SHARED MEDICAL SYSTEMS CORP, 10-K, 1995-03-31

SHARED MEDICAL SYSTEMS CORP
10-K, 1995-03-31
COMPUTER PROCESSING & DATA PREPARATION

Previous: SERVICE CORPORATION INTERNATIONAL, 10-K, 1995-03-31

Next: SHAW INDUSTRIES INC, 10-K, 1995-03-31

<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ___________ to___________
Commission file number 0-7416
SHARED MEDICAL SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1704148
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)

51 Valley Stream Parkway
Malvern, Pennsylvania 19355
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (610) 219-6300

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

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None Not Applicable

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)

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

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

The aggregate market value of the voting stock (Common Stock) held by non-
affiliates of the registrant as of February 28, 1995, was $742,506,000. See page
8 herein for assumptions on which this calculation is based.

On February 28, 1995, there were 23,046,452 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.

Certain portions of the Company's Annual Report to Stockholders for the year
ended December 31, 1994 are incorporated by reference into Part I and Part II of
this Form 10-K. Certain portions of the Company's definitive Proxy Statement to
be mailed to stockholders on or about April 7, 1995 are incorporated by
reference into Part III and Part IV of this Form 10-K.
<PAGE>

Part I

Item 1. Business.

The Company, incorporated in Delaware in January 1969, and its subsidiaries
provide computer-based information processing systems and associated services
to the healthcare industry in North America and Europe.

The Company's products are offered to hospitals of all types (urban, teaching,
suburban, rural, specialty), proprietary hospital companies, not-for-profit
multihospital groups, and integrated health networks. The Company's products are
also offered to healthcare organizations such as clinics, physician groups,
medical schools, public health departments, and home healthcare organizations.
These products include a full range of financial, patient management, clinical,
ambulatory, and decision support software systems that use diverse computing and
networking technologies, ranging from remote processing, to distributed
processing systems, to onsite systems. The Company also provides professional
services related to its information processing systems business.

Domestically, the Company markets its products and provides installation
services and ongoing technical and educational support with a field staff
working from branch offices. At its Corporate Headquarters and Information
Services Center, the Company has a customer service staff, applications
specialists, communications and computer operations personnel who assist
customers in their day-to-day use of the Company's products, and system
designers and programmers who work to improve existing programs and develop
additional data processing products. In Europe, the Company markets, installs,
and supports its products through local offices in nine countries.

The Company's primary markets are acute-care hospitals, generally with 100 or
more beds, multi-entity healthcare corporations, integrated health networks,
physician groups, and other healthcare providers. In the United States, which
has historically been the Company's most significant market, the Company
currently has contracts with hospitals in 47 states, the District of Columbia,
and Puerto Rico.

On September 30, 1994, the Company acquired all of the outstanding capital stock
of GTE Health Systems Incorporated ("GTEHS"), a provider of information systems
to the healthcare industry, for $17,287,000. Upon its acquisition by the
Company, GTEHS was merged into the Company and operates as a division of the
Company.

In 1981, the Company entered the healthcare information processing systems and
services market in Europe. The Company currently has hospital contracts in
Belgium, the Czech Republic, France, Germany, the Netherlands, Hungary, Ireland,
Italy, Poland, Portugal, Spain, and the United Kingdom.

For financial information by geographic area, refer to page 34 of the Company's
1994 Annual Report to Stockholders, Notes to Consolidated Financial Statements,
Business Segment Information (Note 10), which is incorporated herein by
reference.
<PAGE>

Although the number of stand-alone acute-care hospital beds has declined
slightly in recent years, the demand for integrated information systems in the
healthcare industry has grown due to the emergence of multi-entity healthcare
organizations and integrated health networks, increases in information required
by the government and private insurers, additional medical services provided by
healthcare organizations, and the needs related to health maintenance
organizations and preferred provider organizations. In addition, cost
containment pressures on healthcare providers, insurers, and employers require
more sophisticated information systems and services.

Services and Systems Offered
----------------------------

The principal healthcare information systems and related services offered by
the Company are:

Healthcare Information Systems -
------------------------------

. Financial Systems, which consist of a full range of financial functions
that include patient accounting (including billing and receivables),
accounting and financial management, materials management, personnel, and
property.

. Patient Management Systems, which assist in the administration of patient
care through specialized programs for various hospital departments, such
as admissions, outpatient, utilization review, and medical records.

. Clinical Systems, which automate many labor-intensive tasks performed in
the nursing, radiology, laboratory, pharmacy, and other departments
within healthcare organizations. These systems also facilitate
communications among departments.

. Decision Support Systems, which provide access to a range of strategic
information collected from the clinical, financial, and patient
management systems.

. Physician Information Systems, which provide information processing and
administrative support to physician groups, clinics, and medical schools
with features such as scheduling, electronic claims processing, automated
billing and rebilling, and online collections.

. Ambulatory Systems, which provide integrated systems that facilitate the
sharing of clinical and financial information between healthcare
providers in non-acute care settings.
<PAGE>

. Systems for integrated health networks, which are generally comprised of
a variety of healthcare delivery organizations, such as acute-care
hospitals, skilled nursing facilities, home health agencies,
rehabilitation facilities, clinics, physician practices, and others.
These systems include patient indexes that provide for rapid
identification of patients anywhere in the network, scheduling of
network-wide resources, a cumulative electronic patient record,
sophisticated software that addresses the issues involved with managed
care, and communications facilities that enhance communications among
all elements of the network.

Healthcare Data Exchange Systems - which facilitate the sharing and
--------------------------------
standardization of information, such as eligibility verifications, claims
and remittance transmissions, throughout the healthcare industry.

Professional Services - These services consist of a variety of activities
---------------------
related to the Company's healthcare information processing systems. These
professional services include system installation, support, and education.
In addition, the Company provides specialized consulting services for the
design and integration of software and networks, facilities management,
information systems planning, and system-related process reengineering.

The Company's healthcare information systems and related services operate on
computer systems that range from personal computers to minicomputers to
mainframes. These systems are offered on computers operating at the
customer's site, at the Company's Information Services Center (i.e. remotely),
or as part of a distributed network. Distributed network systems generally
process the financial applications at the Company's Information Services
Center, while the patient management and clinical applications operate on
computers located at the customer's site or at the Company's Information
Services Center. These systems are also offered with networking features that
enable multi-entity healthcare organizations to process information for
affiliated hospitals, physician groups and clinics.

The service and system fees earned by the Company for the years ended
December 31, 1994, 1993, and 1992 were $504,386,000, $452,797,000, and
$421,620,000, respectively. The hardware at the customer sites associated with
these services and systems, can be sold or leased to the Company's customers.
Hardware sales for the years ended December 31, 1994, 1993, and 1992 were
$46,383,000, $48,486,000, and $48,004,000, respectively.

Customers
---------

The Company's services and systems are provided to customers under various
contractual agreements. These agreements may be structured as fixed-period
contracts, with terms generally ranging from one to ten years, or perpetual
license contracts. Fixed-period agreements produce recurring revenues over the
term of each contract, in contrast to perpetual license agreements, where
software fees are recognized over the installation period and the related
support fees are recognized over the term of the support agreement. In 1994,
1993, and 1992, no single customer accounted for 10% or more of consolidated
revenues.
<PAGE>

Revenues from individual customers will vary, depending on the number and type
of the Company's services and systems that are used. Because of the high fixed
costs of the Company's operations, the loss of any customer under a fixed-period
contract would have the effect of reducing the Company's net income by a greater
percentage than the percentage of total revenues lost.

Presently, no more than one quarter of the Company's fixed-period contracts
expire in any future year. Although the Company strives to retain its customers,
not all of the Company's past contracts have been renewed, and there can be no
assurance that existing customers will either renew their contracts or convert
to another type of system offered by the Company upon the expiration of their
current contract.

Competition
-----------

The Company experiences intense competition in the healthcare information
systems and services market. Virtually all hospitals with more than 100 beds use
some form of computer-based information processing. The Company has competition
from a number of firms. The Company's competitors vary in size, in geographical
coverage, and in scope and breadth of products and services offered.

The Company considers itself to be a major supplier of information processing
systems and services to healthcare organizations. Some of its competitors are
divisions of major corporations. These corporations are considerably larger,
financially stronger, and more diversified than the Company.

Competition among those providing information processing systems and services
to healthcare organizations, physician groups, and other healthcare providers
is based upon the breadth and reliability of the systems and services provided
and, to the extent that the services are comparable, upon price.

Research and Development
------------------------

The Company is continually investigating the feasibility of enhancing existing
systems and developing new systems to meet the information processing needs of
healthcare organizations. Profitability of newly developed systems and services
depends upon attainment of sufficient sales volumes and continuing improvement
and efficiency of the systems.

In addition to developing its own computer software, the Company uses computer
software from third parties. Some of the Company's development efforts are
directed towards modification of this software to enable it to meet more fully
the Company's specifications.

The Company expenses all research and non-capitalized development costs, which
generally consist of costs incurred to establish the technological feasibility
of internally produced computer software. These expenses are primarily for
computer costs and salaries of personnel. These expenses amounted to $39,226,000
in 1994, $37,087,000 in 1993, and $33,703,000 in 1992.
<PAGE>

The Company capitalizes the cost of certain internally produced computer
software and purchased software. Capitalization for internally produced software
begins when a project reaches technological feasibility and ceases when the
software is available for general release to customers. Internally produced
computer software costs, net of accumulated amortization, were $31,657,000 and
$29,222,000 as of December 31, 1994 and 1993, respectively. Amortization related
to internally produced software amounted to $6,290,000 in 1994, $5,464,000 in
1993, and $4,894,000 in 1992. Purchased software, net of accumulated
amortization, was $7,144,000 and $4,325,000 as of December 31, 1994 and 1993,
respectively. Computer software is amortized using the straight-line method over
its expected useful life, which is generally five years.

Personnel
---------

As of December 31, 1994, the Company had a total of 4,370 full-time employees.

Item 2. Properties.

The Company purchased 116 acres of land in Chester County, Pennsylvania in 1978.
The Company has constructed three buildings on this site; an information
services center (81,000 square feet), which was put into service in 1979, and
two office buildings with an aggregate of 431,000 square feet, the first of
which was placed in service in 1981 and the second of which was placed in
service in 1983. These office buildings serve as the Company's corporate
headquarters. In addition, the Company leases office space near the Company's
corporate headquarters, which is utilized by certain corporate-based operations.
The Company also leases office space in most major metropolitan areas in the
United States for marketing, installation, and support personnel and in various
locations for its European operations. In 1993, the Company acquired an office
building in Spain for its local operations. These facilities are adequate for
existing operations.

In 1986, the Company purchased additional land (241 acres) in Chester County,
Pennsylvania for possible future expansion.

As of December 31, 1994, the Company's Information Services Center, which is
used primarily to process customer information and to support the Company's
internal software development, contains one 5995-8650 AMDAHL processor, and
three IBM 9021-962 processors, all of which were obtained under operating
leases. The Company's Information Services Center also includes related
mainframe peripherals and network communications equipment that has been
purchased or obtained under leases. These leases are generally contracted on a
month-to-month basis or under fixed-period agreements with terms that range from
one to five years.

Item 3. Legal Proceedings.

None.
<PAGE>

ITEM 4. Submission of Matters to a Vote of Security Holders.

None.

Executive Officers of the Registrant

Listed below are the name, age as of December 31, 1994, position(s) with the
Company and principal occupation(s) for the past five years of each of the
executive officers of the Company.

Positions with Company and Principal
Name Age Occupation(s) - Past Five Years
------------------- --- -------------------------------------------------

R. James Macaleer 60 Chairman of the Board and Chief Executive Officer
of the Company since 1969.

Marvin S. Cadwell 51 President and Chief Operating Officer of the
Company since March 1995. Prior to this, Mr.
Cadwell served as Executive Vice President of the
Company since October 1993; Senior Vice President,
Managing Director and Chief Operating Officer of
the Company's SMS Europe operations, March 1992 -
March 1995; and Vice President, Managing Director
and Chief Operating Officer of the Company's SMS
Europe operations, September 1986 - March 1992.

James C. Kelly 55 Secretary of the Company since June 1990. Prior
to this, Mr. Kelly served as Executive Vice
President, Treasurer, and Secretary of the
Company, May 1985 - June 1990.

Francis W. Lavelle 45 Senior Vice President of the Company since
December 1993. Prior to this, Mr. Lavelle served
as Vice President of New Business Development,
January 1991 - December 1993; and National Sales
and Installation Manager of the Company's
Laboratory Division, September 1988 - December
1990.

Marion G. Tomlin 55 Senior Vice President and General Manager of the
Company's Turnkey Systems Division since January
1991. Prior to this, Mr. Tomlin served as Senior
Vice President of the Installation and Support
group of the Company's Hospital Systems Division,
February 1988 - January 1991.
<PAGE>

Positions with Company and Principal
Name Age Occupation(s) - Past Five Years
------------------- --- ----------------------------------------------

Michael B. Costello 51 Vice President of Administration and Corporate
Communications of the Company since January 1991.
Prior to this, Mr. Costello served as Vice
President of Administration of the Company,
February 1990 - January 1991; and Vice President
of Administration and Human Resources of the
Company, May 1986 - February 1990.

Terrence W. Kyle 44 Vice President of Finance, Treasurer and Assistant
Secretary of the Company since June 1990. Prior
to this, Mr. Kyle served as Vice President of
Finance of the Company, May 1985 - June 1990.

Edward J. Grady 42 Controller and Assistant Treasurer of the Company
since February 1993. Prior to this, Mr. Grady
served as Controller of the Company, May 1985 -
February 1993.

Bonnie L. Shuman 46 General Counsel and Assistant Secretary of the
Company since June 1990. Prior to this, Ms.
Shuman served as General Counsel of the Company,
September 1985 - June 1990.
-------------------------------------------------------------------------------

In calculating the aggregate market value of voting stock held by non-affiliates
as shown on the cover page of this Form 10-K Report, the Company has included
all of its directors, and only its directors, as affiliates of the Company. This
is not an admission by the Company that any or all of its directors are in fact
affiliates. The aggregate market value of voting stock held by non-affiliates
was computed by using the average bid and asked prices of the stock as of
February 28, 1995.
<PAGE>

Part II

The following information contained in the Company's Annual Report to
Stockholders for the year ended December 31, 1994 is incorporated herein by
reference:

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.

Page 23, Section titled Market Price and Dividends Declared Per Share - "1994"
and "1993" columns and related footnote

Item 6. Selected Financial Data.

Page 23, Section titled Summary of Consolidated Operations - "Revenues", "Net
Income", and "Net Income Per Share" line items

Page 23, Section titled Summary of Consolidated Financial Position - "Total
Assets" and "Long-Term Obligations" line items

Page 23, Section titled Operating Ratios and Selected Financial Data - "Cash
Dividends Declared Per Share" line item

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Pages 18 through 22, Management's Discussion and Analysis of Financial
Condition and Results of Operations

Item 8. Financial Statements and Supplementary Data.

Pages 24 through 34

Page 35, Report of Independent Public Accountants

Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.
<PAGE>

Part III

The following information contained in the Company's definitive Proxy Statement
to be mailed to stockholders on or about April 7, 1995 is incorporated herein by
reference:

Item 10. Directors and Executive Officers of the Registrant.

Section titled "Security Ownership": subsection titled "Directors and
Management": columns "Name of Beneficial Owner" and "Director Since" for the
section titled "Directors and Nominees" and related footnotes

Section titled "Compliance with Section 16(a) of the Exchange Act"

(For information concerning the Company's Executive Officers see pages 7 and 8
hereof, section titled "Executive Officers of the Registrant")

Item 11. Executive Compensation.

Section titled "Election of Directors": the subsection titled "Compensation of
Directors"

Section titled "Executive Compensation": subsections titled "Compensation
Committee Interlocks and Insider Participation" and "Compensation Summaries"

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Section titled "Security Ownership": subsections titled "Principal
Stockholders"; and "Directors and Management"; columns "Name of Beneficial
Owner", "Common Stock Beneficially Owned", and "Percent of Class" and
related footnotes

Item 13. Certain Relationships and Related Transactions.

Section titled "Executive Compensation": subsections titled "Compensation
Committee Interlocks and Insider Participation", paragraphs two and three

<PAGE>

Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) The following documents are filed as part of this report:

1. Financial Statements - the following consolidated financial
statements included on pages 24 through 34 in the Company's Annual
Report to Stockholders for the year ended
December 31, 1994 are included in this report.

. Consolidated Balance Sheet as of December 31, 1994 and 1993 (pages
24 and 25)

. Consolidated Statement of Income for the years ended
December 31, 1994, 1993, and 1992 (page 26)

. Consolidated Statement of Cash Flows for the years ended
December 31, 1994, 1993, and 1992 (page 27)

. Consolidated Statement of Stockholders' Investment for the years
ended December 31, 1994, 1993, and 1992 (page 28)

. Notes to Consolidated Financial Statements for the years ended
December 31, 1994, 1993, and 1992 (pages 29 through 34)

. Report of Independent Public Accountants (page 35)

. Selected Quarterly Financial Data (Unaudited) for the years
ended December 31, 1994 and 1993 as reported in Notes to
Consolidated Financial Statements (page 33)

2. Financial Statement Schedules - the following Financial Statement
Schedules required by Article 5 of Regulation S-X are included in
this report:

. Report of Independent Public Accountants

. Schedule II - Valuation and Qualifying Accounts

. Schedules omitted - the following schedules are omitted since they
are not required, or not applicable: I, III, IV, and V
<PAGE>

3. The following exhibits are included in this report:

No. Description
--- ----------------------------------------------------------------

(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession

Stock Purchase Agreement dated September 30, 1994 between Shared
Medical Systems Corporation and GTE Directories Corporation
(filed as Exhibit (2) to the Company's Form 8-K dated
September 30, 1994)*

(3) Articles of Incorporation and By-Laws -

Certificate of Amendment of Certificate of Incorporation dated
June 19, 1992 (filed as Exhibit (4) to the Company's Form 10-Q
Report for the quarter ended June 30, 1992)*, By-laws as amended
through January 29, 1992 (filed as Exhibit (3) to the Company's
Form 10-K Report for the year ended December 31, 1991)*

(10) Material Contracts -

Deferred compensation agreements:**

R. James Macaleer (filed as Exhibit (10) to the Company's
Form 10-K Report for the year ended December 31, 1990)*

James C. Kelly (filed as Exhibit (10) to the Company's Form
10-K Report for the year ended December 31, 1993)*

Performance bonus plans - 1995:**

R. James Macaleer

Marvin S. Cadwell

Performance bonus plans - 1994:**

R. James Macaleer

Marvin S. Cadwell

Marion G. Tomlin

*Previously filed as indicated and incorporated herein by reference.

**May be deemed a management contract or compensatory arrangement.
<PAGE>

No. Description
---- ----------------------------------------------------------------

Insurance agreement:**

Marion G. Tomlin (filed as Exhibit (10) to the Company's
Form 10-K Report for the year ended December 31, 1991)*

Employment agreements:**

Marvin S. Cadwell (filed as Exhibit (10) to the Company's
Form 10-K Report for the year ended December 31, 1991)*

Marion G. Tomlin (filed as Exhibit (10) to the Company's
Form 10-K Report for the year ended December 31, 1991)*

Stock Option Plans:

1987 Non-Qualified Stock Option Plan for Non-Employee
Directors (filed as Exhibit (10) to the Company's Form
10-K Report for the year ended December 31, 1993)*

1991 Non-Qualified Stock Option Plan for Non-Employee
Directors (filed as Exhibit B to the Company's Proxy
Statement for the Annual Meeting of Stockholders held on
May 1, 1991)*

(13) Annual Report to Stockholders for the year ended
December 31, 1994***

(21) Subsidiaries of the Registrant

(23) Consent of Independent Public Accountants

(27) Financial Data Schedule

*Previously filed as indicated and incorporated herein by reference.

**May be deemed a management contract or compensatory arrangement.

***With the exception of the material specifically incorporated by reference in
Part I and Part II of this Form 10-K, the Annual Report to Stockholders for the
year ended December 31, 1994 is not to be deemed "filed" as part of this Form
10-K.

<PAGE>

(b) The following reports on Form 8-K were filed during the three month
period ended December 31, 1994:

On October 14, 1994, the Company filed a Form 8-K reporting Item 2,
"Acquisition or Disposition of Assets" and Item 7, "Financial Statements
and Exhibits" with respect to the Company's acquisition of all of the
outstanding capital stock of GTE Health Systems Incorporated ("GTEHS")
from GTE Directories, its sole stockholder. No financial statements were
included in this filing.

On December 13, 1994, the Company filed a Form 8-K/A, Amendment No. 1,
amending Item 2, "Acquisition or Disposition of Assets" and Item 7,
"Financial Statements and Exhibits" of the Form 8-K filed on
October 14, 1994 with respect to the Company's acquisition of GTEHS.
Included in this filing were:

(1) Financial statements of the business acquired.

. MedSeries4 Operations of GTE Health Systems Incorporated Financial
Statements as of December 31, 1993 and 1992 together with Report
of Independent Public Accountants

. MedSeries4 Operations of GTE Health Systems Incorporated Statements
of Operations for the Nine Months Ended September 30, 1994
(Unaudited) and 1993 (Unaudited)

(2) Pro Forma financial information.

. Shared Medical Systems Corporation Pro Forma Combined Income
Statement for the Year Ended December 31, 1993 (Unaudited)

. Shared Medical Systems Corporation Pro Forma Combined Income
Statement for the Nine Months Ended September 30, 1994 (Unaudited)

. Shared Medical Systems Corporation Consolidated Balance Sheet as of
September 30, 1994 Unaudited which reflects the acquisition of GTE
Health Systems Incorporated's MedSeries4 business

. Shared Medical Systems Corporation Notes to Pro Forma Combined
Financial Statements for the Year Ended December 31, 1993
(Unaudited) and the Nine Months Ended September 30, 1994
(Unaudited)
<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.

SHARED MEDICAL SYSTEMS CORPORATION

By: /S/ R. James Macaleer Date: March 31, 1995
----------------------------------- --------------
R. James Macaleer - Chairman of the
Board and Chief Executive Officer

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

By: /S/ R. James Macaleer Date: March 31, 1995
----------------------------------- --------------
R. James Macaleer - Chairman of the
Board and Chief Executive Officer

By: /S/ Raymond K. Denworth, Jr. Date: March 31, 1995
----------------------------------- --------------
Raymond K. Denworth, Jr. - Director

By: /S/ Frederick W. DeTurk Date: March 31, 1995
----------------------------------- --------------
Frederick W. DeTurk - Director

By: /S/ Josh S. Weston Date: March 31, 1995
----------------------------------- --------------
Josh S. Weston - Director

By: /S/ Harvey J. Wilson Date: March 31, 1995
----------------------------------- --------------
Harvey J. Wilson - Director

By: /S/ Jeffrey S. Rubin Date: March 31, 1995
----------------------------------- --------------
Jeffrey S. Rubin - Director

By: /S/ Terrence W. Kyle Date: March 31, 1995
----------------------------------- --------------
Terrence W. Kyle - Vice President
of Finance, Treasurer and Assistant
Secretary

By: /S/ Edward J. Grady Date: March 31, 1995
----------------------------------- --------------
Edward J. Grady
Controller and Assistant Treasurer
<PAGE>

[Arthur Andersen LLP Logo Appears Here]

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Shared Medical Systems Corporation:

We have audited in accordance with generally accepted auditing standards, the
financial statements included in Shared Medical Systems Corporation's 1994
Annual Report to Stockholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 6, 1995. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

/s/ Arthur Andersen LLP

Arthur Andersen LLP

Philadelphia, Pennsylvania
February 6, 1995
<PAGE>

SCHEDULE II

SHARED MEDICAL SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
-----------------------------------------------------
<TABLE>
<CAPTION>

Balance Balance
Beginning of Charges to Additions/ End of
Year Expenses Deductions Year
------------ ---------- --------------- -----------
<S> <C> <C> <C> <C>

Reserve for Doubtful Accounts:

December 31, 1994 $4,279,000 $818,000 $ 220,000 (1) $5,317,000
========== ======== =============== ==========

December 31, 1993 $4,991,000 $810,000 $(1,522,000) (2) $4,279,000
========== ======== =============== ==========

December 31, 1992 $5,072,000 $491,000 $ (572,000) (2) $4,991,000
========== ======== =============== ==========
</TABLE>

(1) Write-offs of uncollectible accounts offset by additions resulting from
the Company's acquisition of GTE Health Systems Incorporated on
September 30, 1994.

(2) Write-offs of uncollectible accounts
<PAGE>

EXHIBIT INDEX

No. Description
---- ---------------------------------------

(2) Plan of Acquisition, Reorganization,
Arrangement, Liquidation or Succession

Stock Purchase Agreement dated
September 30, 1994 between Shared Medical
Systems Corporation and GTE Directories
Corporation (filed as Exhibit (2) to the
Company's Form 8-K dated September 30, 1994)*

(3) Articles of Incorporation and By-Laws -

Certificate of Amendment of Certificate of
Incorporation dated June 19, 1992 (filed
as Exhibit (4) to the Company's Form 10-Q
Report for the quarter ended June 30, 1992)*,
By-laws as amended through January 29, 1992
(filed as Exhibit (3) to the Company's
Form 10-K Report for the year ended
December 31, 1991)*

(10) Material Contracts -

Deferred compensation agreements:**

R. James Macaleer (filed as Exhibit (10)
to the Company's Form 10-K Report for
the year ended December 31, 1990)*

James C. Kelly (filed as Exhibit (10)
to the Company's Form 10-K Report for
the year ended December 31, 1993)*

Performance bonus plans - 1995:**

R. James Macaleer

Marvin S. Cadwell

Performance bonus plans - 1994:**

R. James Macaleer

Marvin S. Cadwell

Marion G. Tomlin

*Previously filed as indicated and incorporated herein by reference.

**May be deemed a management contract or compensatory arrangement.
<PAGE>

No. Description
---- ---------------------------------------
Insurance agreement:**

Marion G. Tomlin (filed as Exhibit (10)
to the Company's Form 10-K Report for
the year ended December 31, 1991)*

Employment agreements:**

Marvin S. Cadwell (filed as Exhibit (10)
to the Company's Form 10-K Report for
the year ended December 31, 1991)*

Marion G. Tomlin (filed as Exhibit (10)
to the Company's Form 10-K Report for
the year ended December 31, 1991)*

Stock Option Plans:

1987 Non-Qualified Stock Option Plan for
Non-Employee Directors (filed as Exhibit
(10) to the Company's Form 10-K Report
for the year ended December 31, 1993)*

1991 Non-Qualified Stock Option Plan for
Non-Employee Directors (filed as Exhibit
B to the Company's Proxy Statement for
the Annual Meeting of Stockholders held
on May 1, 1991)*

(13) Annual Report to Stockholders for the year
ended December 31, 1994***

(21) Subsidiaries of the Registrant

(23) Consent of Independent Public Accountants

(27) Financial Data Schedule

*Previously filed as indicated and incorporated herein by reference.

**May be deemed a management contract or compensatory arrangement.

<PAGE>

Exhibit (10)

1995 INCENTIVE COMPENSATION PLAN FOR R. JAMES MACALEER
------------------------------------------------------

If SMS achieves its EPS goal for 1995, the Incentive Compensation for 1995 will
be based on the combined sales results (NPV) of all SMS business units for
software and processing services, including new business and add-on sales, less
any existing ongoing processing revenues anticipated to be lost due to a
competitive loss in an installed account, as follows:

If the overall sales attainment is 75%, the bonus is $75,000.
For each additional percent attainment, the bonus is increased by
$3,000, to a maximum bonus of $160,000. There will be no bonus if
overall sales attainment is less than 75%.

If SMS misses its 1995 EPS goal by one cent per share, the calculated bonus
shall be reduced by 25%. If the EPS goal is missed by two cents per share, the
calculated bonus shall be reduced by 50%. If SMS misses its EPS goal by more
than two cents per share, there will be no bonus.
<PAGE>

Exhibit (10)

1995 INCENTIVE COMPENSATION PLAN FOR MARVIN S. CADWELL
------------------------------------------------------

If the overall sales attainment is 75%, the bonus is $60,000.
For each additional percent attainment, the bonus is increased by
$2,400, to a maximum bonus of $125,000. There will be no bonus if
overall sales attainment is less than 75%.

Exhibit (10)

1994 INCENTIVE COMPENSATION PLAN FOR R. JAMES MACALEER

If SMS achieves its EPS goal for 1994, the Incentive Compensation for 1994 will
be based on the combined sales results (NPV) of all SMS business units for
software and processing services, including new business and add-on sales, less
any existing ongoing processing revenues anticipated to be lost due to a
competitive loss in an installed account, as follows:

If the overall sales attainment is 80%, the bonus is $100,000.
For each additional percent attainment, the bonus is increased
by $2500, to a maximum bonus of $120,000.
<PAGE>

Exhibit (10)

1994 INCENTIVE COMPENSATION PLAN FOR MARVIN S. CADWELL

If the overall sales attainment is 80%, the bonus is $80,000. For
each additional percent attainment, the bonus is increased by
$2000, to a maximum bonus of $96,000.
<PAGE>

Exhibit (10)

1994 INCENTIVE COMPENSATION PLAN FOR MARION G. TOMLIN
-----------------------------------------------------

1. If the business units for which Mr. Tomlin is responsible (B.U.) equal or
exceed their combined new business sales quota, the bonus will be $40,000.

2. If the B.U. equal or exceed their add-on sales quota, the bonus will
be $22,500.

3. If the B.U. equal or exceed $2,000,000 of profit (pretax), as calculated in
accordance with SMS' standards for business unit profitability, the bonus
will equal 0.5% of the difference between the actual profit and $2,000,000.

4. If B.U. average AR days for 1994 are 36 days or fewer, the bonus will be
calculated according to the following table:

ANNUAL A/R DAYS AVG. BONUS
------------------------------------
------------------------------------

5. The participant will be eligible for a bonus of up to $30,000 based on the
quality and delivery schedules of various software modules. The specific
modules and delivery dates will be determined during 1994.

<PAGE>

EXHIBIT (13)

1994

Annual

Report

[LOGO OF SMS CORP.]
<PAGE>

/(C)/ Copyright 1995 SMS
Shared Medical Systems Corporation
<PAGE>

[LOGO OF SMS CORP.]

Annual Report 1994

SMS is the leading provider of healthcare information system and service
solutions to hospitals, multi-entity healthcare corporations, integrated health
networks, physician groups, and other healthcare providers in North America and
Europe. SMS also provides a full complement of solutions for the newly emerging
community health information networks, which include payers and employers as
well as providers. In response to the increasing demand for information, SMS
offers a comprehensive line of healthcare information systems, including
clinical, financial, administrative, ambulatory, and decision support systems,
for both the public and private healthcare sectors. To meet each healthcare
organization's requirements, these systems are offered on computers operating
at the customer site, at the SMS Information Services Center, or as part of a
distributed network.

SMS also provides a portfolio of professional services critical to our
customers' successful management of their information systems. These
professional services include system installation, support, and education. In
addition, we provide specialized consulting services for the design and
integration of software and networks, for facilities management, for information
systems planning, and for system-related process reengineering.

<TABLE>
<CAPTION>
Financial Highlights
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Results: 1994 1993 % Increase
--------------------------------------------------------------------------------
Revenues $550,769,000 $501,283,000 10%
--------------------------------------------------------------------------------
Income Before Income Taxes $ 57,540,000 $ 51,678,000 11%
--------------------------------------------------------------------------------
Net Income $ 35,099,000 $ 31,013,000 13%
--------------------------------------------------------------------------------
Net Income Per Share $ 1.51 $ 1.35 12%
--------------------------------------------------------------------------------
Cash Dividends Declared Per Share $ .84 $ .84 --
--------------------------------------------------------------------------------
Average Number of Common Shares 23,280,000 23,046,000 1%
--------------------------------------------------------------------------------
Year End Position:
--------------------------------------------------------------------------------
Total Assets $380,065,000 $341,442,000 11%
--------------------------------------------------------------------------------
Retained Earnings $244,698,000 $228,831,000 7%
--------------------------------------------------------------------------------
Total Stockholders' Investment $219,196,000 $198,206,000 11%
--------------------------------------------------------------------------------
Current Ratio 1.5 1.8
--------------------------------------------------------------------------------
Common Stock Outstanding 22,942,546 22,752,808
--------------------------------------------------------------------------------
Number of Stockholders of Record 5,627 5,684
--------------------------------------------------------------------------------
</TABLE>

1
<PAGE>

TO OUR STOCKHOLDERS:

IHN, PRO, CHIN, MSO, PPO, HMO - to the layman it is alphabet soup; confusing at
best, meaningless at worst. But to the healthcare professional, these
acronyms, and others, exemplify the new world of healthcare delivery, a world
which, to some extent, has literally turned upside down. Acute care is rapidly
giving way to ambulatory care, multiple-night stays to same-day surgery, and
the general practitioner has moved from the bottom of the physician food chain
to the most sought-after healthcare provider. Former competitors are now
bedfellows, as mergers and alliances of hospitals and other healthcare
organizations proceed at a dizzying pace. Improved quality and lower cost
(unfortunately not always in that order) have emerged as the battle cry of the
nineties, with a new focus on outcomes management as one of the primary tools
to achieve both objectives.

All of these trends have produced another change that is providing new and
expanding opportunities for SMS - a need for new software and systems that will
enable healthcare providers to cope effectively with new organizational
structures and new priorities. At the same time, the demand should continue for
enhanced versions of the operational systems that SMS has been providing
successfully to the healthcare industry for more than two decades.

The most dramatic change in the structure of healthcare delivery in the United
States is the emergence of the integrated health network (IHN). The typical IHN
is a collection of one or more acute-care hospitals and other healthcare
delivery entities, such as skilled nursing facilities, home health agencies,
rehabilitation facilities, surgicenters, physician practices, and others,
usually governed by a single board of trustees. An IHN is designed to permit
what would otherwise be separate healthcare entities to act collectively to
provide an individual's total healthcare needs. In so doing, many IHNs and
other healthcare providers are accepting some contracts on a capitated basis -
i.e., they receive a fixed monthly premium to provide all healthcare for a
defined population; in other words, they are not only delivering healthcare,
they are "going at risk" as insurance companies and HMOs traditionally have
done. Most IHNs believe that almost all of their business by the end of this
decade will be based on capitation arrangements. Furthermore, in some cases two
or more IHNs will bid jointly to provide healthcare to a particular group,
usually when the geographical boundaries of any one of the IHNs does not match
that of the group being served.

The interrelationships among the disparate entities that form an IHN, their
more extended outreach for healthcare delivery, the issues relating to managed
care and capitation, cost control pressures, and other issues combine to create
new demands for automation. SMS' ongoing and extensive R & D program, through
which we have spent approximately $200 million during the past five years, has
been producing solutions to meet these demands. Our electronic medical record;
advanced patient index; managed care software; storage, transmission, and
display of electronic images for documents and medical images (such as X rays
and MRIs); our IHN scheduling system; our new real-time integrated eligibility
software; and much more are not promises of what will be - they are working
today in many different locations to meet the requirements of IHNs and other
healthcare delivery organizations. The following

2
<PAGE>

pages of this report provide some examples of large, complex healthcare
delivery organizations that have chosen SMS to assist them in coping with their
rapidly changing markets.

One of the emerging trends that was referenced at the beginning of this letter
is the Community Health Information Network - or CHIN. A CHIN is typically an
alliance of healthcare providers, such as hospitals, physicians, home health
agencies, and IHNs, along with employers, payers (such as insurance companies),
HMOs, public health departments, and others. Its purpose is to provide a
communications network that would enable authorized personnel from the
participating entities, with the appropriate security safeguards, to have
access to the medical records (including clinical and financial information) of
any individual who has had contact with one of the participating healthcare
delivery organizations. This could lower costs by, for example, greatly
reducing paperwork and redundant testing, and could even save lives in
emergency situations where the immediate availability of medical data is
crucial. It could also provide a vehicle for ongoing assessments of the
overall health status of the community, a process that historically has been
difficult, but which will be more important as we move forward into the worlds
of managed care and capitation. While a CHIN and an IHN may seem similar to
the layman, they are very different. The participants in a CHIN maintain their
separate legal identities and continue to compete with each other in many
situations. Their alliance is generally designed to expedite electronic
communications among large numbers of participating independent organizations
for the benefit of all parties involved.

In 1994 a consortium of some of the types of participants listed above in one
of the largest cities in the United States awarded SMS a contract as the prime
contractor for its CHIN. Participating with SMS in this venture were several
additional companies, including AT &T , Coopers and Lybrand, and others.

While the CHIN concept is still considered to be embryonic, interest in CHINs
is being expressed in a number of major metropolitan areas in the United States.
We are pleased to have been selected as the prime vendor in the first major CHIN
procurement, and we look forward to participating in additional CHIN
opportunities as they occur.

One of the significant differences between SMS and other companies in the
healthcare information systems (HIS) business involves the issue of revenue
recognition for the sale of software. Most HIS companies sell their software
by means of perpetual licenses. While SMS does likewise in some instances,
most of its software-derived revenues are the result of service contracts, in
which the software is a part of a service rendered by SMS to its customers.
SMS' remote processing business, in which customer data is processed by SMS at
its Information Services Center, is the best example.

Perpetual licenses will increase software revenues dramatically in the short
term, at the risk of substantial quarter-to-quarter and year-to-year volatility,
since there is little ongoing revenue. Revenues from service contracts (other
than implementation revenues) typically do not start for 12 to 24 months after
contract signing, but they continue for five to ten years, producing a more
stable revenue flow and a higher quality of earnings. Additional comments on
this issue are provided

3
<PAGE>

in the Management Discussion and Analysis Section elsewhere in this annual
report.

During 1994 we continued to strengthen our European operations. In the
countries in which we have had ongoing operations (Ireland, the United Kingdom,
the Netherlands, Germany, Spain, Italy, and France) we made significant
progress in adding new customers as well as in selling additional applications
to existing customers. We also added a dozen new customers in three new
countries - Poland, Hungary, and the Czech Republic. Healthcare is an
increasingly important priority for Central European countries, and the use of
automated systems is becoming a key element in their quest to improve its
delivery.

In 1994, compared to 1993, SMS' revenues increased by 10% to a record $550
million. Pretax income, net income, and earnings per share all increased at
double digit rates. Our financial results include the fourth quarter
operations of GTE Health Systems Incorporated, which was acquired by SMS as of
September 30. This Division, located in Salt Lake City, has been designated as
the SMS MedSeries4 Division. MedSeries4 is the IBM AS/400-based hospital
information system that this Division has provided to its 270 customer
locations throughout the United States. We are very pleased to welcome their
170 employees and their customers to SMS, and to make available to them SMS'
extensive array of software products and services, which complement their
existing systems.

Effective with our 1995 Annual Meeting we anticipate some changes in our Board
of Directors. SMS' former Executive Vice President, Marvin Cadwell, was
recently promoted to President and Chief Operating Officer and has been
nominated for election to our Board. Mr. Cadwell joined SMS in 1975 and has
held a variety of senior positions within the Company. In 1986 he moved to
England and spent the next five years orchestrating the very successful
turnaround of our European operations. Also, one of our current directors,
Harvey Wilson, will not be standing for reelection. Mr. Wilson, a co-founder
and former President of SMS, has been very generous with his time in providing
advice on strategic issues. We very much appreciate his assistance, and we are
pleased that he will continue to be available from time-to-time for further
advice and counsel.

While we are gratified by the results of 1994, we recognize that the future
promises to be more difficult for our current and prospective customers, which
means that we will have to increase our levels of service and our performance
overall if we are to maintain our industry leadership position. Towards that
end we are continuing to examine our organizational and cost structures,
additional revenue opportunities, and ways to better serve our customers. We
are optimistic that these efforts will enable us to continue to deliver more
value to our customers and stockholders and more opportunities for our
employees during 1995 and beyond.

/s/R. James Macaleer

R. James Macaleer

Chairman of the Board and
Chief Executive Officer

4
<PAGE>

SOLUTIONS

Serving A Wide Variety Of Customers

SMS serves a wide variety of customers, such as acute-care hospitals, clinics,
physician practices, health maintenance organizations (HMOs), home-health
agencies, laboratories, psychiatric hospitals, and others, on two continents.
We provide an array of industry-leading software and services for each of these
types of organization, and we will continue to do so. However, we also provide
an additional level of software and services for a newly emerging type of health
enterprise. Although a variety of other names are used, these healthcare
delivery systems are typically known as Integrated Health Networks (IHNs).

These IHNs, which first began to emerge several years ago, are rapidly
becoming more the rule than the exception for healthcare delivery. While no two
are exactly alike, these vertically and horizontally integrated, multi-entity
health systems share many common characteristics. They generally include all or
part of a state, region, or major metropolitan area. They link the services of
one or more traditional acute-care hospitals with all or some of the following
types of providers: physicians groups, ambulatory care facilities, home health
agencies, skilled nursing facilities (SNFs), ancillary clinics, labs, hospices,
wellness centers, and others.

Usually under the direction of a single board of trustees, each of these
enterprises is designed to accommodate as many as possible of the healthcare
needs of the population it serves. The goal is to provide patients with easier
access to a comprehensive spectrum of high-quality health services that are both
conveniently located and cost effective.

IHNs often form through mergers, acquisitions, or collaborations among pre-
existing entities, and one of their most critical needs is for information.
Frequently, each individual entity - hospital, clinic, or physicians group -
within the IHN has its own health information system, which evolved around needs
specific to the entity served and which may need to be maintained for some
period of time.

To effectively unite, manage, and support all the associated entities within
the new organization, IHNs require progressive, fully integrated information
systems that extend well beyond the boundaries of previous systems. IHNs must
create a communications infrastructure that electronically links the disparate
parts of their

[CALL-OUT]

Through long-term partnerships in the healthcare industry, SMS helps our
customers improve their quality of care, financial performance, and strategic
position by providing superior, cost-effective, information system and service
solutions.

SMS

Mission Statement

5
<PAGE>

SOLUTIONS

own, usually complex, organizations as well as those of a variety of external
parties. At the same time, they frequently must integrate, rather than replace,
the existing operational systems, making them look as much alike as possible.
That is, they must provide a "seamless view" or a "common look and feel" to the
user.

To do all of this successfully, an IHN needs an information system that
provides a number of critical capabilities. First, an IHN information system
(IHNIS) must connect all points of care, without which effective collaboration
among the entities is not possible. Second, the IHNIS must facilitate the
recognition of each member of the population it serves, regardless of where in
the organization an individual may appear. Third, the IHNIS must provide
immediate access to up-to-date clinical information on patients, which may have
been collected in one or more locations over multiple episodes. Fourth, the
IHNIS must provide scheduling capabilities to facilitate the channeling of care
delivery to the most appropriate and cost-effective level, so that patients move
smoothly throughout the network.

Fifth, the IHNIS must facilitate electronic communication to entities other
than those within its own organization, such as insurance companies, HMOs, and
Medicare and Medicaid organizations, because communication does not stop at the
borders of the IHN. Sixth, the IHNIS must accommodate the transition to managed
care, which means providing traditional financial information at the same time
as it provides the IHN with the information it needs to implement multiple
managed care contracts and plans. And finally, an IHNIS must be able to make
different systems look alike to the user, so that the user's task of learning
how to use multiple systems is minimized.

IHNs are choosing SMS to help them create these unique and progressive health
systems for one simple reason. While others are currently in the process of
defining and designing their solutions for IHNs, SMS has been developing and
implementing IHN solutions in real-life situations since 1987. We have
extensive experience with every component of the IHN, including various
individual departments and institutions, ambulatory care, physician groups,
employers, payers, and networks. We have used that experience to create a
comprehensive set of IHN solutions that are available and in operation today.

[CUSTOMER CALL-OUT QUOTE]

Eleven years ago, one of the most strategic challenges we faced was the choice
of an integrated information system. SMS' support has been essential to the
development of our system.

Joan Grau i Sociats

Chief Executive Officer

Hospital Clinic i Provincial

de Barcelona

Barcelona, Spain

6
<PAGE>

SOLUTIONS

A State-Wide IHN

One SMS IHN customer is a rapidly expanding regional health network
headquartered in a major city in the western United States. This state-wide
IHN includes 80 clinics, a 400-bed hospital, 600 physicians, an HMO, and an
insurance partner. It continues to expand and is in the process of extending
its alliances to include additional clinics, rural hospitals, and other
providers. SMS' IHN and clinical solutions are the hub of this impressive
health system.

Patient information is available across this IHN via a network of 3,500 PCs
located throughout the state. This IHN uses the SMS demographic index as part of
a state-wide registration program, so that it can recognize members or patients
regardless of where in the organization, or the state, the individual appears
for treatment. This index includes a single set of demographic and key clinical
data for every person who has used any of the services of the IHN. It is vital
patient information that is entered only once and is subsequently available
online to anyone who needs it and has the proper security access code.

The results of lab and radiology procedures and transcribed reports, including
discharge summaries and operating reports, flow into the SMS electronic patient
record (EPR). The EPR enables all care givers to obtain a patient's current,
comprehensive, integrated, and cumulative clinical records at the point of care.
The EPR accepts information from any number of different systems throughout the
IHN, whether or not they are SMS systems. Information such as allergies, active
medications, problems, test results, and notes and observations from all
involved physicians are immediately available across the entire organization and
can be viewed in the IHN's hospitals as well as in any clinic.

This IHN's employees and care providers, including the physicians, are
comfortable interacting with the IHN information system. They access it by
means of SMS' universal workstation, which is icon driven and easy to use.
Because the workstation employs state-of-the-art GUI and Windows/(R)/
technology, users can access various components of the information system
without esoteric system knowledge. In addition, there are e-mail, fax, and other
office services available that also facilitate communication and the transfer of
information throughout the IHN.

[CUSTOMER CALL-OUT QUOTE]

SMS' Radiology Management System has eliminated all missing reports for us. We
can now provide better quality of care to our patients because we can ensure
that all studies are transcribed and that our radiologists read and sign off on
the procedures quickly. The results are immediately available to all of our
clinicians.

John DeGrazia, M.D.

Chief Radiologist

Mount Vernon Hospital

Alexandria, Virginia

7
<PAGE>

SOLUTIONS

A Publicly Funded IHN

In the southwestern part of the United States, SMS has a large IHN customer
that is in the process of transitioning from a centralized public health system,
organized to deliver care at one location, to a community-based health system
in which service is provided at many diverse locations. An SMS customer since
the early 1980s, this IHN consists of an acute-care hospital, two stand-alone
psychiatric centers, a homeless center, a half dozen community health centers,
and several specialty clinics. In addition, this IHN also provides health
services for several county correctional facilities and public schools.

As is the case with all IHNs, this customer has a critical need for a central
scheduling system that offers an efficient means of scheduling virtually all
patient services and activities throughout the IHN. This customer uses SMS' IHN
Scheduling to facilitate coordination of all services and streamline scheduling
tasks, from single appointments to multiple activities for any health setting
in the enterprise.

For example, a clerk working in a physician's office can, in a single
interaction, schedule consecutive appointments for blood tests, X rays, and an
EKG at a diagnostic center across town. The system includes built-in functions
that guide the scheduling process, ensuring that events are scheduled in the
proper sequence, prerequisites are met, the patient receives proper
instructions, and the patient's preferences for time, location, etc. are
accommodated. It also helps to ensure that available resources are fully
utilized.

An Academic Medical Center IHN

One of SMS' West Coast IHN customers is an academic, not-for-profit
organization operating in a heavily managed care environment. Acknowledged as a
premier academic medical center, this IHN consists of a 500-bed academic
university hospital, 16 major clinics, 65 smaller speciality clinics, 60 primary
care providers, and 1,300 affiliated physicians, of whom approximately 400 are
employed by the IHN. Like most of our IHN customers, this enterprise is in the
process of moving many of its services from an inpatient to an ambulatory
environment. They used

[CUSTOMER CALL-OUT QUOTE]

As a rapidly growing IHN, we are taking full advantage of SMS solutions. The
customer service functions and support for medical management round out the
comprehensiveness of the administrative capabilities. This is the kind of
managed care solution that every IHN needs in order to succeed in the managed
care environment.

Jeffrey Hacker

Chief Financial Officer

United Health of Wisconsin

Insurance Co., Inc.

United Health Group

Appleton, Wisconsin

8
<PAGE>

SOLUTIONS

SMS' Strategic Services Group (SSG) to ensure that they did so as
expeditiously and cost effectively as possible.

This customer asked SSG to develop a plan showing them how they might better
utilize their resources. In addition, they wanted to know how they might
optimize all the SMS products they were using, which include various clinical
applications, such as automatic ordering, online access to observations, and
results; Patient Assessment; and Chart Tracking; the electronic patient record;
eligibility; managed care; and the demographic index, along with additional
applications they intended to acquire.

Working closely with the IHN staff, SSG reengineered certain of their business
and care processes. After providing an assessment of all IHN financial services,
SSG streamlined the existing processes for admissions, scheduling, registration,
and patient billing. In addition, using a combination of process redesign and
system optimization, SSG completely redesigned the environment in which
ambulatory care is provided, so that care is delivered more efficiently and more
effectively.

Originally, this customer had planned to expand their cardiac catheterization
lab. However, SSG was able to demonstrate how the customer could use the
existing resources more effectively. As a result, the organization was able to
cancel the planned lab expansion and avoid several million dollars in
expenditures.

An RHN in the Netherlands

An RHN, or regional health network, is emerging in the Netherlands.
Healthcare for this particular region of some 1.2 million people is delivered by
twelve hospitals, 270 general practitioners, 70 pharmacies, 250 physician
specialists, and two independent labs. These providers, along with both public
and private insurance companies, have formed a cooperative association to
provide electronic communication among the various entities, thus improving the
quality of care and maintaining financial self-sufficiency.

SMS has been involved with the project from its inception, providing both
consultative and project management services, as well as technical expertise and
trouble-shooting services. The RHN's two pilot hospitals are using SMS software

9
<PAGE>

SOLUTIONS

and communications and networking services to send admission and discharge data,
as well as lab and radiology results, to its general practitioners. In
addition, the general practitioners can send prescription requests and other
information electronically to participating pharmacies. SMS also provides the
systems used by the general practitioners.

By the end of 1995, the association plans to have five hospitals, 35
pharmacies, 150 physicians, and a regional lab interconnected. In addition, the
1995 plan includes eligibility services between the hospitals and insurance
companies. The ambitious 4-year plan includes electronic billing for all
participants, as well as automated scheduling and orders.

Outsourcing IHN Processing

Another long-time SMS IHN customer, located in the northeastern part of the
United States, includes four acute-care hospitals, five long-term care
facilities, both visiting nurse and home care organizations, a managed care
organization that is associated with a network of 3,000 physicians, and a
wellness complex.

This customer is particularly proud of its SMS-supplied state-of-the-art lab
system, which was recently selected as one of the top ten automated labs in the
United States. The employees of this IHN's lab and blood banks perform more than
1.25 million tests and procedures each year. Results are immediately available
at more than 700 visual display terminals located throughout the IHN.

Each year, this health system manages some 34,000 inpatient admissions and
more than 95,000 emergency room visits, as well as hundreds of thousands of
patient appointments for virtually every service provided by the system. Using
the SMS demographic index, this customer can track all these encounters and
events by individual, an otherwise logistical nightmare. It also gives them new
information about their enterprise and their member population. For example,
they now know which patients regularly visit more than one of their facilities
and with what frequency.

We have installed both voice and data networks for this customer, which we
monitor and manage remotely. In the first year after we put the voice network
in

[CUSTOMER CALL-OUT QUOTE]

Medicine is like a jigsaw puzzle. The more I can take patient data and transfer
it into a useful, visual format, the easier it is for me to fill in the blanks
of the puzzle and provide better care.

John A. Zapp, M.D.

Chairman

Department of Family Practice

Crozer-Keystone

Health System

Media, Pennsylvania

10
<PAGE>

SOLUTIONS

place, the IHN reported a 22% decrease in its phone bills, even though the
number of calls increased 35% and the duration of those calls increased 26%.

Interestingly, this large IHN has a permanent IS staff of only five people to
handle all of the processing for their dozens of affiliated healthcare delivery
providers. This IHN outsources most of its IS needs to SMS. Consequently, we
supplement their staff of five with SMS employees who provide support and
expertise in the areas of installations, operations, networking, applications,
distribution, and the help desk.

A Large Urban IHN

Our IHN customers have great confidence in SMS' ability to deliver and
maintain state-of-the-art IHN solutions. One large urban IHN, consisting of
eleven acute-care hospitals, six large ambulatory diagnostic and treatment
centers, four skilled nursing facilities, an emergency room service, eight
pharmacies, two teaching hospitals, seven primary care clinics, two corporate
headquarters sites, and a number of primary care physician practices believes
SMS is best-positioned of the HIS vendors to support its evolving IHNIS needs.

This IHN customer is an enthusiastic user of SMS' electronic data interchange
(EDI) services. It generates over 35,000 transactions per day just with SMS'
eligibility service, which quickly checks to see if a patient is covered by a
particular insurance plan. This customer estimates that annual savings from
this service alone exceed $14 million.

SMS' EDI capabilities verify eligibility quickly and accurately. Coverage is
identified automatically as a by-product of routine registration functions.
This reduces registration time, increases claims acceptance and cash
collections, and results in higher revenues. It also reduces discrepancies
between patients and payers that can delay or deny payment. Conflicts are
resolved immediately, saving the time required for follow up, re-billing, and
collection. At the same time, patients are informed early enough to enable them
to make informed choices, and the organization is protected from unnecessary
losses.

[CUSTOMER CALL-OUT QUOTE]

SMS' Electronic Remittance Service (ERS) has given us the biggest one-time
savings we have ever realized.

Diane MacElree

Director of Patient Accounts

Phoenixville Hospital

Phoenixville, Pennsylvania

11
<PAGE>

SOLUTIONS

Network Support for an IHN

SMS has extensive networking experience, which we provide as a service to our
customers. We have delivered an enterprise-wide network that is video, voice,
and data capable, to one of our IHN customers, a six-facility organization in a
major East Coast metropolitan area. At the customer's request, we began this
project by moving the computer room to a totally different location. We then
planned and built both the local and wide-area networks, which are among the
largest health networks in the United States, and we monitor and operate them
remotely from our Information Services Center.

We are currently in the process of installing hundreds of devices for this
customer, which will provide access for several thousand users. We are enabling
single device access for these users, who, as a result, will be able to switch
back and forth from clinical applications, such as Orders, to office automation
products to departmental systems, such as Pharmacy, all from the same PC.

In conjunction with AT&T and the local phone company, SMS uses frame relay
technology to provide physicians access to patient information and clinical
results from remote locations, such as their homes and offices. Because this
eliminates the need for dedicated lines, users have faster access to the IHNIS
at a lower cost.

To ensure that our customers receive the full benefit of network advances, SMS
partners with AT&T, DEC, IBM, Microsoft, Novell, and other industry leaders in
networking and communications. These alliances guarantee our customers that the
strategic networks that we design and implement for them are, and will continue
to be, state-of-the-art solutions.

A County-Wide IHN

SMS has a customer in the southwestern part of the United States that is
working to develop a managed services offering ( MSO ) as the primary focus of
its expanding IHN. Currently consisting of a 500-bed acute-care hospital; a
large physicians practice group; two clinics, each with more than 80 primary
care physicians; and a health services organization specifically for Native
Americans,

[CUSTOMER CALL-OUT QUOTE]

We required a well-planned strategy to design a new, integrated network
solution. SMS understood all aspects of our current environment and our
technological needs. With SMS' help, we have positioned ourselves as an
integrator of healthcare solutions to meet our local and regional requirements.

Manuel Guzman Rodriguez, MHSA, CHE

Chief Executive Officer

Puerto Rico Medical Services Administration

San Juan, Puerto Rico

12
<PAGE>

SOLUTIONS

this IHN is in the process of merging with two additional hospitals and an
affiliated physicians group. Among the many SMS operational applications used
by this customer are SMS' Decision Support Systems ( DSS ) and managed care
solutions.

DSS enables executives of this IHN to understand how their organization is
performing, both overall, and in key areas that they define, such as utilization
review, staffing, quality, and profitability. Because our systems accurately
define their business on a day-to-day basis, DSS enables IHN executives to
resolve problems and make decisions much more quickly. Examples include
checking the profitability of a capitated payer plan and reviewing payer
compliance with fee schedules. Executives also report extensive use of the
system to prepare themselves for contract negotiations.

In SMS' managed care solution, this customer has a complete set of
applications to support the complex administrative and financial management
demands of many managed care lines of business. SMS provides support for
HMOs, PPOs, PHOs, TPAs, multiple option plans, and point-of-service plans. Our
managed care solutions include functions for eligibility, referrals, pre-
certification, claims processing, provider contracting, capitation management,
premium billing, accounts receivable and payable, and much more.

Conceived with the end user in mind, these applications accommodate an
organization's existing data formats, using Windows/(R)/, pull-down screens,
online documentation, field-level prompts, and user-defined templates to
promote easy implementation and flexibility.

Clinical Systems in an IHN

A long-time IHN customer in the Great Lakes area includes among its associated
entities a 500-bed hospital, a home health agency, two immediate care centers, a
wellness center, a senior-living community, a network of primary care practices,
and a number of specialty centers devoted to various aspects of healthcare, such
as diagnostic imaging, rehabilitation, family medicine, and behavioral health.

Caregivers at this IHN appreciate SMS' clinical system because it greatly
reduces the risk of errors and improves the availability of results data. They
are

[CUSTOMER CALL-OUT QUOTE]

We want the best outcome for our customer, the patient. We need an information
system that makes it easy for the patient to understand what we are doing and
gives us the information we need to make business decisions. We want to build
our system with SMS technology. It is user friendly and enables us to provide a
seamless, integrated product to our users and our patients.

Ed Rice

Project Manager

Scott & White Health System

Temple, Texas

13
<PAGE>

SOLUTIONS

using SMS clinical system to build standards for interdisciplinary care. And,
they retain historical data online to facilitate cross-case reporting.

Physicians at this customer IHN use the system to check demographics,
allergies, results, active orders, transcribed reports, including history and
physicals, consults, procedural and operative notes, and discharge summaries.
They are particularly enthusiastic about their rounds reports, which, among
other data, contain vital signs (temperature, blood pressure, etc.), lab
results, and active pharmacy orders. Physicians can access the system from the
hospital or from a variety of remote sites.

The nursing staff also uses the system extensively. It expedites patient
classification, charting, and confirmation of tests, while reducing the time for
completion of orders. Patient charts, care plans, even the nursing procedures
manual, are available online for immediate review or for timely updating. So
good is the documentation from these clinical systems that the JACHO rated
nursing documentation at this site as Level One, the highest possible ranking.
One of this IHN's executives reports that they have documented annual savings of
well over one million dollars, which they attribute to the use of SMS clinical
systems.

Building Our Future Success

The IHNs described earlier, and many others, are turning to SMS for assistance
because they need real, working solutions, not simply technology for
technology's sake. They also know that they must partner with a health
information systems leader whose long-term objectives match those of the IHN and
whose track record of financial and technological strength, industry expertise,
and experience is both outstanding and incontrovertible. When all of these
factors are considered, SMS is the logical choice.

SMS' demographics significantly differentiate us from other suppliers in the
industry. SMS' revenues exceeded one-half billion dollars last year. Our
customer base numbers over two thousand, with more than 1,500 customers in North
America and another 500 in Europe. SMS has more than two dozen offices in

14
<PAGE>

SOLUTIONS

the United States, another dozen in Europe, and over 4,000 employees, who
collectively constitute the most experienced group of healthcare IS
professionals in the industry.

Each year, SMS invests tens of millions of dollars in research and
development, which enables us and our customers to take advantage of advances in
technology and to accommodate today's dizzying pace of relentless technological
change. Our investment in R & D combined with our incomparable industry
experience uniquely position SMS to move forward steadily, assimilating change
rather than succumbing to the turmoil it creates. And, our customers clearly
benefit from this philosophy of progress through evolution and smooth
transition.

We constantly look ahead so that we and our customers will be prepared to
compete successfully in the marketplace of the future, however it may evolve.
This foresight enabled us to garner IHN experience years before most information
systems vendors began serving the IHN market.

Our IHN customers, harbingers of healthcare delivery in the 21st century, have
chosen to define their futures in association with SMS. They have done so
because we are focused solely on the health industry; because we have the proven
ability to manage large, complex installations; because we are committed to
ongoing research and development; and because of our twenty-plus years as the
industry leader.

SMS' past is one of enormous success. We are confident that the future will
also be successful, for ourselves and for our customers. At SMS, we believe
that the future is not a matter of chance. Rather, we believe it is a matter of
choice, something to be forged, one day at a time, from our accumulated
experience, our constancy of purpose, our vision, and our efforts. We believe
that these unique attributes, together with our commitment to our customers and
to the health industry that they serve, will guarantee further success for us
all, in a future that we have been building since 1969.

[CUSTOMER CALL-OUT QUOTE]

Our close relationship with SMS and their quality solutions have helped us meet
our clinical and business objectives. More importantly, we share SMS' vision of
the future, which lies in integrated health networks and which will provide much
more information than we have ever seen before.

Tudor E. Thomas, Ph.D.

Chief Executive

Epsom Health Care Trust

Surrey, England

15
<PAGE>

COMMUNITY SERVICE

SMS is a strong advocate of community service and volunteerism. Each year our
various offices, as well as a large number of employees individually,
participate in a wide variety of fundraising drives and special events, all of
which contribute to the welfare of others.

We support the American Red Cross through regular blood drives held at the
Company's facilities. We support the hungry through a number of food drives,
including those sponsored by the Boy Scouts and The Greater Philadelphia Food
Bank. We support underprivileged children in our communities by matching
employees with children from low-income or homeless families to ensure that
these children have food, clothing, and gifts during the holiday season.

SMS has supported the United Way campaign since the Company's founding,
raising hundreds of thousands of dollars each year. In addition, we directly
support a multitude of charitable non-profit organizations throughout the year.
Working with these various organizations, SMS employees across the country have
organized picnics, built houses, planted flowers, refurbished a Girl Scout camp,
painted and stocked bookcases, worked on crafts, painted and renovated homes,
participated in sing-alongs, and accompanied children, seniors, and the
physically or mentally challenged on field trips, all to help those less
fortunate than themselves.

We sponsor a number of events each year, the proceeds of which are donated to
local charities or agencies. These special events include a Two-on-Two
Basketball Tournament, a One-Pitch Softball Tournament, a 5-K run, and a flower
sale.

SMS participates in the Corporate Sports Battle, which raises hundreds of
thousands of dollars annually for various charities throughout the United
States. Participating corporations field a team composed of ten men and ten
women ( and a senior executive, who participates in a golf putting contest).
Each team competes in approximately 20 events at one of 12 regional
competitions. Events range from conventional track and swimming activities to
basketball and volleyball to less conventional activities such as frisbee toss
and somewhat unusual relay races. We are delighted to report that SMS, after
garnering six first places and two second places in regional competition during
the past eight years, won the national championship this past year, defeating
companies many times our size.

SMS literally opens our doors to the community, accommodating various groups
and organizations who use our facilities at night and on weekends. The Boy
Scouts, the YMCA, the Cub Scouts, the American Heart Association, the SPCA, and
a senior citizens organization are just a few of the groups that have taken
advantage of our facilities. They use our atriums for fundraisers and silent
auctions, our conference rooms for Board and committee meetings, and our
training rooms to support their continuing education programs.

SMS is also very conscious of the need to protect our environment. Flowing
through the 116 acres on which our corporate headquarters is located is one of
only two wild trout streams in southeastern Pennsylvania. This past year SMS
donated a 300-foot easement, which contains the trout stream, to the Valley
Forge Chapter of Trout Unlimited ( VFCTU ). The VFCTU engages in numerous
activities designed to protect the quality of the stream. These include stream
cleanup and maintenance as well as working with the Pennsylvania Department of
Environmental Resources to upgrade the designation of the stream to "Exceptional
Quality", the highest possible rating. The easement gives the VFCTU
significantly greater latitude to oppose upstream activities that periodically
threaten to pollute or downgrade the stream.

At SMS, we view ourselves as members of the human community and citizens of
the world. We think it vitally important to be good members and good citizens.
We engage in community service because we know that ultimately our well-being
depends on the well-being of our neighbors. We help because we can and because
we know it is the right thing to do.

16
<PAGE>

Shared Medical Systems Corporation
---------------------------------------------------------------------------------------------
Financial Statments

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

Index
---------------------------------------------------------------------------------------------
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations 18
---------------------------------------------------------------------------------------------
Selected Financial Data 23
---------------------------------------------------------------------------------------------
Consolidated Balance Sheet 24
---------------------------------------------------------------------------------------------
Consolidated Statement of Income 26
---------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows 27
---------------------------------------------------------------------------------------------
Consolidated Statement of Stockholders' Investment 28
---------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 29
---------------------------------------------------------------------------------------------
Report of Independent Public Accountants 35
---------------------------------------------------------------------------------------------
</TABLE>

17
<PAGE>

Shared Medical Systems Corporation
--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
--------------------------------------------------------------------------------

Results of Operations - General

The Company provides services and systems to healthcare organizations, such as
clinics, physician group practices, medical schools, public health departments,
home healthcare organizations, hospitals of all types (urban, teaching,
suburban, rural, specialty), proprietary hospital companies, and not-for-profit
multihospital groups. The Company's revenues include service and system fees
derived from computer-based information processing systems and software, related
professional services and support, and hardware leases. The Company's
professional services consist of a variety of services related to the
information processing systems business, such as systems installation and
support, software and network customization, information systems planning and
integration, business office consulting, facilities management, and customer
education. The remainder of the Company's revenues are primarily generated from
hardware sales to its healthcare customers and interest on short-term
investments.

As the information processing requirements of the healthcare industry have
continued to grow, the business of providing information has become more
complex. Additionally, changes in the way healthcare organizations are
structured and reimbursed, combined with pressures to control costs and
eliminate excess capacity in the healthcare delivery system, have created new
and increased demands for the Company's services and systems.

The Company's services and systems are provided to customers under both fixed-
period contracts and perpetual license contracts. Fixed-period contracts have
terms primarily ranging from one to ten years, and generally allow price
increases annually, limited to the increase in the Consumer Price Index. The
Company has increased some of its prices under these contract provisions.
Fixed-period agreements produce recurring revenues over the term of each
contract, in contrast to perpetual license agreements, where software fees are
recognized over the installation period and the related support fees are
recognized over the term of the support agreement.

There is an important distinction to be drawn in comparing the revenues
reported by the Company with other companies, whose business is primarily
focused around the sale of their software almost exclusively by means of
perpetual licenses. Such companies generally recognize software revenue and
related installation fees, if there are any, during the course of installation
at a customer location. Excluding support fees, there is no revenue to be
recognized on a recurring basis. The Company does sell some of its software
products under perpetual licenses. However, the majority of the Company's
business is primarily focused around providing services to customers through
long-term contracts. Revenues under these service agreements are recognized as
they are earned over the life of the long-term contract. A substantial portion
of these revenues are recognized after installation is complete, as contrasted
to perpetual license arrangements where revenue recognition generally ends upon
completion of the installation. As a result, the Company's revenues tend to be
more stable than those of many software companies. Also, at any point in time,
the Company has a significant amount of revenues to be realized in the future as
installation work is completed and processing services are performed. While the
Company does not routinely report such amounts, management estimates the total
amount of future revenues under contract at December 31, 1994 is in excess of
$1.0 billion.

The Company's information processing services and systems operate on computer
systems that range from personal computers to minicomputers to mainframes. These
systems are offered on computers operating at the customer's site, at the
Company's Information Services Center (i.e., remotely), or as part of a
distributed network. Depending on the type of product or service selected,
equipment utilized by the customer can be provided by the Company under fixed-
period lease agreements or sales agreements.

Results of Operations for 1994 Compared to 1993

In 1994, revenues grew 9.9%, to $550,769,000 compared to 1993. Net income was
$35,099,000 and net income per share was $1.51 for the year ended December 31,
1994, which represent increases of 13.2% and 11.9%, respectively, compared to
1993.

18
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Analysis of Changes in Consolidated Cost and Expenses
(000 omitted)
------------------------------------------------------------------------------------------------------------------
Change Change
from from
1994 Prior Year 1993 Prior Year 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating and development.............................. $234,975 $24,727 $210,248 $ 4,970 $205,278
Percentage of service and system fees revenues........ 46.6% 46.4% 48.7%
Marketing and installation............................. 170,941 15,611 155,330 16,667 138,663
Percentage of service and system fees revenues........ 33.9% 34.3% 32.9%
General and administrative............................. 47,508 3,401 44,107 2,069 42,038
Percentage of service and system fees revenues........ 9.4% 9.8% 10.0%
Interest............................................... 1,443 94 1,349 244 1,105
Percentage of service and system fees revenues........ 0.3% 0.3% 0.2%
---------------------------------------------------------
Total................................................ $454,867 $43,833 $411,034 $23,950 $387,084
=========================================================
Percentage of service and system fees revenues...... 90.2% 90.8% 91.8%
=========================================================
------------------------------------------------------------------------------------------------------------------
Cost of hardware sales................................. $ 38,362 $ (209) $ 38,571 $ 1,077 $ 37,494
=========================================================
Percentage of hardware sales revenues................. 82.7% 79.6% 78.1%
=========================================================
------------------------------------------------------------------------------------------------------------------
</TABLE>

. Service and system fees revenues increased 11.4% to $504,386,000 in 1994
compared to 1993. This increase was primarily due to higher levels of
professional services, system processing fees, and system sales. The higher
level of professional services was generally attributable to systems
installation and support fees.

. Hardware sales revenues decreased to $46,383,000 in 1994 from $48,486,000 in
1993, primarily due to the change in the timing and product mix of systems
installed.

. Operating and development expenses increased to 46.6% of service and system
fees revenues in 1994 from 46.4% in 1993. This change was primarily due to
increased personnel costs to support higher levels of professional services,
and computer hardware and associated costs to support the growth in the
base of customers operating their systems at the Company's Information
Services Center.

. Marketing and installation expenses decreased to 33.9% of service and system
fees revenues in 1994 from 34.3% in 1993. This decrease was primarily due to
improved efficiency in providing installations and support services to the
Company's growing base of customers. This decrease was partially offset by
higher costs incurred for equipment and training to improve staff
productivity.

. General and administrative expenses, as a percentage of service and system
fees revenues, decreased to 9.4% in 1994 from 9.8% in 1993, primarily due
to the Company's ongoing efforts to control administrative costs.

. Interest expense was $1,443,000 in 1994 compared to $1,349,000 in 1993. This
change was primarily due to a higher level of average outstanding borrowings
associated with the Company's short-term loan and capital lease obligations
in 1994 compared to 1993.

. Cost of hardware sales increased to 82.7% of hardware sales revenues in 1994
from 79.6% in 1993. This change was primarily due to the different product
mixes of systems installed in each year, and reduced hardware margins in line
with industry trends.

. Income taxes were $22,441,000 in 1994 and $20,665,000 in 1993. The Company's
effective tax rate for federal, state, and foreign income taxes was 39.0% in
1994 compared to 40.0% in 1993. The lower rate in 1994, when compared to
1993, was primarily due to the additional provision made in 1993 to adjust
the Company's deferred tax liability to the increased federal tax rate of
35.0%.

The impact of currency fluctuations on the Company's European operations was
not significant in 1994.

19
<PAGE>

Shared Medical Systems Corporation
--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
--------------------------------------------------------------------------------

RESULTS OF OPERATIONS FOR 1993 COMPARED TO 1992

In 1993, revenues grew 6.7%, to $501,283,000 compared to 1992. Net income
was $31,013,000 and net income per share was $1.35 for the year ended December
31, 1993, which represent increases of 9.3% and 8.9%, respectively, compared to
1992.

. Service and system fees revenues increased to $452,797,000 in 1993 from
$421,620,000 in 1992. Contributing to this change were higher levels of
professional services, which include support and installation services, and
system processing fees.

. Hardware sales revenues of $48,486,000 in 1993 did not vary significantly
from the prior year.

. Operating and development expenses decreased to 46.4% of service and system
fees revenues in 1993 from 48.7% in 1992, primarily due to efficiencies
gained through decreased costs for computer hardware at the Company's
Information Services Center, which were partially offset by increased
personnel costs to support higher levels of professional services, generally
related to installations, provided by the Company in 1993.

. Marketing and installation expenses increased to 34.3% of service and system
fees revenues in 1993 from 32.9% in 1992, due to increased costs for
personnel, travel and living, and outside consulting fees, which were
related to higher levels of professional services for installation and
support activities. Also contributing to this change were increases in
incentive compensation expenses, which were primarily due to the higher
level of revenues generated in 1993.

. General and administrative expenses, as a percentage of service and system
fees revenues, decreased to 9.8% in 1993 from 10.0% in 1992, primarily due to
decreases in certain administrative expenses as part of the Company's ongoing
efforts to control costs, which were partially offset by increased personnel
costs.

. Cost of hardware sales increased to 79.6% of hardware sales revenues in 1993
from 78.1% in 1992, due primarily to the different product mixes for systems
installed in each year, and reduced hardware margins in line with industry
trends.

. Interest expense was $1,349,000 in 1993 compared to $1,105,000 in 1992. This
increase was primarily due to a higher level of average outstanding
borrowings associated with the Company's short-term loan obligations and
capital leases in 1993 compared to 1992.

. Income taxes were $20,665,000 in 1993 and $16,667,000 in 1992. The Company's
effective tax rate for federal, state, and foreign income taxes was 40.0% in
1993 compared to 37.0% in 1992. The higher rate in 1993 compared to 1992 was
primarily due to the increase in the statutory corporate rate for federal
income taxes enacted in 1993, an additional tax provision to adjust the
Company's deferred tax liability resulting from the new federal rate, and
increases in certain non-deductible items. Excluding the additional
provision needed to increase the Company's deferred tax liability to the
new federal tax rate, the Company's effective tax rate for 1993 was 39.0%.

INFLATION

Significant portions of the Company's expenses are inflation sensitive.
Rising costs for the years ended December 31, 1994, 1993, and 1992 have been
partially offset by increased employee and computer productivity.

20
<PAGE>

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Liquidity and Capital Resources

Total assets increased from $305,604,000 at January 1, 1993 to $380,065,000 at
December 31, 1994. Stockholders' investment increased from $186,596,000 to
$219,196,000 over the same period. These changes resulted primarily from
operations. During this period, the Company financed most of its capital
expenditures and working capital requirements from operations. The major uses
of funds during this period were for investments in computer equipment and
software, the payment of quarterly dividends, the acquisition of GTE Health
Systems Incorporated (GTEHS), the formation of a partnership related to home
healthcare software, and the addition of long-term financing arrangements
extended to some of the Company's customers. The Company has had no negative
collection experience associated with these long-term financing arrangements,
and they have not materially affected short-term liquidity. At the end of 1994,
cash and short-term investments were $21,249,000 compared to $30,854,000 at the
beginning of 1993.

Net cash flows from operating activities decreased to $46,932,000 in 1994
compared to $67,778,000 in 1993. This change was primarily due to the growth in
accounts receivable of $17,391,000 and reductions in deferred revenues of
$14,765,000. The increase in accounts receivable was caused by higher business
levels and greater amounts of revenues recognized, which are contractually
billable in future periods. These reductions in cash flows were partially offset
by the increase in net income, adjusted for non-cash expenses such as
depreciation and amortization, of $5,393,000.

Net cash flows from operating activities increased to $67,778,000 in 1993
compared to $50,156,000 in 1992. This change was primarily due to the
improvements in cash flows caused by increases in deferred revenues of
$13,316,000, accrued and deferred income taxes of $6,014,000, and the growth in
net income, adjusted for non-cash expenses such as depreciation and
amortization, of $3,832,000. These increases in cash flows were partially
offset by reduced cash flows related to accounts payable and accrued expenses of
$2,326,000, and prepaid expenses and other current assets of $2,260,000. Cash
flows related to accounts receivable were essentially unchanged in 1993 when
compared to 1992.

Cash flows used for investing activities were $49,664,000, $44,021,000, and
$27,817,000, in 1994, 1993, and 1992, respectively. The Company's investing
activities in 1994 included the acquisition of all of the outstanding capital
stock of GTEHS, a provider of information systems to the healthcare industry,
for $17,287,000. Investing cash flows in 1993 included the Company's
acquisition of a 50% ownership share in Delta Health Systems, a partnership
related to home healthcare software, for $6,500,000 and the purchase of an
office building in Spain for $4,811,000.

The following is an analysis of cash flows used to invest in property,
equipment, and computer software, excluding equipment acquired under capital
leases, for the three-year period ended December 31, 1994:

<TABLE>
<CAPTION>
(000 omitted)
--------------------------------------------------------------------------------
1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Inhouse computer and network
communications equipment....... $14,093 $11,316 $8,651
Internally produced software.... 8,725 8,700 8,150
Purchased software.............. 4,349 2,411 2,318
Minicomputers and peripherals,
most of which are leased
to customers................... 2,859 3,259 3,562
Building........................ -- 4,811 --
--------------------------------------------------------------------------------
</TABLE>

21
<PAGE>

Shared Medical Systems Corporation
--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
--------------------------------------------------------------------------------

Inhouse computer and network communications equipment is used primarily to
process, store, and retrieve customer information at the Company's Information
Services Center, and to service and support customers from the Company's
corporate headquarters and branch offices. Capital expenditures for inhouse
computer equipment vary depending upon whether the equipment is purchased or
obtained under operating leases. Capital expenditures for minicomputers and
peripherals fluctuate due to changes in vendor pricing, unit volumes, and the
customers' decisions to buy or lease hardware.

The remaining significant use of cash by the Company for each of the three
years in the period ended December 31, 1994 was for the payment of common stock
dividends, which were $19,192,000 in 1994, $18,989,000 in 1993, and $18,883,000
in 1992.

GTEHS, which was purchased on September 30, 1994, had historically incurred
operating losses. The Company, upon the acquisition of GTEHS, implemented
various strategies to improve their operating results. Accordingly, the Company
anticipates that the acquisition of GTEHS will have no material negative impact
on the Company's financial position or results of operations.

Management is not aware of any potential material impairments to the Company's
strong financial position. The most significant requirements for funds now
anticipated are as follows:

. Equipment - During 1995, the Company anticipates that capital expenditures
for equipment will be in line with similar expenditures in recent years.
Factors such as business activity levels, buy versus lease decisions, and
vendor pricing will continue to affect capital equipment expenditures.

. Dividends - During each of the three years in the period ended December 31,
1994, cash dividends declared were $.84 per share. All dividends were
declared in the last month of each calendar quarter and paid the following
month. The Company anticipates paying approximately $19,300,000 in
dividends in 1995.

. Stock repurchase - The Company's Board of Directors has authorized the
repurchase of up to 5,000,000 shares of the Company's common stock. As of
December 31, 1994, 2,873,500 shares, at a cumulative cost of $54,325,000,
have been repurchased. During 1994, 1993, and 1992, no shares were
repurchased.

The Company expects to finance most of its capital requirements with
internally generated funds. Currently, the Company has lines of credit with
banks of approximately $51,700,000, primarily at their prime interest rates.
These lines are used from time to time to supplement cash provided from
operating activities.

22
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data
(000 omitted, except per share amounts)

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

1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
Summary of Consolidated Operations
------------------------------------------------------------------------------------------------------------------------------------

Revenues................... $550,769 $501,283 $469,624 $438,705 $403,127
Cost and Expenses.......... $493,229 $449,605 $424,578 $399,193 $369,308
Income Before Income Taxes. $ 57,540 $ 51,678 $ 45,046 $ 39,512 $ 33,819
Income Taxes............... $ 22,441 $ 20,665 $ 16,667 $ 14,224 $ 11,160
Net Income................. $ 35,099 $ 31,013 $ 28,379 $ 25,288 $ 22,659
Net Income Per Share....... $ 1.51 $ 1.35 $ 1.24 $ 1.11 $ 1.01
Average Shares Outstanding. 23,280 23,046 22,880 22,761 22,437
------------------------------------------------------------------------------------------------------------------------------------

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

Summary of Consolidated Financial Position
------------------------------------------------------------------------------------------------------------------------------------

Total Assets............... $380,065 $341,442 $305,604 $292,790 $286,021
Long-Term Obligations...... $ 4,974 $ 6,395 $ 2,291 $ 4,237 $ 4,415
Total Liabilities.......... $160,869 $143,236 $119,008 $115,577 $113,657
Stockholders' Investment... $219,196 $198,206 $186,596 $177,213 $172,364
Stockholders' Investment
Per Share................. $ 9.55 $ 8.71 $ 8.27 $ 7.89 $ 7.69
Current Assets............. $177,478 $165,536 $156,428 $151,007 $140,178
Current Liabilities........ $116,847 $ 92,840 $ 87,944 $ 81,956 $ 82,196
Working Capital............ $ 60,631 $ 72,696 $ 68,484 $ 69,051 $ 57,982
Current Ratio.............. 1.52:1 1.78:1 1.78:1 1.84:1 1.71:1
------------------------------------------------------------------------------------------------------------------------------------

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

Operating Ratios and Selected Financial Data
------------------------------------------------------------------------------------------------------------------------------------

Operating Margin........... 9.8% 9.2% 8.2% 7.2% 5.8%
Hardware Margin............ 17.3% 20.4% 21.9% 23.9% 28.2%
Pretax Margin.............. 10.4% 10.3% 9.6% 9.0% 8.4%
Net Margin................. 6.4% 6.2% 6.0% 5.8% 5.6%
Effective Tax Rate......... 39.0% 40.0% 37.0% 36.0% 33.0%
Return on Average
Investment................ 16.8% 16.1% 15.6% 14.5% 13.3%
Cash Dividends Declared
Compared to Prior Year's
Net Income................ 62.0% 67.0% 74.8% 83.2% 81.4%
Cash Dividends Declared
Per Share................. $ .84 $ .84 $ .84 $ .84 $ .84
Depreciation and
Amortization.............. $ 32,122 $ 30,815 $ 29,617 $ 29,007 $ 27,260
Research and Development... $ 39,226 $ 37,087 $ 33,703 $ 33,639 $ 31,926
------------------------------------------------------------------------------------------------------------------------------------

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

Market Price and Dividends Declared Per Share *
------------------------------------------------------------------------------------------------------------------------------------

First Quarter
High..................... $ 29 3/8 $ 24 3/8 $ 24 3/8 $ 19 1/8 $ 14 3/4
Low...................... $ 23 5/8 $ 20 3/4 $ 19 1/4 $ 13 7/8 $ 12
Dividends Declared....... $.21 $.21 $.21 $.21 $.21
Second Quarter
High..................... $ 28 1/4 $ 23 7/8 $ 20 5/8 $ 22 3/4 $ 13 3/4
Low...................... $ 22 1/8 $ 19 1/2 $ 16 7/8 $ 16 1/8 $ 12 1/4
Dividends Declared....... $.21 $.21 $.21 $.21 $.21
Third Quarter
High..................... $ 28 1/2 $ 24 1/2 $ 22 3/8 $ 23 3/8 $ 16 7/8
Low...................... $ 22 3/4 $ 17 1/2 $ 17 3/4 $ 19 7/8 $ 12 1/2
Dividends Declared....... $.21 $.21 $.21 $.21 $.21
Fourth Quarter
High..................... $ 34 1/2 $ 26 $ 22 3/4 $ 22 7/8 $ 18 3/8
Low...................... $ 25 3/8 $ 21 1/2 $ 19 7/8 $ 17 $ 14 5/8
Dividends Declared....... $.21 $.21 $.21 $.21 $.21
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
* As of December 31, 1994 there were 5,627 stockholders of record of the
Company's common stock. The Company's common stock trades
on The Nasdaq Stock Market under the symbol SMED. The prices shown in the
table above are the high and low transaction prices as quoted in the Nasdaq
National Market.

23
<PAGE>

Shared Medical Systems Corporation
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet

December 31
---------------------------------------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and short-term investments........................................... $ 21,249,000 $ 35,826,000
Accounts receivable, net of reserve of $5,317,000 in 1994 and
$4,279,000 in 1993 (Note 1)............................................. 138,554,000 113,138,000
Prepaid expenses and other current assets (Note 1)........................ 17,675,000 16,572,000
--------------------------
Total Current Assets..................................................... 177,478,000 165,536,000
--------------------------

Property and Equipment, at cost (Notes 1 & 8):
Land and land improvements................................................ 10,711,000 10,703,000
Buildings................................................................. 59,402,000 57,368,000
Equipment................................................................. 169,487,000 183,257,000
--------------------------
239,600,000 251,328,000
--------------------------
Less: Accumulated depreciation and amortization.......................... 134,513,000 146,463,000
--------------------------
105,087,000 104,865,000
--------------------------

Computer Software, net of accumulated amortization of $36,158,000 in 1994
and $28,552,000 in 1993 (Note 1).......................................... 38,801,000 33,547,000
--------------------------
Other Assets (Note 1)...................................................... 58,699,000 37,494,000
--------------------------
$380,065,000 $341,442,000
==========================
---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.

24
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

December 31
-------------------------------------------------------------------------------------------------------------------
1994 1993
-------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Investment
<S> <C> <C> <C> <C>
Current Liabilities:
Notes payable (Note 7)....................................... $ 12,383,000 $ 5,830,000
Current portion of long-term obligations under capital leases
(Note 8)..................................................... 3,100,000 2,433,000
Dividends payable............................................ 4,818,000 4,778,000
Accounts payable............................................. 23,633,000 16,509,000
Accrued expenses (Note 1).................................... 38,189,000 32,434,000
Current deferred revenues (Note 1)........................... 28,133,000 23,477,000
Accrued and current deferred income taxes (Notes 1 & 3)...... 6,591,000 7,379,000
---------------------------
Total Current Liabilities................................... 116,847,000 92,840,000
---------------------------
Deferred Revenues (Note 1).................................... 17,352,000 21,619,000
---------------------------
Long-Term Obligations Under Capital Leases (Note 8)........... 4,974,000 6,395,000
---------------------------
Deferred Income Taxes (Notes 1 & 3)........................... 21,696,000 22,382,000
---------------------------
Commitments (Note 8)

Stockholders' Investment (Notes 1, 5 & 6):
Preferred stock, par value $.10; authorized 1,000,000 shares;
none issued.................................................. -- --
Common stock, par value $.01; authorized 60,000,000 shares;

1994 1993
----------------------
Shares issued............................................... 26,964,821 26,770,731
Less--
Treasury shares:
Donated.................................................. 1,114,400 1,114,400
Purchased................................................ 2,907,875 2,903,523
Shares outstanding.......................................... 22,942,546 22,752,808 270,000 268,000
Paid-in capital (Note 6)..................................... 32,365,000 28,829,000
Retained earnings............................................ 244,698,000 228,831,000
Purchased common stock in treasury, at cost (Note 5)......... (55,116,000) (54,948,000)
Cumulative translation adjustment (Note 1)................... (3,021,000) (4,774,000)
---------------------------
Total Stockholders' Investment.............................. 219,196,000 198,206,000
---------------------------
$380,065,000 $341,442,000
===========================
-------------------------------------------------------------------------------------------------------------------
</TABLE>

25
<PAGE>
<TABLE>
<CAPTION>
Shared Medical Systems Corporation
----------------------------------------------------------------------------------------------
Consolidated Statement of Income

Year Ended December 31
----------------------------------------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Service and system fees (Note 1)................... $504,386,000 $452,797,000 $421,620,000
Hardware sales (Note 1)............................ 46,383,000 48,486,000 48,004,000
----------------------------------------
550,769,000 501,283,000 469,624,000
----------------------------------------
Cost and Expenses:
Operating and development.......................... 234,975,000 210,248,000 205,278,000
Marketing and installation......................... 170,941,000 155,330,000 138,663,000
General and administrative......................... 47,508,000 44,107,000 42,038,000
Cost of hardware sales............................. 38,362,000 38,571,000 37,494,000
Interest (Notes 7 & 8)............................. 1,443,000 1,349,000 1,105,000
----------------------------------------
493,229,000 449,605,000 424,578,000
----------------------------------------
Income Before Income Taxes.......................... 57,540,000 51,678,000 45,046,000
Provision for Income Taxes (Note 3)................. 22,441,000 20,665,000 16,667,000
----------------------------------------
Net Income.......................................... $ 35,099,000 $ 31,013,000 $ 28,379,000
========================================
Net Income Per Common Share (Note 2)................ $1.51 $1.35 $1.24
========================================
Number of shares used to compute per share amounts.. 23,280,000 23,046,000 22,880,000
========================================
----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.

26
<PAGE>
<TABLE>
<CAPTION>
Shared Medical Systems Corporation
----------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows

Year Ended December 31
----------------------------------------------------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................................... $ 35,099,000 $ 31,013,000 $ 28,379,000
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization.............................. 32,122,000 30,815,000 29,617,000
Asset (increase) decrease -
Accounts receivable...................................... (20,047,000) (2,656,000) (2,644,000)
Prepaid expenses and other current assets................ (973,000) (1,480,000) 780,000
Other assets............................................. (5,321,000) (7,982,000) (7,952,000)
Liability increase (decrease) -
Accounts payable and accrued expenses.................... 11,585,000 4,030,000 6,356,000
Accrued and current deferred income taxes................ (788,000) 39,000 487,000
Deferred revenues........................................ (4,977,000) 9,788,000 (3,528,000)
Deferred income taxes.................................... (686,000) 6,192,000 (270,000)
Other...................................................... 918,000 (1,981,000) (1,069,000)
------------------------------------------
Net cash provided by operating activities................ 46,932,000 67,778,000 50,156,000
------------------------------------------
Cash Flows from Investing Activities:
Property and equipment additions............................. (20,328,000) (24,945,000) (18,423,000)
Investment in computer software.............................. (13,074,000) (11,111,000) (10,468,000)
Dispositions of equipment.................................... 1,025,000 235,000 1,074,000
Investments in subsidiary, partnership and related loan...... (17,287,000) (8,200,000) --
------------------------------------------
Net cash used for investing activities................... (49,664,000) (44,021,000) (27,817,000)
------------------------------------------
Cash Flows from Financing Activities:
Dividends paid............................................... (19,192,000) (18,989,000) (18,883,000)
Change in treasury stock..................................... (168,000) (84,000) (202,000)
Payments on long-term obligations............................ (2,576,000) (1,845,000) (4,181,000)
Increase (decrease) in notes payable......................... 6,553,000 (1,104,000) 2,347,000
Exercise of stock options.................................... 3,538,000 3,237,000 2,137,000
------------------------------------------
Net cash used for financing activities................... (11,845,000) (18,785,000) (18,782,000)
------------------------------------------
Net (Decrease) Increase in Cash and Short-Term Investments.... (14,577,000) 4,972,000 3,557,000
Cash and Short-Term Investments, Beginning of Year............ 35,826,000 30,854,000 27,297,000
------------------------------------------
Cash and Short-Term Investments, End of Year $ 21,249,000 $ 35,826,000 $ 30,854,000
==========================================
----------------------------------------------------------------------------------------------------------
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
Shared Medical Systems Corporation
------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Stockholders' Investment
For the Years Ended December 31, 1994, 1993, and 1992

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

Common Stock Cumulative
--------------------- Paid-in Retained Treasury Translation
Shares Par Value Capital Earnings Stock Adjustment
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------

Balance, January 1, 1992 .......................... 26,456,410 $265,000 $ 23,458,000 $207,374,000 $(54,662,000) $ 778,000
Common stock transactions -
Exercise of stock options and grant
of restricted shares (Note 6)................... 123,841 1,000 1,836,000 (147,000)
Employee stock purchase plan..................... (55,000)
Tax benefit from the exercise of
non-qualified stock options..................... 300,000
Dividends on common stock
($.84 per share)................................ (18,907,000)
Net income........................................ 28,379,000
Translation adjustment (Note 1)................... (2,024,000)
------------------------------------------------------------------------------

Balance, December 31, 1992 ........................ 26,580,251 266,000 25,594,000 216,846,000 (54,864,000) (1,246,000)

Common stock transactions -
Exercise of stock options and grant
of restricted shares (Note 6)................... 190,480 2,000 2,610,000 (91,000)
Employee stock purchase plan..................... 7,000
Tax benefit from the exercise of
non-qualified stock options..................... 625,000
Dividends on common stock
($.84 per share)................................ (19,028,000)
Net income........................................ 31,013,000
Translation adjustment (Note 1)................... (3,528,000)
------------------------------------------------------------------------------

Balance, December 31, 1993......................... 26,770,731 268,000 28,829,000 228,831,000 (54,948,000) (4,774,000)

Common stock transactions -
Exercise of stock options and grant
of restricted shares (Note 6)................... 194,090 2,000 2,622,000 (132,000)
Employee stock purchase plan..................... (36,000)
Tax benefit from the exercise of
non-qualified stock options..................... 914,000
Dividends on common stock
($.84 per share)................................ (19,232,000)
Net income........................................ 35,099,000
Translation adjustment (Note 1)................... 1,753,000
------------------------------------------------------------------------------

Balance, December 31, 1994 26,964,821 $270,000 $ 32,365,000 $244,698,000 $(55,116,000) $(3,021,000)

==============================================================================
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
The accompanying notes are an integral part of this statement.

28
<PAGE>

Shared Medical Systems Corporation
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1994, 1993, and 1992

--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries. The financial position and
results of operations of the Company's foreign branches and subsidiaries are
included in the accompanying consolidated financial statements on the basis of
their fiscal year ends, all of which are within three months of the calendar
year end. The Company's investment in Delta Health Systems, a 50%-owned
affiliate, is accounted for under the equity method. All significant
intercompany transactions and accounts have been eliminated.

Recognition of Revenues - The Company's services and systems are provided to
hospitals, multi-entity healthcare corporations, physician groups, and other
healthcare providers in North America and Europe based upon contractual
agreements. Service revenues, which include processing, professional
service and support fees, are recorded in the period in which the services are
performed. Service contracts can have terms which range from one to ten years.
System fees, consisting of software applications provided under perpetual
licensing agreements, are recognized primarily over the system's installation
period and when collection is deemed probable in order to properly match
revenues with expenses incurred. Hardware sales are recognized generally upon
installation of the equipment at the customer site.

All service and system fees are billable according to the specific terms in
each customer contract. Accounts receivable consist primarily of unsecured
short-term amounts due from the Company's customers. At December 31, 1994 and
1993, accounts receivable included $55,800,000 and $42,167,000, respectively, of
unbilled revenues recognized under certain long-term software license,
installation, and hardware contracts. Such unbilled receivables arise from the
consistent application of the revenue recognition policies described above.
Invoicing of unbilled receivables, which generally occurs within six months of
the recognition of the related revenues, is based upon the terms of the
individual customer contracts.

The Company has provided long-term financing arrangements for systems and
hardware to some of its customers. Some of these long-term financing
arrangements are partially collateralized by customer equipment. These long-
term financing arrangements have terms ranging from three to ten years and bear
interest at rates, which may be stated or imputed, ranging from 7% to 12%. The
long-term portion of these financing arrangements, included in other assets, was
$29,162,000 and $21,679,000 at December 31, 1994 and 1993, respectively.
Interest income earned on long-term financing arrangements was $2,018,000,
$1,541,000, and $953,000 in 1994, 1993, and 1992, respectively.

Current and noncurrent deferred revenues totaling $45,485,000 at December 31,
1994 and $45,096,000 at December 31, 1993, represent funds received by the
Company in advance of the performance of services or installation of systems,
which are deferred and recognized as revenues when earned.

Interest income from short-term investments included in revenues was $484,000
in 1994, $745,000 in 1993, and $1,627,000 in 1992.

Prepaid Expenses and Other Current Assets - Included in prepaid expenses and
other current assets are deferred charges of $6,562,000 at December 31, 1994 and
$5,503,000 at December 31, 1993, representing the cost of equipment which will
be expensed when the related hardware revenues are earned.

Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives, which range from two to fifteen years. The
Company's buildings, not including equipment therein, are being depreciated
using a 45-year life.

Computer Software - The Company capitalizes the cost of certain internally
produced computer software and purchased software. Capitalization for
internally produced software begins when a project reaches technological
feasibility and ceases when the software is available for general release to
customers. Internally produced computer software costs, net of accumulated
amortization, were $31,657,000 and $29,222,000 as of December 31, 1994 and 1993,
respectively. Amortization related to internally produced software amounted to
$6,290,000 in 1994, $5,464,000 in 1993, and $4,894,000 in 1992. Purchased
software, net of accumulated amortization, was $7,144,000 and $4,325,000 as of
December 31, 1994 and 1993, respectively. Computer software is amortized using
the straight-line method over its expected useful life, which is generally five
years.

29
<PAGE>

Shared Medical Systems Corporation
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1994, 1993, and 1992

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

Acquisitions - On September 30, 1994, the Company acquired all of the
outstanding capital stock of GTE Health Systems Incorporated, a provider of
information systems to the healthcare industry, from GTE Directories Corporation
for $17,287,000. This acquisition was accounted for using the purchase method.
GTE Health Systems Incorporated's results of operations have been included in
the Company's consolidated results of operations since the date of acquisition.
The following unaudited pro forma consolidated results of operations give effect
to the above acquisition as though it had occurred on January 1, 1993, however,
they are not necessarily indicative of results of operations that would have
occurred had the purchase been made on January 1, 1993, or future results of
operations of the combined companies.

<TABLE>
<CAPTION>
---------------------------------------------------------
1994 1993
---------------------------------------------------------
<S> <C> <C>
Revenues..................... $568,120,000 $525,975,000
==========================
Net Income................... $ 32,470,000 $ 29,168,000
==========================
Net Income Per Common Share.. $ 1.39 $ 1.27
==========================
---------------------------------------------------------
</TABLE>

During 1993, the Company acquired a 50% ownership share in Delta Health
Systems for approximately $6,500,000. Delta Health Systems provides information
systems and services to home healthcare organizations.

Goodwill - Included in other assets are amounts for goodwill, net of
accumulated amortization, of $20,089,000 and $3,654,000 as of December 31, 1994
and 1993, respectively. Goodwill is amortized using the straight-line method
over twenty years.

Research and Development - The Company expenses all research and non-
capitalized development costs, which generally consist of costs incurred to
establish the technological feasibility of internally produced computer
software. These expenses were primarily for computer costs and salaries of
personnel, and amounted to $39,226,000 in 1994, $37,087,000 in 1993, and
$33,703,000 in 1992.

Accrued Expenses - Included in accrued expenses are incentive compensation
plan accruals of $14,136,000 at December 31, 1994 and $11,545,000 at December
31, 1993. Incentive compensation plan payments are primarily based on revenues
generated and on the signing of new and renewal contracts. Accrual balances for
incentive compensation plans can vary based on the timing of revenues
recognized, draws and related settlements, and are not necessarily indicative of
sales activities for the year.

Income Taxes - The Company uses the liability method of accounting for income
taxes. Under this method, deferred income taxes result from temporary
differences in the recognition of revenues and expenses (principally
depreciation and the cost of internally produced software) for tax and financial
reporting purposes.

Translation of Foreign Currencies - Assets and liabilities of foreign branches
and subsidiaries are translated at current exchange rates, and the effects of
these translation adjustments are reported as a separate component of
stockholders' investment. Revenues and expenses of foreign branches and
subsidiaries are translated at the average exchange rates that prevailed over
the applicable year.

Foreign Currency Transactions - Transactions of the Company and its foreign
branches and subsidiaries are periodically made in currencies other than their
own and are included in income as they occur. There were no material gains or
losses arising from foreign currency transactions during 1994, 1993, and 1992.

Statement of Cash Flows - The Company's short-term investments have original
maturities of less than 91 days and are deemed to be cash equivalents for
purposes of reporting cash flows. At December 31, 1994 and 1993, the Company's
carrying amount for cash and short-term investments approximates fair value.
The Company paid income taxes, net of refunds, of $23,018,000 in 1994,
$13,959,000 in 1993, and $15,833,000 in 1992. During the same periods, the
Company paid interest of $1,404,000, $1,360,000, and $1,122,000, respectively.
Capital lease obligations of $1,822,000, $7,089,000, and $2,196,000 were added
by the Company in 1994, 1993, and 1992, respectively.

2. NET INCOME PER COMMON SHARE:

For each of the three years in the period ended December 31, 1994, net income
per common share was computed using the weighted average number of shares of
common stock and common stock equivalents outstanding. Common stock equivalents
result from the assumed exercise of stock options. Primary income per share and
fully diluted income per share were the same in each period.

30
<PAGE>

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

--------------------------------------------------------------------------------
3. INCOME TAXES:

The provision for income taxes includes the following:

<TABLE>
<CAPTION>
---------------------------------------------------------------
1994 1993 1992
<S> <C> <C> <C>
---------------------------------------------------------------
Federal:
Current.............. $17,131,000 $16,527,000 $14,724,000
Current deferred..... 3,495,000 1,265,000 791,000
Noncurrent deferred.. (578,000) 626,000 (622,000)
---------------------------------------
20,048,000 18,418,000 14,893,000
---------------------------------------
State:
Current.............. 2,226,000 2,011,000 1,440,000
Current deferred..... 275,000 (241,000) (18,000)
Noncurrent deferred.. (108,000) 477,000 352,000
---------------------------------------
2,393,000 2,247,000 1,774,000
---------------------------------------
Provision for
income taxes......... $22,441,000 $20,665,000 $16,667,000
=======================================
---------------------------------------------------------------
</TABLE>

The provision for income taxes results in effective tax rates for the years
ended December 31, 1994, 1993, and 1992, which differ from the statutory federal
income tax rate as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------
Percentage of Income
----------------------
1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate.... 35.0% 35.0% 34.0%
State income taxes, net of
federal income tax benefit.......... 2.7 2.8 2.6
Effect on deferred tax liability of
statutory federal income tax
rate increase....................... -- 1.0 --
Other................................ 1.3 1.2 0.4
---------------------
39.0% 40.0% 37.0%
=====================
--------------------------------------------------------------
</TABLE>

The significant components of the current and noncurrent deferred income tax
liability for the years ended December 31, 1994 and 1993 were as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------
1994 1993
-----------------------------------------------------------------
<S> <C> <C>
Depreciation and amortization.......... $10,402,000 $10,730,000
Internally produced computer software.. 11,606,000 10,760,000
Accrued and deferred revenues, net..... 2,065,000 (2,340,000)
Other temporary differences............ 2,029,000 3,868,000
------------------------
$26,102,000 $23,018,000
========================
-----------------------------------------------------------------
</TABLE>

At December 31, 1994 the Company had foreign net operating loss carryforwards
of approximately $8,900,000, most of which can be carried forward indefinitely.
The Company also has approximately $10,000,000 of tax basis in excess of book
value, which may be utilized to offset taxable income in the future. Due to
their contingent nature, these deferred tax assets have been fully offset by a
valuation allowance.

The Company does not provide for U.S. income and foreign withholding taxes on
the unremitted earnings of its foreign subsidiaries, which the Company considers
to be permanently invested. The cumulative unremitted foreign earnings amounted
to $10,252,000 at December 31, 1994.

4. EMPLOYEE BENEFIT PLAN:

The Company has a Section 401(k) retirement and savings plan. As part of this
plan, employees may contribute a portion of their earnings, which are then
invested, as specified by the employees, in the common stock of the Company or
in any of six mutual investment funds. The Company matches a certain portion of
employee contributions under the plan. The Company's matching contributions
charged to expenses in 1994, 1993, and 1992, were $2,096,000, $1,640,000, and
$1,395,000, respectively.

31
<PAGE>

Shared Medical Systems Corporation
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1994, 1993, and 1992

--------------------------------------------------------------------------------
5. CAPITAL STOCK:

The Board of Directors may authorize the issuance of one or more series of
preferred stock with dividend rates, redemption prices, conversion privileges,
and sinking fund requirements as determined by the Board.

During 1987 and 1988, the Board adopted resolutions authorizing, but not
requiring, the Company to repurchase up to a total of 5,000,000 shares of its
common stock from time to time. As of December 31, 1994, 2,873,500 shares had
been acquired, at a cumulative cost of $54,325,000. During 1994, 1993, and 1992
no additional shares were repurchased under these resolutions.

In 1991, the Board of Directors adopted a stockholder rights plan and declared
a dividend of one preferred stock purchase right for each outstanding share of
common stock. In general, such rights only become exercisable, or transferable
apart from the common stock, after a person or group (Acquiring Person) acquires
beneficial ownership of, or commences a tender or exchange offer for, 15% or
more of the Company's common stock. Each right then may be exercised to acquire
one one-thousandth of a share of a newly-created Series A Junior Participating
Preferred Stock at an exercise price of $80. Alternatively, upon the occurrence
of certain events (for example, if the Company is the surviving corporation in a
merger with an Acquiring Person), the rights entitle holders other than the
Acquiring Person to acquire common stock having a value of twice the exercise
price of the rights, or, upon the occurrence of certain other events (for
example, if the Company is acquired in a merger or other business combination
transaction in which the Company is not the surviving corporation), to acquire
common stock of the Acquiring Person having a value twice the exercise price of
the rights. In general, the rights may be redeemed by the Company at $.001 per
right at any time until the tenth day following public announcement that a 15%
position has been acquired. The rights will expire on December 31, 2001.

6. STOCK OPTIONS:

The Company has issued stock options to key employees under various incentive
and non-qualified stock option plans. These stock options may have terms
ranging up to twenty years. Incentive stock options are exercisable at the fair
market value of the Company's common stock as determined on the date of the
grant. Non-qualified stock options are exercisable at prices no less than 75%
of the fair market value of the Company's common stock as determined on the date
of the grant.

The Company also has issued stock options under two non-qualified stock option
plans for non-employee directors. Under one of these plans a committee of the
Board, comprised of members who may not participate in this plan, may grant
options at prices no less than the fair market value of the Company's common
stock on the date of the grant. These non-qualified options become exercisable
as determined by the committee and may have terms ranging from two to ten years.
Under the other plan for non-employee directors, options were granted on the
effective date of the plan to all non-employee directors then on the Board.
Subsequent to the effective date of the plan, options are issued upon a
director's initial election to the Board and on each five-year anniversary of
continuous service by a director on the Board. These non-qualified options
become exercisable during the five-year period from the date of grant and have a
ten-year term.

The following table summarizes the activity of all option plans during the
three years ended December 31:

<TABLE>
<CAPTION>
-------------------------------------------------------------------
1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year.. 1,606,772 2,065,077 1,856,927
Granted........................ 524,815 62,500 415,000
Exercised...................... (176,642) (173,079) (117,468)
Cancelled...................... (60,440) (347,726) (89,382)
---------------------------------
Outstanding, end of year........ 1,894,505 1,606,772 2,065,077
=================================
-------------------------------------------------------------------
</TABLE>

32
<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
As of December 31, 1994, a maximum of 2,355,204 and 235,000 of additional
options may be granted to key employees and non-employee directors,
respectively, under these plans. As of December 31, 1994, options to purchase
1,894,505 shares were outstanding at option prices ranging from $12.50 to $27.06
per share. Options covering 335,274 shares, with an average option price of
$14.12 per share and an aggregate option price of $4,735,000, were exercisable
as of December 31, 1994. The outstanding options expire on various dates
through 2004. Options were exercised at prices ranging from $12.50 to $19.94 in
1994, $12.50 to $20.13 in 1993, and $12.50 to $15.75 in 1992.

The Company may also grant restricted shares of its common stock under two of
these plans. Restricted stock grants are recorded as compensation expense
during the vesting terms, which currently range from three to six years. As of
December 31, 1994, there were 43,432 restricted shares outstanding under these
plans.

7. LINES OF CREDIT:

At December 31, 1994 the Company had lines of credit with banks totaling
$51,664,000, generally at their prime interest rates. At December 31, 1994,
$39,281,000 of these lines of credit was unused.

8. LONG-TERM LEASES:

The Company leases equipment, which is primarily used at the Company's
Information Services Center, for periods ranging up to 60 months. Obligations
for this type of equipment for the next five years are as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------
Operating Capital
Year ending December 31 Leases Leases
----------------------------------------------------------------
<S> <C> <C>
1995..................... $20,708,000 $3,530,000
1996..................... 18,547,000 3,230,000
1997..................... 11,945,000 1,871,000
1998..................... 781,000 168,000
1999..................... 798,000 --
-----------------------
$52,779,000 8,799,000
===========
Less interest........................ 725,000
----------
Present value of future capital lease
obligations.......................... $8,074,000
==========
----------------------------------------------------------------
</TABLE>

Rental expenses for the operating leases described above were $20,124,000 in
1994, $17,453,000 in 1993, and $20,730,000 in 1992.

Operating lease obligations for office space, primarily branch offices,
expiring at various dates through 2000 require minimum aggregate annual rentals
of: 1995 - $8,886,000, 1996 - $6,871,000, 1997 - $5,141,000, 1998 - $3,889,000,
1999 - $3,001,000. Rental expenses for these facilities amounted to $9,078,000
in 1994, $8,198,000 in 1993, and $7,867,000 in 1992.

9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

The following table summarizes quarterly financial data for 1994 and 1993:

<TABLE>
<CAPTION>
(000 omitted, except per share amounts)
---------------------------------------------------
Income
Before Net
Income Net Income
Quarter Revenues Taxes Income Per Share
---------------------------------------------------
<S> <C> <C> <C> <C>
1993:
First... $117,220 $12,159 $7,539 $.33
Second.. 124,146 12,657 7,847 .34
Third... 123,734 13,019 7,192 .31
Fourth.. 136,183 13,843 8,435 .37
---------------------------------------------------
---------------------------------------------------
1994:
First... $125,170 $14,007 $8,544 $.37
Second.. 132,607 14,036 8,562 .37
Third... 138,834 14,639 8,930 .38
Fourth.. 154,158 14,858 9,063 .39
---------------------------------------------------
</TABLE>

The 1994 fourth quarter consolidated results of operations include GTE Health
Systems Incorporated (see Note 1).

33
<PAGE>

Shared Medical Systems Corporation
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1994, 1993, and 1992

--------------------------------------------------------------------------------
10. BUSINESS SEGMENT INFORMATION:

The only line of business of the Company is computer-based information
processing services and systems, which are provided to healthcare organizations,
such as clinics, physician group practices, medical schools, public health
departments, home healthcare organizations, hospitals of all types (urban,
teaching, suburban, rural, specialty), proprietary hospital companies, and not-
for-profit multihospital groups. Revenues and operating profits for the three
years ended December 31, 1994, and identifiable assets at the end of each of
those years, classified by geographic area, were as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------
North
America Europe Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C>
1994:
Revenues..................... $480,076,000 $70,693,000 $550,769,000
=======================================
Operating profit............. $ 52,904,000 $ 6,079,000 $ 58,983,000
=========================
Interest expense............. 1,443,000
------------
Income before income taxes.. $ 57,540,000
============
Identifiable assets.......... $304,131,000 $54,685,000 $358,816,000
=========================
Corporate assets............. 21,249,000
------------
Total assets................ $380,065,000
============
-----------------------------------------------------------------------

1993:
Revenues..................... $439,260,000 $62,023,000 $501,283,000
=======================================
Operating profit............. $ 47,255,000 $ 5,772,000 $ 53,027,000
=========================
Interest expense............. 1,349,000
------------
Income before income taxes.. $ 51,678,000
============
Identifiable assets.......... $264,208,000 $41,408,000 $305,616,000
=========================
Corporate assets............. 35,826,000
------------
Total assets................ $341,442,000
============
-----------------------------------------------------------------------

1992:
Revenues..................... $403,992,000 $65,632,000 $469,624,000
=======================================
Operating profit............. $ 40,309,000 $ 5,842,000 $ 46,151,000
=========================
Interest expense............. 1,105,000
------------
Income before income taxes.. $ 45,046,000
============

Identifiable assets.......... $234,174,000 $40,576,000 $274,750,000
=========================
Corporate assets............. 30,854,000
------------
Total assets................ $305,604,000
============
-----------------------------------------------------------------------
</TABLE>

Operating profit equals total revenues less operating expenses and cost of
hardware sales. In computing operating profit, interest expense is excluded.
Identifiable assets are those assets of the Company that are identified with the
operations in each geographic area. Corporate assets are cash and short-term
investments. In 1994, 1993, and 1992, no single customer accounted for
10% or more of consolidated revenues.

34
<PAGE>

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

--------------------------------------------------------------------------------
Report of Independent Public Accountants

To the Stockholders and Board of Directors, Shared Medical Systems Corporation:

We have audited the accompanying consolidated balance sheet of Shared Medical
Systems Corporation (a Delaware corporation) and subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of income, stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 1994. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Shared Medical Systems
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.

Philadelphia, PA Arthur Andersen LLP
February 6, 1995 /s/ Arthur Andersen LLP
--------------------------------------------------------------------------------

Directors

R. James Macaleer, Chairman of the Board and
Chief Executive Officer
Mr. Macaleer has been Chairman and Chief Executive Officer since the Company's
founding in 1969.

Raymond K. Denworth, Jr., Director
Mr. Denworth has been a Director since 1976. He is a partner of Drinker Biddle
& Reath, attorneys and counsel to the Company.

Frederick W. DeTurk, Director
Mr. DeTurk has been a Director since 1981. He is President of DeTurk
Enterprises, Inc., a management consulting firm.

Josh S. Weston, Director
Mr. Weston has been a Director since 1987. He is Chairman and Chief Executive
Officer of Automatic Data Processing, Inc., an information processing services
company.

Harvey J. Wilson, Director
Mr. Wilson has been a director since 1993. He is a private investor. Mr.
Wilson previously served as an officer and member of the Board from the
Company's founding in 1969 to 1984.

Jeffrey S. Rubin, Director
Mr. Rubin has been a director since 1993. He is a private investor and
consultant.

Executive Officers

R. James Macaleer, Chairman of the Board and
Chief Executive Officer

Marvin S. Cadwell, President and Chief Operating Officer

James C. Kelly, Secretary

Michael B. Costello, Vice President of Administration and Corporate
Communications

Edward J. Grady, Controller and Assistant Treasurer

Terrence W. Kyle, Vice President of Finance, Treasurer, and Assistant Secretary

Francis W. Lavelle, Senior Vice President

Bonnie L. Shuman, General Counsel and Assistant Secretary

Marion G. Tomlin, Senior Vice President

35
<PAGE>

Shared Medical Systems Corporation
--------------------------------------------------------------------------------
Domestic and International Offices

--------------------------------------------------------------------------------
DOMESTIC

Corporate Headquarters

SMS
51 Valley Stream Parkway
Malvern, PA 19355
610-219-6300

Branch Offices

Ann Arbor
4251 Plymouth Road
Ann Arbor, MI 48105
313-994-8300

Atlanta
400 Northridge Road
Atlanta, GA 30350
404-993-2490

Atlanta (MedSeries4 Division)
900 Circle 75 Parkway
Atlanta, GA 30339
800-783-4833

Boston
301 Edgewater Place
Wakefield, MA 01880
617-224-0817

Charlotte
2901 Coltsgate Road
Charlotte, NC 28211
704-362-4802

Chicago
1600 Golf Road
Rolling Meadows, IL 60008
708-806-0666

Cleveland
3 Summit Park Drive
Independence, OH 44131
216-524-0313

Columbus
455 Hutchinson Avenue
Columbus, OH 43235
614-885-0198

Dallas
800 E. Campbell Road
Richardson, TX 75081
214-783-6737

Denver
1355 S. Colorado Boulevard
Denver, CO 80222
303-692-9244

Florida
100 West Cypress Creek Road
Ft. Lauderdale, FL 33309
305-771-4880

Indianapolis
2780 Waterfront Parkway E Drive
Indianapolis, IN 46214
317-293-3360

Kansas City
4350 Shawnee Mission Parkway
Shawnee Mission, KS 66205
913-384-4811

Los Angeles
3010 Old Ranch Parkway
Seal Beach, CA 90740
310-596-4554

Nashville
Three Maryland Farms Boulevard
Brentwood, TN 37027
615-377-1244

New Jersey
343 Thornall Street
Edison, NJ 08818
908-906-8900

New Orleans
3850 N. Causeway Boulevard
Metairie, LA 70002
504-835-3894

New York
2 Penn Plaza
New York, NY 10121
212-563-2380

Oakland
2201 Broadway
Oakland, CA 94612
510-444-3434

Philadelphia
100 Berwyn Park
Berwyn, PA 19312
610-640-4490

Pittsburgh
Foster Plaza #9
750 Holiday Drive
Pittsburgh, PA 15220
412-921-6400

Salt Lake City
175 South West Temple
Salt Lake City, UT 84101
800-243-8483

San Francisco
6000 Stoneridge Mall Road
Pleasanton, CA 94588
510-463-9750

San Juan
654 Avenue Munoz Rivera
Hato Rey, PR 00918
809-756-6700

Santa Barbara
4213 State Street
Santa Barbara, CA 93110
805-964-5561

Seattle
3055 112th Avenue, N.E.
Bellevue, WA 98004
206-827-4455

St. Louis
1801 Park 270 Drive
St. Louis, MO 63146
314-542-0100

Virginia
2411 Dulles Corner Drive
Herndon, VA 22071
703-713-3490

Wilmington
1010 Concord Avenue
Wilmington, DE 19802
302-655-8514

INTERNATIONAL

Administration-Europe

SMS Europe
Deane House
Sarum Hill
Basingstoke
Hampshire RG21 1SR
England
011-44-256-467556

Operating Companies

Belgium
SMS Belgium
Keiberg Estate
Excelsiorlaan, 4042
B1930 Zaventem
Belgium
011-32-2-725-0407

France
SMS France
Batiment, 8
Mini Parc
Parc Euromedicine
Montpellier 34198
Cedex 5
France
011-33-6-7041143

Germany
SMS Zweigniederlassung
der SMS Corporation
Kolner Strasse 10b
W-6236 Eschborn/Ts.bei
Frankfurt
Germany
###-##-####/9240

Hungary
SMS Hungary
Egeszegugyi Informatikai Kft.
H-1146 Budapest
Hungaria Krt. 162
Hungary
011-36-1252-7345

Ireland
SMS Ireland, Unlimited
SMS House
St. Johns Court Business Centre
Swords Road Santry
Dublin 9
Ireland
011-353-1-8420022

Italy
SMS Italia, S.r.l.
Piazza Sante Bargellini, 21
00157 Rome
Italy
O11-39-6-439-3350

Spain
SMS Corp y Cia S.R.C.
Avenida de los Encuartes, 21
28760 Tres Cantos, Madrid
Spain
011-34-1-807-7500

The Netherlands
SMS Nederland b.v.
Nevelgaarde 4
3436 ZZ Nieuwegein
The Netherlands
011-31-3402-52852

United Kingdom
SMS United Kingdom, Ltd.
Sarum Gate
Sarum Hill
Basingstoke
Hampshire RG21 1SR
England
011-44-256-57100

Windows/(R)/ is a registered trademark of Microsoft Corp.

<PAGE>

[LOGO OF SMS CORP.]

Shared Medical Systems Corporation
51 Valley Stream Parkway
Malvern, PA 19355

610-219-6300
<PAGE>

Corporate Headquarters

Shared Medical Systems Corporation
51 Valley Stream Parkway
Malvern, PA 19355
610-219-6300

Annual Stockholders Meeting
The Annual Stockholders Meeting will
be held on Thursday, May 11, 1995,
at the Union League of Philadelphia,
140 South Broad Street, Philadelphia,
Pennsylvania at 11:30 a.m. You are
cordially invited to attend.

Common Stock
SMS common stock trades on
The Nasdaq Stock Market under
the symbol SMED.

Transfer Agent
Chemical Bank
J.A.F. Building
P.O. Box 3068
New York, NY 10116-3068
800-851-9677

Counsel
Drinker Biddle & Reath
Philadelphia, PA

Independent Public Accountants
Arthur Andersen LLP
Philadelphia, PA

Member
[LOGO of American Business Conference]
American
Business
Conference

SMS is an Equal Employment
Opportunity/Affirmative
Action Employer.

[LOGO FOR RECYCLE] This annual report is printed on recycled paper.

<PAGE>

Exhibit (21)

Subsidiaries of the Registrant
------------------------------

SMS Enterprises Corporation (a Delaware corporation)

<PAGE>

Exhibit (23)

[Arthur Andersen LLP Logo Appears Here]

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Shared Medical Systems Corporation:

As independent public accountants, we hereby consent to the incorporation of our
reports dated February 6, 1995 included (or incorporated by reference) in this
Form 10-K, into the Company's previously filed Registration Statements on Form
S-8 (File Nos. 2-72055, 2-83465, 2-84938, 2-85345, 2-85346, 2-96224, 2-96225,
33-18161, 33-25009, 33-25010, 33-34089, 33-34410, 33-37742, and 33-47572).

/s/ Arthur Andersen LLP

Arthur Andersen LLP

Philadelphia, Pennsylvania
March 30, 1995

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 21,249
<SECURITIES> 0
<RECEIVABLES> 143,871
<ALLOWANCES> 5,317
<INVENTORY> 0
<CURRENT-ASSETS> 177,478
<PP&E> 239,600
<DEPRECIATION> 134,513
<TOTAL-ASSETS> 380,065
<CURRENT-LIABILITIES> 116,847
<BONDS> 4,974
<COMMON> 270
0
0
<OTHER-SE> 218,926
<TOTAL-LIABILITY-AND-EQUITY> 380,065
<SALES> 46,383
<TOTAL-REVENUES> 550,769
<CGS> 38,362
<TOTAL-COSTS> 444,278
<OTHER-EXPENSES> 47,508
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,443
<INCOME-PRETAX> 57,540
<INCOME-TAX> 22,441
<INCOME-CONTINUING> 35,099
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,099
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51

</TABLE>