expected to effect taxable income.  Valuation allowances are
 established when necessary to reduce deferred tax assets to the amounts
 expected to be realized.

 INCOME (LOSS) PER COMMON SHARE

 Income (loss) per common share data are computed using the weighted average
 number of shares of common stock outstanding and dilutive common equivalent
 shares from stock options, using the treasury stock method.

 RECLASSIFICATIONS
 Certain reclassifications of 1995 amounts in previously issued financial
 statements have been made to permit comparison.

                                      F-11
<PAGE>
 
                                   CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


 3.  CASH MANAGEMENT SYSTEM

 Daily, under the Company's cash management system, the bank notifies the
 Company of checks presented for payment against operating accounts.  The
 Company utilizes available funds and, if necessary, transfers funds from other
 sources, such as short-term investments or available lines of credit, to cover
 the checks presented for payment.

 At December 31, 1994, the Company reflects a book cash overdraft as a result of
 the checks outstanding.

 4.  INVESTMENTS

 At December 31, 1995 and 1996, the Company had no securities that qualified as
 trading or held-to-maturity.
 The following is a summary of available-for-sale securities at  December 31,
 1995 and 1996:
<TABLE>
<CAPTION>
 
                                                        GROSS       GROSS
                                          AMORTIZED   UNREALIZED  UNREALIZED  ESTIMATED
                                             COST        GAIN        LOSS     FAIR VALUE
                                        ------------------------------------------------
<S>                                       <C>         <C>         <C>         <C>
 
December 31, 1995:
U.S. Treasury Securities maturing
in 1 to 5 years                           $1,500,635     $30,975              $1,531,610
                                        ================================================
December 31, 1996:
U.S. Treasury Securities                  $2,001,299     $   479      $  208  $2,001,570
Mortgage-backed Securities                 5,401,714      36,579       4,332   5,433,961
Municipal Bonds                            1,000,535                     535   1,000,000
                                        ------------------------------------------------
Due after one year through five years     $8,403,548     $37,058      $5,075  $8,435,531
                                        ================================================
 
</TABLE>

 For the years ended December 31, 1995 and 1996, the Company sold available-for-
 sale securities with a fair value on the date of sale of $8,392,306 and
 $16,725,858, respectively.  The cost of available-for-sale investments that
 were sold was based on specific identification in determining realized gains
 and losses.  Realized gains of $9,123 and $16,003 on these sales have been
 recognized in the financial statements for the years ended December 31, 1995
 and 1996, respectively. The net unrealized gains on available-for-sale
 securities of $30,975 and $31,983 have been included as a separate component of
 stockholders' equity as of December 31, 1995 and 1996, respectively.

 5.  PROPERTY AND EQUIPMENT

 Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
 
                                     1995          1996
                               ---------------------------
<S>                              <C>           <C>
Computer and office equipment    $ 3,353,569   $ 5,465,545
Software                           1,532,061     2,333,247
Furniture and fixtures               932,619     1,830,141
Leasehold improvements             1,109,122     1,864,375
                               ---------------------------
                                   6,927,371    11,493,308
Accumulated depreciation          (3,772,137)   (5,047,888)
                               ---------------------------
Property and equipment, net      $ 3,155,234   $ 6,445,420
                               ===========================
</TABLE>
6.   ADVANCES UNDER LETTERS OF CREDIT

In May 1995, the Company entered into an arrangement with a bank whereby the
bank would issue letters of credit amounting to $283,000 on behalf of the
Company.  Letters of credit outstanding at December 31, 1996 amount to $192,000
and are to be maintained as security for payments under a furniture lease
agreement.

                                      F-12
<PAGE>
 
                              CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

7.   NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
<TABLE> 
<CAPTION> 
                                             1995         1996
                                        ------------------------
<S>                                       <C>          <C>
Capital lease obligations, payable to
 various leasing companies, bearing
 interest rates ranging from 9% to 15%,
 including interest                       $  163,128   $  83,773  
Notes payable to former shareholders       1,043,615     100,000
Note payable for leasehold improvements                  314,789
Other - insurance financing                  155,994
                                          ----------------------
 
                                           1,362,737     498,562
Less current maturities                     (545,662)   (154,597)
                                          ----------------------
                                          $  817,075   $ 343,965
                                          ======================
</TABLE>

The fair value of notes payable and capital lease obligations approximates the
carrying value.  Principal maturities of notes payable and capital lease
obligations are as follows:
<TABLE>
<S>                                          <C>
             1997                             $161,045
             1998                              147,984
             1999                               74,473
             2000                               76,030
             2001                               47,603
                                              --------     
                                               507,135
             Less imputed interest              (8,573)
                                              --------                  
             Present value of obligations     $498,562
                                              ========
</TABLE>

At December 31, 1995, the Company recorded the balance of the notes payable
insurance financing of $155,994 as prepaid expenses; therefore, these amounts
have been excluded from the operating and financing activities disclosed in the
statement of cash flows for the year ended December 31, 1995.

8.   STOCK OPTION PLANS

The Company has elected to follow Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 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, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of 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 1995
and 1996 respectively:  risk-free interest rates of 6.09% and 6.18%, volatility
factors of the expected market price of the Company's common stock of 1.06% and
 .98% and a weighted average expected life of the option of 5 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>
 
                                   CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


8.  STOCK OPTION PLANS (CONTINUED)

For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.  The Company's pro
forma information for the years ended December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
 
                                    1995          1996
                              ---------------------------
<S>                             <C>           <C>
 
Pro forma net loss              $(1,534,000)  $(2,589,000)
                              ===========================
Pro forma net loss per share    $      (.32)  $      (.45)
                              ===========================
</TABLE>

The Company has reserved 1,337,500 shares of common stock for issuance under
stock option plans established in 1986 and 1991.  The Company has also granted
622,760 non-plan stock options of which 68,000, 110,944 and 223,904 have been
exercised as of December 31, 1994, 1995 and 1996, respectively.  Other than the
remaining 398,856 non-plan stock options outstanding at December 31, 1996, no
shares have been reserved for non-plan stock options.

Plan and non-plan stock options activity and related information for the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
 
                                                          DECEMBER 31,
                                              1994           1995            1996
                                        ----------------------------------------------
 
<S>                                       <C>            <C>            <C>
Outstanding at beginning of year               441,315        377,038        1,267,853
Granted                                         68,552      1,004,509          429,589
Canceled                                       (33,531)       (59,234)        (172,241)
Exercised                                      (99,298)       (54,460)        (129,508)
                                        ----------------------------------------------
Outstanding at end of year                     377,038      1,267,853        1,395,693
                                        ==============================================
Price range of outstanding options        $0.11-$15.24   $2.50-$12.08   $2.50 - $13.38
                                        ==============================================
Price range of options exercised          $0.11-$ 3.73   $0.11-$ 4.80   $2.50 - $ 9.38
                                        ==============================================
Exercisable at end of year                     307,938        594,925          811,132
                                        ==============================================
Available for grant at end of year             232,348          -----          175,338
                                        ==============================================
 
The weighted average exercise prices
 for 1995 and 1996 are as follows:
 
                                                                    DECEMBER 31,
                                                               1995             1996
                                                        --------------------------------
 
Granted                                                  $       4.50   $        11.10
Canceled                                                 $       8.00   $         7.90
Exercised                                                $       1.70   $         3.40
Outstanding at end of year                               $       4.50   $         6.25
Exercisable at end of year                               $       4.20   $         5.50
 
</TABLE>

The weighted average fair value of options granted during the years ended
December 31, 1995 and 1996 are $2.60 and $8.80, respectively.  Stock options
will expire on various dates through February 2004.  The weighted average
remaining contractual life of options outstanding at December 31, 1996 is 3.7
years.

                                      F-14
<PAGE>
 
                                   CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


9.  INCOME TAXES

The approximate effect of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities as of December 31 is as follows:
<TABLE>
<CAPTION>
                                              1995          1996
                                        ---------------------------
<S>                                       <C>           <C>
Deferred tax assets:
 Bad debt reserve                         $    69,000   $    87,000
 Expense accruals                             264,000       282,000
 Net operating loss carryforwards           2,860,000     2,305,000
 Valuation allowance                       (3,078,000)   (2,574,000)
                                        ---------------------------
                                              115,000       100,000
Deferred tax liabilities:
 Change in accounting method               
    from cash to accrual                     (204,000)     (150,000)
  Depreciation                               (129,000)     (168,000)
                                        ---------------------------
                                             (333,000)     (318,000)
                                        ---------------------------
Net deferred tax liability                $  (218,000)  $  (218,000)
                                        ===========================
</TABLE>

At December 31, 1996, the Company has available for federal and state income tax
purposes net operating loss carryforwards of approximately $6 million which
expire through 2010.  The amount of NOL carryforwards that can be utilized in
any future year are limited due to "equity structure shifts" in 1995 involving
"5% shareholders" (as these terms are defined in Section 382 of the Internal
Revenue Code), which resulted in a more than 50 percentage point change in
ownership.  The utilization of these NOL carryforwards may be subject to further
limitation provided by the Internal Revenue Service Code of 1986 and similar
state provisions.

During 1995, the Company changed from the cash receipts and disbursements method
to the accrual method of accounting for federal income taxes for one of its
subsidiaries.  As such, the excess of accrual basis income over cash basis
income earned in prior years of $600,000 is taxable over four years.  (At
December 31, 1996, the remaining excess is $405,000).

State excise taxes have been included in general and administrative expenses in
the consolidated statements of operations.

The following is a summary of the items which cause the effective federal tax
expense to differ from the statutory federal tax expense:
<TABLE>
<CAPTION>
 
                                                YEAR ENDED DECEMBER 31,
                                              1994         1995        1996
                                        -------------------------------------
 <S>                                     <C>           <C>         <C>
       Statutory federal tax (benefit)    $(1,598,000)  $ (27,000)  $  49,000
       State income taxes, net of            (296,000)     (3,000)    (16,000)
        federal benefit
       Effect of nondeductible                381,000     404,000
        reorganization costs
       Effect of goodwill write-off           780,000
       Other                                   23,000    (126,000)     86,000
       Effect (utilization) of net            710,000    (248,000)   (119,000)
        operating loss carry forward
                                          -----------------------------------
       Effective federal tax              $      ---    $    ---    $    ---
                                          ===================================
 
</TABLE>

                                      F-15
<PAGE>
 
                                   CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


10.  LEASES

The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expire at various dates through April 2002.

The terms of the lease agreements at the Boston, Massachusetts location,
scheduled to expire in May 2000, and the Irvine, California location, scheduled
to expire in September 2000 include base rent increases over the terms of the
leases and options to renew for one five-year term at the then prevailing rental
rate.  The total amount of the base rent payments is being charged to expense on
the straight-line method over the term of the lease.  The Company has recorded a
deferred credit to reflect the excess of rent expense over cash payments since
inception of the lease.

The Company received free rent concessions under terms of lease agreements at
the Boston, Burlington, Massachusetts and Los Angeles, California locations.
Total lease payments under these agreements are amortized on a straight-line
basis over the terms of the related leases.  The excess of the expense incurred
over the cash paid is included as deferred rent in the accompanying balance
sheets.

At December 31, 1996, future minimum annual rental commitments under all of the
lease agreements described above are as follows:
<TABLE>
<CAPTION>
 
                    <S>           <C>
                    1997          $1,893,671
                    1998           1,707,245
                    1999           1,527,165
                    2000           1,140,647
                    2001             312,355
                    Thereafter        57,254
                                ------------
                                  $6,638,337
                                ============
</TABLE>
Total rent expense amounted to $1,039,283, $1,199,153 and $1,432,851 for the
years ended December 31, 1994, 1995 and 1996, respectively.

11.  COMMITMENTS AND CONTINGENCIES

Certain of the Company's service agreement contracts have provisions which allow
clients to audit the Company's performance under the contracts.

The funding for CORE's WorkAbility software was provided by Chrysler Corporation
in exchange for a perpetual license to use such software and repayment of 140%
of the development costs (approximately $2.8 million).  The agreement states
that repayment of such development costs is contingent upon CORE's collection of
certain licensing fees.  During 1994 and 1995, licensing fees of $156,000 and
$37,000, respectively, were collected.  No such licensing fees were collected in
1996.  Royalties of $7,720 are accrued and payable to Chrysler at December 31,
1996.  No payments of royalties were made during 1994, 1995 or 1996.

The Company has several 401(k) profit sharing plans covering all employees
meeting certain service requirements.  The Plans provide for discretionary
contributions by the Company.  Matching contributions for the years ended
December 31, 1994, 1995 and 1996 were $23,229, $54,017 and $131,948,
respectively, and are included in general and administrative expenses in the
accompanying statements of operations.

                                      F-16
<PAGE>
 
                                   CORE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


12.  RELATED PARTIES

The notes receivable from officers are due in February and April, 1997 and
accrue interest at current market rates.

13.  SIGNIFICANT CUSTOMERS

The Company has a contract with a major customer which accounted for
approximately 13% of total revenues for the year ended December 31, 1996.  The
Company also has a contract with a significant customer which represented 12% of
1994 revenues.  No other client represented 10% or more of revenue during the
years 1994, 1995 and 1996.

14.  FOURTH QUARTER ADJUSTMENTS  (UNAUDITED)

During the fourth quarter of 1994, the Company recognized the following unusual
or infrequently occurring items:
<TABLE>
<CAPTION>
 
                                            1994
                                          --------         
 <S>                                     <C>
         Reorganization costs             $335,423
         Realized loss on permanent        
          decline in fair market value
          of investments                   157,774
         Severance accrual                  57,130
         Increase in allowance for          
          doubtful accounts                 50,000
                                          --------
                                          $600,327
                                          ========
</TABLE>
There were no unusual or infrequently occurring items during the fourth quarter
of 1995 or 1996.

                                      F-17
<PAGE>
 
                                   CORE, INC.


                       VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
 
                                         Balance at       Charge to    
                                        Beginning of      Costs and     Deductions-      Balance at
            Description                   Period          Expenses      Describe        End of Period
----------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                  <C>                <C>          <C>
 1996
 Allowance for doubtful accounts            $170,337         $52,026(a)       $   438(b)       $221,925
 1995
 Allowance for doubtful accounts            $181,629         $14,375          $25,667(b)       $170,337
 1994
 Allowance for doubtful accounts            $174,798         $83,050          $76,219(b)       $181,629
 
 
 
</TABLE>

(a) The allowance for doubtful accounts was increased by a reserve against
receivables which related to revenues recorded during the current year and thus,
charged directly against revenues during the current year.

(b) The allowance for doubtful accounts was reduced by the actual write-off of
receivables which had been reserved for in previous years and deemed
uncollectible.

                                      F-18