U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                  FORM 10-KSB/A
                                  Amendment - 1

(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                            January 31, 1995
                         --------------------------------------------
                                       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              N/A          to
Commission file Number                               33-9396-LA
                           National Health Enhancement Systems, Inc.
(Name of small business issuer in its charter)

Delaware 86-0460312
(State or other jurisdiction of                   (I.R.S. Employer
 incorporation or organization)                   Identification
                                                  Number)
Suite 1750
3200 North Central Avenue
Phoenix, Arizona                                  85012
(Address of principal executive offices)          (Zip Code)

Issuer's telephone number                         602-230-7575

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

                                      NONE

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

                          COMMON STOCK $.001 PAR VALUE

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ].

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ X ].

Issuer's revenues for its most recent fiscal year:   $ 13,350,268

As of March 31, 1995, the aggregate  market value of Registrant's  voting shares
held by non-affiliates of shares, based upon the average between the closing bid
and  asked  prices  of  such  stock  as  quoted  on  NASDAQ,  was  approximately
$1,746,663.

The number of shares of the  Registrant's  common stock issued was 4,163,636 and
3,791,220 outstanding at March 31, 1995.

The  Registrant's  definitive Proxy Statement to be filed pursuant to Regulation
14A with the Securities  and Exchange  Commission not later than May 31, 1995 is
incorporated by reference into Part III, Items 9 through 12.
JTZ3414





                                TABLE OF CONTENTS

                                                                                
                                                                          PAGE
PART I                                                                    ----

   Item 1.        Description of Business                                   1
   Item 2.        Description of Properties                                 9
   Item 3.        Legal Proceedings                                         9
   Item 4.        Submission of Matters to a Vote of Security Holders       9

PART II

   Item 5.        Market for Common Equity and Related Stockholder          10
                  Matters
   Item 6.        Management's Discussion and Analysis of
                  Financial Condition and Results of Operations             11
   Item 7.        Financial Statements                                      15
   Item 8.        Changes In and Disagreements with Accountants on
                  Accounting and Financial Disclosure                       30

PART III

   Item 9.        Directors, Executive Officers, Promoters and
                  Control Persons:  Compliance with Section 16(a) of        30
                  the Exchange Act                                          30
   Item 10.       Executive Compensation                                    30
   Item 11.       Security Ownership of Certain Beneficial
                  Owners and Management                                     30
   Item 12.       Certain Relationships and Related Transactions            30
   Item 13.       Exhibits and Reports on Form 8-K                          30

SIGNATURES                                                                  31


National  Health  Enhancement  Systems,   Inc.  has  restated  its  consolidated
financial  statements  for the fiscal  year ended  January  31, 1995 and for the
quarterly  periods in the fiscal years ended January 31, 1996 and 1995. See Part
II, Item 6,  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations.

PART I

Item 1.  Description of Business

Business Development

National  Health   Enhancement   Systems,   Inc.  (the  "Company"),   originally
incorporated  in July 1983 as an  Arizona  corporation  named AHI  Limited,  was
formed for the purpose of developing,  licensing and marketing health evaluation
programs to healthcare providers,  including hospitals,  medical groups, clinics
and physicians.  On October 7, 1986, the Company was  reincorporated in Delaware
by merger into a Delaware corporation formed for that purpose.

In   1983,   the   Company   commenced    marketing   a   single    proprietary,
software-supported  health  evaluation  system  designed to assist a  healthcare
provider to assess an apparently "well" individual's overall fitness and risk of
incurring  cardiovascular  disease.  This product, the Personal Fitness Profile,
helped  healthcare  providers to generate  additional  direct  revenue and refer
consumers  to  other  programs,   departments  or  physicians  for  remedial  or
preventive  care. The Company's  business  strategy has since  evolved,  and the
Company's  current  business  objective  is to become the  leading  supplier  of
medical  call  center  system  products  and  services  that  enable  healthcare
providers  to  reduce  costs  associated  with   inappropriate   utilization  of
healthcare while improving service and quality.

In April 1993,  the  Company  acquired  by merger  into a newly  formed  Company
subsidiary,  all the assets and business of First Strategic Group, Ltd. ("FSG"),
a California  corporation.  FSG is a consulting  firm which  specializes  in the
development of healthcare  marketing and  advertising  strategies.  FSG services
include  providing  healthcare  marketing  consulting  services and  strategies,
development of creative marketing and/or  advertising  materials (such as direct
mail pieces and print ad materials) as requested by its clients. FSG services do
not include the  placement of media or  advertising.  The Company  believes that
FSG's business  supports the Company's short and long term strategic  goals, and
enhances the range of services available to existing and prospective clients and
increases  revenue,  thereby  reducing the  Company's  dependence on initial fee
revenue from licensed products.

Healthcare  expenditures in the United States  currently exceed 13% of the gross
national product.  The need to slow the growth of healthcare costs has served as
a catalyst for healthcare  reform.  The  escalating  costs of healthcare and the
focus  healthcare  has  received  have  caused  many  changes  to  occur  in the
healthcare market. In the Company's view, one of the most significant changes is
the rapid and accelerating growth of managed care in both the private and public
sector.  As the focus shifts from  fee-for-service  to capitation,  managed care
programs are becoming more prevalent, and will begin to have a tremendous impact
on how business is done in the healthcare  industry.  The Company  believes this
trend  will  create  a   marketplace   where   healthcare   providers   maximize
profitability by improving or reducing utilization and managing health risk more
directly than in the past, i.e. by keeping people healthy and providing the most
cost-effective care should they become sick.

According  to the United  States  General  Accounting  Office,  an  estimated 90
million emergency department visits occurred in 1992, approximately 40% of these
emergency  department  visits were  unnecessary.  The cost to diagnose and treat
acute and chronic  conditions  that are not truly  emergencies,  in an emergency
department,  are far more expensive than the cost to treat such  conditions in a
physician's office.

The  Company's  strategy  focuses  upon the  opportunity  to  assist  healthcare
providers  redirect  these costly and  unnecessary  emergency  room visits,  and
similar inefficient  utilization  patterns to more cost-effective  settings,  by
offering  medical call center  products and services which can be implemented or
used by healthcare providers.  The Company has "coined" the phrase "medical call
center"  to  represent  a part of the  solution  to improve  service  and reduce
healthcare  costs in this  context.  These  medical  call centers are staffed by
registered   nurses,   who  field  calls  from  people  with  health  questions,
24-hours-a-day,  seven days a week.  Nurses  provide  callers with access to the
right  information at the right time and direct them to the most  cost-effective
and appropriate level of care. Callers then become actively involved in managing
their own health, and are better equipped to make informed healthcare decisions.
The information  callers  receive helps them to make better  decisions and helps
them avoid  unnecessary or  inappropriate  emergency or physician office visits.
Ultimately,  the Company  believes this reduces  healthcare  costs and increases
satisfaction  and loyalty within the  healthcare  delivery  system.  The typical
medical call center offers the following capabilities:

     1.  Assists people in evaluating their health symptoms.

     2.  Enables  people to better  understand  and  manage  serious  healthcare
         episodes.

     3.  Provides assistance in administering at-home remedies.

     4.  Offers educational information on a wide variety of health topics.

     5.  Offers  assistance  to find a  physician,  class or program to meet the
         callers needs.

As managed care and capitation continue to change the healthcare  industry,  the
focus continues to shift.  The Company  believes that healthcare  providers,  to
succeed, will seek to increase access to information while concurrently managing
access to  quality  healthcare  services,  and that  this  shift  toward  demand
management will require greater reliance on three components of healthcare: self
care,  patient  education and telephone  triage.  Medical call centers can guide
nurses in triaging adult and pediatric patients to the most appropriate and cost
effective levels of care. Success for hospitals,  primary care physicians, HMO's
and other  alliances will, in the Company's  opinion,  depend upon the degree to
which  these   organizations  are  able  to  effectively  educate  patients  and
subscribers regarding appropriate  utilization of the healthcare system. Medical
call centers will support demand management strategies by delivering information
to patients and subscribers that will help them make intelligent,  well-informed
decisions about their health.

The Company's software products provide the foundation to implement medical call
centers and systems operated by or for healthcare providers to assist healthcare
providers  in  reducing  healthcare  costs and help them  improve the quality of
service to their  customers.  During the past three  years the  Company has also
expanded  its product  line from  primarily  software-based  products to include
strategic  healthcare  consulting  services.  The  Company's  services  focus on
assisting  healthcare providers meet the marketing challenges they are facing in
a  changing  healthcare   industry.   The  Company's  management  believes  that
successful  healthcare  providers  will  continue  to  market  themselves  in an
environment  where  consumers  will have some  opportunity  to make  choices for
delivery of  healthcare.  The Company  currently  distributes  its  products and
services through Company-employed sales representatives  primarily to hospitals,
and  plans to  expand  distribution  to  medical  groups,  clinics,  physicians,
self-insured employers and managed care organizations.  The Company continues to
evaluate alternative distribution methods for its products and services and will
continue to evaluate expanding its current products and services.

Products and Services

The Company's  products have expanded over the past few years to include certain
services and  software-based  products with prices  ranging  between  $2,500 and
$250,000.  The  Company's  base of users now includes  over 600  hospitals.  The
Company's  management  believes that this network of  healthcare  providers is a
base that will facilitate the Company's distribution of new products.

The Company's core software-based products are:

                           - Centramax (R)
                           - Centramax. MTM
                           - Centramax PlusTM
                           - Centramax. M PlusTM
                           - VoicemaxTM
                           - Voicemax PlusTM
                           - Referral One (R)


The Company's products also include value-added products or services such as:

                           - The Professionals
                           - HealthFone
                           - Profit Acceleration System
                           - Health Direct
                           - Healthcare Marketing Services

Centramax and Centramax.  M. In December 1989,  the Company  released  Centramax
(R), a DOS-based  software system that is designed to manage  consumer  contacts
through a centralized database. With Centramax, the healthcare provider or other
end user can  capture and store  information  on the  caller,  and  subsequently
market  directly to this and other  consumers  based on specific  information or
needs  obtained  from the  caller;  access,  analyze  and report on  information
contained  in  the  database;   and  track  revenues  generated  from  marketing
campaigns. The Company believes that Centramax enables a healthcare organization
to  improve  its  customer  service  function  and more  effectively  manage the
marketing  function  through the  management of  information.  For example,  the
inbound telephone functions of Centramax are initiated when an operator receives
a call. The Centramax  operator then  retrieves a particular  script and follows
the  directions  given.  The system  enables the  operator to  cross-sell  other
programs  offered by the healthcare  provider which may not have been motivating
factors behind the original call but which may be of interest to the caller. For
example,  a pregnant  caller may ask for a referral to an OB/GYN.  The Centramax
software will remind the operator to mention the healthcare  providers  prenatal
classes.  With one  keystroke  the  operator  can access the  schedule  and then
register the caller.

In  January  1995 the  Company  released  its  Centramax.  M product  which is a
Windows-based  product  that has all the  capabilities  of  Centramax  including
enhanced reporting and graphic capabilities.

Centramax  and  Centramax.  M  are  offered  to  healthcare  providers  under  a
non-exclusive  license  at an initial  license  fee plus an annual  license  and
support fee. The user is entitled to ongoing software  support,  maintenance and
enhancements during the term of the license.


Centramax  Plus and  Centramax.  M Plus.  Centramax  Plus combines the Centramax
software product with certain  medically-based  health  information  guidelines,
known as the Health  Reference  Information  System(TM)  ("HRIS"),  that  enable
nurses to answer  health-related  questions on incoming  calls.  Centramax  Plus
assists a nurse to  respond to  callers'  questions,  answering  a wide range of
medical and health  related  questions,  and  directing  callers to  appropriate
medical   resources   thereby  providing  the  caller  with  greater  access  to
information  to make an informed  decision and the  healthcare  provider with an
opportunity to direct the caller to the most  appropriate  cost effective  care.
Each Centramax Plus user is granted a non-exclusive license. The Company charges
an initial license fee and an annual support and license fee, which entitles the
Centramax  Plus user to continue to license the product and to ongoing  software
updates, support, maintenance, enhancements and updates to the HRIS for the term
of the license.

The  Company  initially  developed  the  HRIS  internally  through  research  of
available current consumer health  information and medical texts. In March 1990,
the  Company  transferred  the  ownership  rights in the HRIS to a third  party,
retaining  the  right to  distribute  the HRIS for a period  of time.  Under the
agreement the third party is responsible for the accuracy,  currency and medical
appropriateness of the HRIS,  including  additional HRIS developed thereunder by
the Company.  Provided certain performance criteria are met, the Company has the
right to be the exclusive world-wide distributor of the HRIS for the term of the
agreement.  Under  certain  circumstances  the  Company is granted  the right to
purchase all rights to the HRIS.

Centramax.  M Plus,  which was  released  in January  1995,  is a  Windows-based
software product that combines all the features  included in Centramax Plus with
improved and  enhanced  reporting  and graphic  capabilities  and the  pediatric
guidelines  not  offered  in the  Centramax  Plus  DOS  product.  The  pediatric
guidelines  are provided  through an exclusive  agreement  with Barton  Schmitt,
M.D.,  Professor of Pediatrics at the University of Colorado  School of Medicine
and a recognized  pioneer in pediatric  telephone  triage. In September 1994 the
Company  entered  into an  agreement  with Dr.  Schmitt,  pursuant  to which the
Company acquired certain exclusive rights to distribute the pediatric guidelines
developed by Dr.  Schmitt to medical call centers or for use in software used in
medical call centers.  The pediatric  guidelines have been used for the past six
(6) years in the "After  Hours  Program"  established  at the Denver  Children's
Hospital.  The Company has included the  pediatric  guidelines in certain of its
medical  call center  products,  and the Company is  obligated  to pay a royalty
based on the sales of the pediatric guidelines by the Company on a standalone or
bundled basis.

Centramax.  M Plus and  Centramax  Plus are the base  products for the Company's
medical call center  offering and are offered to  healthcare  providers  under a
non-exclusive  license  at an initial  license  fee plus an annual  license  and
support fee. Users are entitled to ongoing  software  support,  maintenance  and
enhancements during the term of the license.

The  Professionals.  The  Professionals  was originally  released to include the
Centramax software,  the HRIS and a marketing package.  The Company has recently
changed its strategy  regarding  The  Professionals.  Currently the Company only
includes  the  marketing  package,  which is  intended  to create  awareness  of
targeted services,  and to generate incoming consumer calls,  thereby helping to
build the awareness of a healthcare  providers  medical call center  operations.
The  Company  believes  that  healthcare  providers  will  continue  to purchase
marketing  tools in order to assist them to compete  among other  providers  for
managed care and other opportunities.

The marketing component is a strategic  integration package that is a customized
turn-key  marketing  campaign  which is designed  to position  the end user as a
leading  resource center for medical and health  information in its market.  The
Company believes that this customized  marketing  campaign provides the hospital
with  a  sophisticated,  state-of-the-art  set  of  marketing  materials  at  an
economical  price.  The Company  believes it would cost a hospital  two to three
times  more  than the  total  license  fee for The  Professionals  to  develop a
comparable customized marketing campaign on its own.

Each user of The Professionals is granted a five-year  renewable license with an
exclusive geographic service area in which it is the only healthcare provider in
that  service  area that has been  granted  the  right to use The  Professionals
service mark and customized marketing package. The Company charges each licensee
of The  Professionals  an initial  license fee and an annual license and support
fee, which entitles the user to have continued geographic exclusivity and annual
updates to the marketing package, during the term of the license.

Interactive  Voice Response  System.  The Company's  interactive  voice response
product line includes Voicemax, and Voicemax Plus. Introduced in September 1992,
these products permit a licensee to provide health  information to consumers via
use of a touch-tone  telephone,  24 hours a day, 7 days a week, 365 days a year.
These products,  which operate using The Brite Voice Systems hardware  platform,
allow  callers  to  anonymously  access  health  information  (up to 950  health
categories),  physician  referrals,  class information or other information that
can be  programmed  or customized  by the  licensee.  The  HealthFone  marketing
product is a strategic product which offers an exclusive name brand to assist in
generating call volume for the Voicemax and Voicemax Plus products.

The Company believes that the benefits of its interactive  voice response system
enable a  licensee  to  improve  utilization  of  existing  resources,  increase
visibility  and improve  profitability.  Each user of the  Voicemax and Voicemax
Plus  products  is granted a  non-exclusive  license.  Each  HealthFone  user is
granted a five-year renewable license with an exclusive  geographic service area
in which the user is the only healthcare  provider in that service area that has
been granted the right to use the HealthFone  tradename and marketing materials.
The Company charges each user of the  interactive  voice products an initial fee
and an annual license and support fee, which entitles the user to annual updates
to the health information,  software support and enhancements to the interactive
voice response products.

The Profit Acceleration  System. The Profit Acceleration System ("PAS") combines
nine  proprietary,  software-supported  health  screening  products  designed to
assess an individual's  overall  fitness and risk of incurring  certain kinds of
disease.  The nine products are: "The Heart TestTM",  "The Health TestTM",  "The
Cancer TestTM",  "Double CheckTM",  "The Diabetes  TestTM",  "The Woman's Health
TestTM" and "The  Woman's  Health  CheckTM",  "The Life Test TM" and the "Custom
Profile".  The PAS also includes a follow-up  referral  system linked to the PAS
programs called "The Healthcare Telemarketing ProgramTM" (The PAS components are
referred to herein as the "Programs".) Healthcare providers deliver the Programs
as part of a lead generation  system or risk assessment system that permits them
to refer consumers to other programs,  physicians or departments for remedial or
preventive care and thereby generate additional revenue. The PAS is offered with
territorial   exclusivity  and  includes  proprietary   software,   confidential
instruction  manuals for implementing and distributing the Programs as part of a
marketing  campaign  or  strategy;   and  additional  standard  promotional  and
marketing materials. The software supporting the Programs can also produce group
summary reports  analyzing a group's  cardiovascular  risk factors,  cancer risk
factors, health assessment results, diabetes risk factors and levels of interest
in specific intervention programs.

The "Custom Profile", the ninth software-supported health assessment in the PAS,
was launched in December of 1994. This new profile is a flexible risk management
tool that allows users to obtain  information  from their  markets and follow-up
with other disease  specific  assessments.  The Custom Profile is designed to be
completely  customizable in order to meet the needs of physician groups, managed
care contracts,  direct contracts and support case management  efforts,  as they
transition from fee-for-service to managed care and capitation.

The current  standard PAS  agreement  grants each new PAS user up to a five-year
license with a geographic  service area within which it has the exclusive  right
among  healthcare  providers to use the software  supporting  the Programs.  The
initial  fee paid by a PAS  user  depends  primarily  on the  population  of the
service  area,  the  number of  hospitals  in the  service  area,  the number of
physicians  in a service  area and the  economic  environment  of the area.  The
Company evaluates increasing the initial PAS user fee as additional programs are
developed.  In addition,  the standard PAS license agreement  requires that each
PAS licensee pay the Company a monthly support fee.

Due to the geographic  exclusivity  of the PAS, the number of available  markets
has decreased as the Company  increased its PAS customer  base.  Presently,  the
Company  believes  markets remain  available and that in the foreseeable  future
initial  license fee revenue will  continue to be generated  from the  available
markets.  In addition,  the  revenues  from PAS renewal  fees,  support fees and
material  sales will  continue  to  provide  the  Company  with  ongoing  future
revenues.

Health  Direct.  On April 9,  1991,  the  Company  entered  into a  distribution
agreement with McMurry Publishing Company (formerly Vim & Vigor, Inc.) to be the
exclusive distributor for a specialized  publication now known as Health Direct.
Health Direct is an eight-page,  direct response  publication  (direct  response
marketing  system)  designed   primarily  to  promote  hospital  services  while
providing health information.  The Health Direct contains thirty to forty "quick
read" health  related  articles  that can be customized  by each  licensee.  The
Company  charges the Health  Direct  licensee an initial  license fee and grants
geographic exclusivity to distribute the Health Direct product (generally within
a certain zip code area). In addition,  the Company  requires each Health Direct
licensee to purchase a minimum  number of copies of Health  Direct per  quarter.
The Company is obligated to pay McMurry  Publishing a portion of the initial fee
received from Health Direct licensees.

Healthcare  Marketing Services.  FSG provides healthcare strategic and marketing
services to existing and prospective  clients.  FSG services  include  providing
healthcare marketing consulting services and strategies, development of creative
marketing  and/or  advertising  materials (such as direct mail pieces,  print ad
materials)  as  requested  by the  clients.  FSG  services  do not  include  the
placement of media.

Other  Products and Services.  In May 1988,  the Company  introduced a physician
referral system  ("Referral  One"),  which is a proprietary,  software-supported
product  distributed and marketed  primarily to hospitals through  non-exclusive
software  license  agreements.  Referral  One is to be  used as a  referral  and
follow-up system for referring  interested  individuals to specific  physicians.
The Personal Fitness Profile (the  "Profile"),  was the Company's first product,
which it  commenced  marketing  in July  1983.  The  Profile  is a  proprietary,
software-supported  health  evaluation  system  designed to permit a  healthcare
provider to assess an apparently "well" individual's overall fitness and risk of
incurring  cardiovascular disease.  Revenues generated from the Referral One and
the  Profile  during  the last  three  fiscal  years  were  less  than 5% of the
Company's  total  revenue  and there are no  immediate  plans by the  Company to
devote a significant amount of resources to distribute these products beyond the
current level.

New Products. In January 1995 the Company introduced Centramax. M and Centramax.
M Plus. While the Company  believes that these products are being  well-received
in the market, there are no assurances that these products will be successful.

The Company intends to develop or acquire,  and to market to its current clients
and others,  additional products and services which may or may not be similar to
its existing  products.  The Company's  future growth in revenue is dependent on
the Company's ability to acquire or develop and successfully market new products
in the changing  healthcare market.  There are no assurances the Company will be
able to do so. The  Company's  future  success  also depends upon its ability to
sell its current  products to, and acquire or develop new products for,  managed
care and similar organizations. The managed care market is changing rapidly, the
Company's  historical business has not been in the managed care market and there
are no assurances  that the Company will be able to compete  successfully in the
managed care market.

Research and Development.  The Company's development staff presently consists of
a senior vice president of software  development,  ten computer systems analysts
and two research and development  specialists.  Management estimates that during
the two most recent fiscal years, the Company spent approximately  $1,136,000 on
company-sponsored   research  and   development   activities   (which   includes
enhancements and upgrades to the Company's products).

Liability in the  Healthcare  Industry.  In recent  years,  participants  in the
healthcare  industry,   including   physicians,   nurses  and  other  healthcare
professionals,  have become subject to an increasing number of lawsuits alleging
malpractice, product liability and related legal theories, many of which involve
large  claims and  significant  defense  costs.  Although  the Company  does not
provide healthcare services directly to consumers, medical malpractice,  product
liability or similar claims against the Company's customers relating to delivery
and use of the Company's  products may also be made against the Company.  Due to
the nature of its business, the Company could become involved in litigation with
the  attendant  risk  of  adverse  publicity,   significant  defense  costs  and
substantial  damage  awards.  As of April 15, 1995, no such claims had been made
against the Company.  However, there can be no assurance that claims will not be
brought against the Company.  Even if such claims ultimately prove to be without
merit,  defending  against them can be time  consuming  and  expensive,  and any
adverse  publicity  associated with such a claim could have an adverse effect on
the Company.  The Company is in no position to determine the probability of such
claims being made.

The Company has taken  certain  steps to minimize the risk of potential  claims.
Delivery  and  use of  the  Company's  products  is  the  responsibility  of the
licensee,  and each licensee is required to indemnify the Company  against third
party claims  arising out of use of the products by the  licensee.  In addition,
the agreement with the third party for use of the HRIS provides that the Company
shall be indemnified  and held harmless from third party claims arising from the
accuracy,  currency or  completeness  of the  information  contained in the HRIS
reviewed by the third party. The Company also presently  maintains  professional
errors and omissions liability insurance which it believes to be adequate. There
can be no assurance,  however,  that claims in excess of the Company's insurance
coverage  will not arise or that all claims would be covered by such  insurance.
In addition,  although the Company has not  experienced  difficulty in obtaining
insurance  coverage in the past, there can be no assurance that the Company will
be able to maintain existing  insurance  coverage or obtain increased  insurance
coverage on acceptable  terms or at all. The Company  expects to seek  increased
insurance coverage as its business grows.

Regulatory Matters

Government  Regulation.  The  healthcare  industry is subject to  extensive  and
evolving government regulation at both the Federal and state level regarding the
provision,  marketing and  reimbursement  of  healthcare  services and products,
including Medicare/Medicaid anti-kickback regulations and requirements governing
the  provisions of healthcare  information  services.  Specific  sections of the
Social  Security Act  authorize  the  exclusion of an  individual or entity from
reimbursement  and/or  participation  in  state  health  programs  and  Medicare
programs if it has violated the Social  Security Act. In July 1991,  regulations
outlined  certain  payment  practices  which  would not be subject  to  criminal
prosecution.   These   regulations,   commonly  referred  to  as  "safe  harbor"
regulations,  effect the manner in which hospitals make physician referrals. The
Company's  software product  accommodates the entry of the information  required
under the "safe harbor" regulations  provided that the appropriate  policies and
procedures are followed by the users of the Company's products.  The Company has
no reason to believe that its business violates any Federal or state statutes or
regulations.

Franchise Matters. Effective October 21, 1979, the Federal Trade Commission (the
"FTC")  adopted a franchise  rule (the "FTC Rule") which,  except for exemptions
therefrom  in  particular  instances,  requires  a  franchiser  to  give to each
prospective   franchisee  at  specified  times  a  written  disclosure  document
containing  certain  information  about the franchise and complete copies of the
franchise agreement and any related agreements.

In addition,  approximately  30 states regulate the offer and sale of franchises
or "business opportunities" (which may include franchises) or both, by requiring
registration  of  franchises  or business  opportunities  prior to their sale or
special disclosure documents regarding the sale thereof, or both. Also, a number
of states  have  unfair  trade  practices  or "little  FTC" acts that  typically
contain general prohibitions against unfair or deceptive acts or practices,  and
in many such states,  violation of the federal  franchise  regulations  may also
constitute  violations of the state "little FTC" acts. In addition to regulation
of offers  and sales of  franchises  and  business  opportunities,  distribution
programs  are  subject  to, or  potentially  subject to, a number of other laws,
including  state laws  concerning  termination  and  renewal of  franchises  and
federal and state antitrust laws.

From 1986 to 1993, the Company registered the Profile and the PAS as a franchise
or  business  opportunity  in certain  states  where the Company  believed  such
registration was prudent under the franchise or business opportunity law of that
state, and also marketed the PAS and the Profile only to hospitals or healthcare
providers that met  requirements  of an available  exemption under the FTC Rule.
The Company  believes  that the mix and emphasis of the products that it markets
to hospitals has changed substantially. The Profile is no longer the focal point
of the Company's marketing efforts.  Furthermore, in marketing its products, the
Company is no longer  promoting the Profile and the PAS as products that offer a
potential direct revenue stream through sale of fitness  assessments and reports
to the general public.  Instead,  the Company's  marketing efforts now emphasize
the usefulness of the Company's  products in a hospital's own marketing and cost
containment efforts. The Company markets the Programs as questionnaires that can
be  distributed  to the  general  public  free  of  charge  for the  purpose  of
stimulating  interest in health-related  issues and the various services offered
by the hospital. The Profile is now offered as an option that can be included in
this system.  In light of the  foregoing,  the Company  believes it is no longer
required to register the offer and sale of the PAS and the Profile,  and in 1993
the Company discontinued registration of the PAS or Profile as a franchise.

Trademarks and Proprietary Rights

The  Company  claims  proprietary  rights  in the  software  that  supports  its
products,  as  well as in  confidential  training  and  promotion  manuals,  the
questionnaires  and  report  forms  used with the PAS,  the input  forms used in
connection  with the Profile,  the packaging and  presentation  of the Company's
products and their representative  components and related protectable materials.
The Company  has  registered  software  source  code  copyrights  for all of its
DOS-based  software  products  and intends to  register  its source code for its
newly developed  Windows-based  software  products.  In addition,  the Company's
current agreements prohibit its customers from decoding,  reproducing or copying
the software (except for the customer's own use in machine readable form). Those
agreements also require customers to take reasonable and appropriate  actions to
protect and preserve the Company's rights in the software and other  proprietary
materials.  Subject to certain conditions, the Company will indemnify and defend
a customer with respect to claims brought by third parties  against the customer
for infringement of patents,  copyrights and trademarks,  or misappropriation of
trade  secrets or other  proprietary  rights  relating  to the  products  of the
Company licensed by its customers.
The Company is not aware of any such claims.

The Company holds registered  trademarks for the Centramax,  The  Professionals,
HealthFone  and Referral One names with the United  States  Patent and Trademark
Office.

Market Conditions and Competition


The  healthcare  industry  in  general  is  extremely  competitive.   Healthcare
expenditures are currently approximately 13% of the gross national product. Many
changes in the  industry  that began in the 1980's will  continue  through  this
decade and will transform the way healthcare providers function and the types of
healthcare  services  they  provide.  The  following  trends among  others,  are
anticipated to have a strong influence on healthcare in the 1990's:

         -    Rising national healthcare expenditures.
         -    Reduced reimbursement levels.
         -    Increasing competition among providers.
         -    Shifting healthcare delivery patterns.
         -    Aging population with an increased demand for healthcare services.
         -     Hospital mergers and realignments.

Within the  healthcare  industry,  the Company  and its  clients  are  competing
directly  and  indirectly  for  the  business  of  individuals   and  businesses
interested in healthcare services. The Company believes that hospitals, clinics,
group practices,  managed care organizations and other healthcare  providers are
seeking new ways to reduce  healthcare  costs and to market their  services more
effectively.  Healthcare providers are particularly interested in products which
assist in  reducing  healthcare  costs and  improve  the  quality and service of
healthcare delivery.

There are a number of software-based  systems,  health promotion  programs,  and
wellness  services  being offered to healthcare  providers that are perceived by
the  Company to be direct  competitors  because  they have  software  systems or
services  capable of providing  health  information,  database  information  and
producing  reports  that contain  health  information  similar to the  Company's
reports or providing benefits similar to the Company's software products.

The barriers to entry into this market are relatively low, consisting  primarily
of the means to develop or  otherwise  acquire  supporting  software and medical
assessment  information;  a  product  responsive  to the  healthcare  providers'
particular  needs;  and a  distribution  system for the  products.  In addition,
development  of similar  programs by  healthcare  providers for use in their own
facilities may provide competition for the Company's programs.

The Company  believes  that much of its  competitive  strength  lies in its user
network and in its ability and  experience  in  providing  quality  products and
services to its market.  The  Company's  user  network of  healthcare  providers
affords it a means of quickly reaching a group of healthcare  providers who have
a proven  interest in the types of products  the  Company  supplies  and who are
familiar with the quality of the products and services the Company supplies. The
Company  believes that it has  demonstrated  ability and experience in providing
products  that are (1)  useful in  decreasing  overall  healthcare  costs and in
improving  healthcare service and quality;  (2) effective in improving operating
efficiency and increasing a healthcare  provider's  return on expenditures;  (3)
well  supported  by the  Company's  technical  expertise;  and (4)  easy for the
healthcare  provider to use.  The Company  believes  that these  attributes  are
likely  to  be   attractive   to  healthcare   providers   without   significant
reconfiguration  of the products.  To the extent the Company offers new products
or services or offers its existing  products  and  services in new  markets,  it
expects to face increased  competition from competitors with potentially greater
financial,  marketing or technical  resources than the Company. No assurance can
be given that the Company will continue to compete successfully.

The  business  of the  Company is and will  continue  to be  affected by general
economic  conditions and is dependent  upon both a continued  interest to reduce
healthcare  costs  and  a  continued  competitive   environment  for  healthcare
providers.  In addition, the success of the Company will depend upon its ability
to  identify  and  develop  sources of revenue in  addition  to the  initial and
recurring  maintenance and support fees payable from its customers,  such as the
future development or acquisition and distribution of new products.

Employees

As of  March  31,  1995,  the  Company  employed  a total of  approximately  115
full-time employees. None of the Company's employees are covered by a collective
bargaining agreement,  and the Company believes its relations with its employees
are good. As the Company's  operations expand, it will hire additional personnel
as the Company deems necessary.


Item 2.  Description of Properties

The  Company's  corporate  offices  are  located in a  twenty-one  story  office
building. The Company occupies approximately 10,600 square feet of leased space,
for which the lease  term for this space  expires  on  December  15,  1995.  The
Company is currently concluding  negotiating its existing lease with the present
landlord to extend the lease term and believes it will secure an extended  lease
term.  The  Company  also has an option  under  certain  conditions  to lease an
additional  3,000 square feet of office  space.  The Company  believes  that its
existing  office  space,  along with the  options  to expand its space,  will be
sufficient to meet its needs for the foreseeable future. The Company also leases
certain office space in Whittier, California which is used by FSG.


Item 3.  Legal Proceedings

NONE


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

NONE


PART II

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

The Company's certificate of incorporation authorizes 5,000,000 shares of Common
Stock.  On December  3, 1986,  the Company  successfully  concluded  the initial
public  offering  of  700,000  shares of Common  Stock at $5.00 per  share.  Net
proceeds to the Company from the offering were $2,640,443  after deducting a 10%
commission  to the  underwriter  and other  issuance  expenses of $509,557.  The
Company's common stock commenced trading in the over-the-counter  market (NASDAQ
Symbol:  NHES) on  November  25,  1986,  and is  quoted  on the  NASDAQ  system.
Approximately  941,290 shares of the Company's outstanding common stock are held
by Dr.  Diethrich,  the Company's  former Chairman of the Board, and Mr. Petras,
the  Company's  President,  and may not be sold except  pursuant to an effective
registration   statement  filed  by  the  Company  or  an  applicable  exemption
(including Rule 144 promulgated under the Securities Act of 1933).

The following table of market price information sets forth the range of high and
low bid prices for the Company's  Common Stock (based on pre-split stock prices)
during the past two fiscal years as quoted on NASDAQ.  These quotations  reflect
interdealer prices, without retail markups,  mark-downs or commissions,  and may
not reflect actual transactions.

Market Price

YEAR ENDED:  January 31, 1995

           FIRST                SECOND              THIRD              FOURTH
          QUARTER              QUARTER             QUARTER             QUARTER
          -------              -------             -------             -------
HIGH        5-1/2                4-5/8              4-3/8                  4
LOW         3-1/2                3-3/4              2-7/8                  2-3/4

YEAR ENDED:  January 31, 1994

          FIRST                 SECOND              THIRD              FOURTH
          QUARTER              QUARTER             QUARTER             QUARTER
          -------              -------             -------             -------
HIGH        6-1/8                3-3/8               3                     5
LOW         2-1/4                2-1/4               2-1/8                 2-1/2

The Company has not  declared or paid any  dividends on its common stock to date
and does not plan to do so in the foreseeable future. On January 31, 1995, there
were  approximately  250 shareholders of record and  approximately  750 to 1,000
total shareholders.

The Company has 1,000,000  shares of authorized  Preferred  Stock. On August 18,
1992 the Company issued 125,000 shares of Series A Convertible  Preferred  Stock
(the  "Preferred  Stock") at $2.40 per share.  Through  January  31,  1994,  the
Company was required to pay a quarterly  dividend equal to a certain  percent of
the Company's gross quarterly revenue (the cumulative  percentage based dividend
as defined in the Preferred Stock Agreement) beginning with the first quarter of
the fiscal  year  ending  January  31,  1994.  By  amendment  of the  applicable
Certificate  of  Designation  effective  June 14,  1994,  the  right to  receive
dividends on the Preferred  Stock  (including all accrued but unpaid  dividends)
was eliminated.

Effective June 14, 1994, each share of the Preferred  Stock is  convertible,  at
the option of the holder,  into four shares of the Company's  Common  Stock.  In
addition,  the holder of the  Preferred  Stock is entitled to one votes for each
share of Common  Stock  into  which the  Preferred  Stock is  convertible.  Upon
liquidation  or dissolution  of the Company,  the holder of the Preferred  Stock
shall  have  liquidating  preferences  as to payment  for any  accrued or unpaid
dividends and a fixed amount equal to $2.40 per share.  Effective  June 14, 1994
the  Preferred  Stock is no longer  redeemable.  Accrued  and  unpaid  preferred
dividends  are no longer  payable due to the  amendment  described  above.  As a
result of the  amendment,  the Preferred  Stock is now considered a common stock
equivalent for purposes of determining the primary earnings per share.


Item  6.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
          RESULTS OF OPERATIONS


Except as noted herein, all references in this Item 6 to the Company include the
Company and its subsidiaries consolidated.

Restated Financial Statements

In connection with the preparation of the Company's financial statements for the
year ended January 31, 1996, the Company  determined that the application of its
accounting  policy  regarding  recognizing  revenues  on its  sales of  software
products and related  services did not comply in all respects with the technical
requirements  and  interpretations  of  Statement  of Position  91-1,  "Software
Revenue  Recognition."  Accordingly,  the  Company  has  conformed  its  revenue
recognition  for the  affected  transactions  and has  restated  its  previously
reported   accumulated  deficit  for  the  cumulative  effect  of  this  change.
Additionally,  the  Company's  fiscal  1995  quarterly  and annual  consolidated
financial statements and fiscal 1996 quarterly consolidated financial statements
have  also  been  restated.  See  Note  1 of  Notes  to  Consolidated  Financial
Statements.  The  information  in the following  discussion  is presented  after
restatement of the financial statements.

Results of Operations

For the fiscal year ended January 31, 1995, the Company had a net loss available
for common  stockholders  of $775,727  compared with a net income  available for
common  stockholders  of $180,133  for the fiscal year ended  January 31,  1994.
During the past  fiscal  year,  the  Company  invested  resources  to expand and
improve its sales and client services functions and also invested to support its
product  development  efforts which were primarily focused on the development of
its new  Windows-based  Centramax and Centramax Plus products and development of
an expanded  interactive  voice  response  product line and a Pediatric  product
line. As a result,  operating expenses increased and are expected to continue at
the current or at  increasing  levels.  The  investment  in the sales and client
services  functions  (which are designed to enable to Company to improve product
sales to its existing client network) and the investment in product  development
is part of management's strategy to increase revenues. While management believes
this strategy will result in increased  revenues,  there are no assurances  that
future revenues will increase.

During the fourth  quarter the Company was  expecting to finalize a  significant
agreement with a large hospital  organization to assist it to establish in-house
medical  call  centers  for its  constituent  hospitals.  The  Company  had been
initially  selected as the preferred  vendor by this  organization and therefore
directed   significant   selling  efforts  to  its  constituents   hospitals  in
anticipation of reaching final  agreement in January.  A final agreement was not
signed by the end of January  1995,  and the Company has since been  informed by
the organization that it has elected to create a service bureau to meet its call
center  needs and  therefore  declined to enter into any  relationship  with the
Company.   The  Company  is  no  longer  anticipating  any  revenues  from  this
opportunity,  yet it does not preclude the Company from selling its products and
services  to  constituent  hospitals.  As a result of the  Company's  efforts to
finalize this agreement and generate  potential sales with this organization and
its  constituents   hospitals,   the  Company  believes  it  experienced   "lost
opportunity"  with  respect to  potential  business  it  believes  it could have
obtained from others had it not directed the resources  toward the  relationship
with this organization.  The second non-recurring event which adversely impacted
the  Company's  operations  was the  write-off  of certain  accounts  receivable
related to the Company's distribution strategy to penetrate the Northeast market
(primarily New York and New Jersey).  The Company  entered into  agreements with
three organizations  whereby the organizations agreed to purchase certain of the
Company  products and utilize the products to establish  service  contracts with
hospitals.  The purchasers  defaulted on their obligations in the fourth quarter
and the Company wrote-off these accounts, which resulted in $543,240 in bad debt
expense. The Company has discontinued this strategy.

The Company's  operations  are also currently  being affected by  consolidation,
alliances  and  mergers in the  healthcare  market.  The  Company  continued  to
experience that certain prospective clients delayed or froze expenditures during
the fiscal  year,  consequently  delaying  or  precluding  the  purchase  of the
Company's  products.  Nonetheless,  and  while  there  are  no  assurances,  the
Company's  management believes that its competitive  strengths will permit it to
continue to compete in its  targeted  market and that the Company is  positioned
favorably to take advantage of future  opportunities in the healthcare industry.
While there continue to be uncertainties  associated with healthcare reform, the
Company's  management  believes that the November 1994  congressional  elections
have decelerated healthcare reform at the federal government level; however, the
Company  believes that healthcare  reform will result in a shift to managed care
at the local level.  The  Company's  management  also believes its products help
healthcare  providers  improve  their  services and also help reduce  healthcare
costs by providing  objective  information  on healthcare  issues to individuals
thereby enabling them to make informed choices about when, where and how to seek
healthcare services and reduce healthcare costs while providing providers with a
favorable return on their investment in the Company's products. Nonetheless, the
Company's  operations  may be materially  and  adversely  affected by continuing
consolidation,  alliances  and mergers in the  healthcare  industry,  healthcare
reform in the private or public sector, and by future economic conditions.

Revenues  and  operating  results  depend  primarily on the volume and timing of
orders  received  during each fiscal  quarter,  which are difficult to forecast.
Historically,  the Company has often  recognized  a  substantial  portion of its
license  revenues in the last month of each fiscal  quarter,  frequently  in the
last week. Because a significant portion of the Company's operating expenses are
relatively fixed with personnel levels and other expenses based upon anticipated
revenues,  a substantial  portion of which may not be generated until the end of
each fiscal quarter,  the Company may not be able to reduce spending in response
to sales shortfalls or delays. These factors could cause variations in operating
results from quarter to quarter.

Revenues.   Revenues  for  fiscal  year  1995  increased  approximately  24%  to
$13,350,268,  compared to  $10,794,076  in fiscal year 1994. The increase in net
revenues in fiscal  year 1995 from  fiscal year 1994 is the result of  increased
revenues from initial  license and support fees,  materials  sales  revenues and
marketing service revenues from FSG.

License fees represent revenues primarily from the initial sale of the Company's
products.   The  Company's   existing   product  lines  consist  of  its  Profit
Acceleration  System(TM)  ("PAS")  (which  includes  nine health  screening  and
education  products),   Centramax,  Centramax  Plus,  Referral  One(TM),  Health
Direct(TM),  Health  Information  Library  and its  interactive  voice  response
products. In the fourth quarter the Company introduced  Windows-based Centramax.
M and Centramax. M Plus, and the ninth PAS product.

Revenue  generated  from license fees of the  Company's  products  accounted for
approximately  50% of the Company's  total revenues in fiscal year 1995 compared
to 51% in fiscal  year  1994.  Revenue  from  support,  materials  and  services
accounted for 50% of the Company's total revenue in fiscal year 1995 compared to
49% in fiscal year 1994.  The Company's  management  believes that revenues from
initial  license  fees will  continue  to  provide a  significant  amount of the
Company's future revenues. The Company is exploring and will continue to explore
opportunities  to  increase  recurring  revenue  and  decrease  the  reliance of
operating results on initial fee revenues.

License fees  increased to  $6,647,145  for fiscal year 1995 from  $5,488,566 in
fiscal year 1994.  The  increase in license fee revenue in fiscal year 1995 from
fiscal year 1994 is due to revenue  generated  from the  Company's  medical call
center  products such as Centramax Plus,  Centramax.  M Plus and the interactive
voice  response   products.   Certain  of  the  Company's   products--PAS,   The
Professionals,  Health Direct and HealthFone--are  offered on an exclusive basis
and  therefore  as the Company  places these  products,  the number of available
markets  decreases.  The Company's  management  believes that there are still an
adequate  number of markets  available  for all of its  exclusive  products  and
therefore  these  products will continue to generate  license fee revenue in the
foreseeable future, although there are no assurances in that regard.

Support fees,  material and service  revenue was $6,703,123 in fiscal year 1995,
compared to $5,305,510 in fiscal year 1994.  Support fees  represent  charges to
customers,  as provided for in the Company's license  agreements,  for continued
use of the products and for ongoing software maintenance and enhancements to the
products.  The support fees  generally  begin within six months after a customer
executes a license agreement.  Support fee revenue increased in fiscal year 1995
from  fiscal  year 1994 due to the  increase  in the  number of  customers.  The
Company  believes  that as the  number  of  customers  it has  for all  products
increases,  revenues  generated  from  recurring  support fees will  continue to
increase.  Revenues  generated  from the sale of  materials  in fiscal year 1995
remained at comparable levels to fiscal year 1994. Material sales represents the
sale of printed  questionnaires and reports from the Company's PAS and quarterly
publication of the Health Direct product.  The Company presently does not expect
any  significant  increase or decrease in future  revenue from the Health Direct
product  or  material  sales to PAS users.  Service  revenue  (which  represents
strategic and creative services revenue generated from FSG) was approximately $2
million for fiscal 1995 and increased  $600,000 from fiscal 1994.  The Company's
management  believes that service revenue from FSG will continue to increase but
there are no assurances that service revenue from FSG will continue to increase.

Operating  Expense.  Total  operating  expenses  incurred  for fiscal  year 1995
increased 36% to $14,153,758,  compared to $10,433,695 for fiscal year 1994. The
primary reason for this increase in total operating expenses in fiscal year 1995
compared  to fiscal  year 1994 is due to the  increased  investment  made by the
Company  in  selling,  product  development  and  support  functions,   one-time
write-off certain accounts receivable and increased expenses associated with FSG
operations.

Cost of  Revenues.  The cost of  revenues  includes  the costs  associated  with
license fees to implement and install the products and costs of materials  sold.
The cost of initial  license fees  increased to  $1,900,102 in fiscal year 1995,
from $1,495,332 in fiscal year 1994. The increase in the cost of initial license
fees in fiscal year 1995,  compared to fiscal year 1994, is due primarily to the
increase in costs  associated with increased sales of the Centramax Plus and the
interactive voice response product lines.

The cost of materials sold, which represents the cost of printed  questionnaires
and  reports to PAS users and,  the costs  associated  with the  delivery of the
Health  Direct  product  and  variable  cost of  delivery  of  services  by FSG,
increased to  $1,854,255  in fiscal year 1995,  from  $1,335,405  in fiscal year
1994.  The  increase in the cost of  materials  in fiscal year 1995  compared to
fiscal year 1994, is due to the increased  costs  associated  with the increased
revenue generated from the support fees and services of FSG.

Selling,  Product  Development  and Support.  Selling,  product  development and
support expenses were $7,355,514 in fiscal year 1995,  compared to $5,307,705 in
fiscal year 1994.  The increase in fiscal year 1995 from fiscal year 1994 is due
primarily to increased costs associated with the increase in the number of sales
and product  support and  development  staff  necessary to support the Company's
products.  The Company will continue to invest in product  development,  service
support and sales  staffs.  In addition as the  Company's  customer  and product
support  obligations  increase,  it anticipates that additional staff and office
space will be needed.  The Company believes that additional  staffing and office
space  will be needed  during  fiscal  year  1996,  which in turn will  increase
operating expenses.

General and Administrative. General and administrative expenses were $ 1,762,454
in fiscal year 1995, compared to $1,766,521 in fiscal year 1994. The decrease in
general and administrative  expense in fiscal year 1995 from fiscal year 1994 is
due primarily to a reduction of certain professional services expenses.

Depreciation  and  Amortization.  Depreciation  and  amortization  expenses were
$493,870  in fiscal year 1995,  compared  to  $261,959 in fiscal year 1994.  The
increase is due  primarily  to an increase in the  amortization  of  capitalized
software  development  costs of certain  products and  amortization  of goodwill
associated with the FSG acquisition.

Provision for Doubtful  Accounts.  The provision for doubtful accounts increased
to $787,562 for fiscal year 1995,  from  $266,773 for the fiscal year 1994.  The
change in the  provision  for  doubtful  accounts  is adjusted by the Company to
reflect potentially uncollectible accounts receivable.  The increase of $520,789
was a result  of the  one-time  write-off  of  certain  accounts  as  previously
discussed.  The Company  believes that the  allowance  for doubtful  accounts is
adequate,  given the amount of receivables,  the payment terms and the Company's
history of collecting receivables.

Liquidity and Capital Resources.

As of January  31,  1995,  the Company had a working  capital  deficit  (current
assets minus current  liabilities) of $1,704,367,  compared to a working capital
deficit of $303,765 as of January 31, 1994. The decrease in working  capital was
primarily  caused by the  Company's  loss for the  fiscal  year.  The  Company's
accounts receivable balance increased to $3,681,724 (including long term amounts
of $320,815) at January 31, 1995 from $2,883,943 at January 31, 1994. During the
first nine months of the Company's  fiscal year it continued to experience  that
payment of the initial license fees was often deferred,  on a negotiated  basis,
for a period after the license agreements were executed.  As a result during the
past fiscal year, the average  payment of initial fee  receivables  increased to
approximately 200 days from 180 days a year earlier. The Company has taken steps
to  reduce  payment  terms and as a result of these  steps has  experienced  the
number of days to collect payment for the initial fees has begun to decrease. As
a result of shorter payment terms the Company expects that the trend of improved
cash receipts  from initial fee  receivables  will  continue in the  foreseeable
future although there are no assurances.

The Company has two $500,000 lines of credit with a bank as of January 31, 1995.
One of the $500,000 credit lines is secured by accounts receivable and the other
is  secured by cash  balances  equal to the amount  borrowed.  Interest  is paid
monthly on the unpaid  balance at an annual rate of one  percentage  point above
the bank's prime rate with a 7.5% floor. Borrowings against this credit line are
secured by accounts receivable.  Due to the Company's fiscal 1995 operating loss
and  resulting  noncompliance  with certain  borrowing  covenants,  the bank has
reduced  the line of credit  secured by  accounts  receivable  from  $500,000 to
$325,000.  This  $325,000 line of credit  expires on May 16, 1995  however,  the
Company  believes  the bank will  extend the line for an  additional  sixty days
based  on  the  attainment  of  certain  requirements.  If  the  Company  is not
successful  in securing an  extension  on the line of credit and in obtaining an
increase  in the line of  credit,  it would have to seek  additional  sources of
capital for general  working  capital  purposes.  The Company  continues to seek
alternative  sources to raise additional  capital to support its general working
capital needs.

The Company is currently  dependent on the established  bank lines of credit for
its  daily  operating  cash  requirements.  The  Company  is in the  process  of
evaluating  opportunities  to reduce the number of days it takes to collect  the
initial  fee  accounts  receivable.  If the credit  line is  further  reduced or
terminated or if the Company is not successful in reducing the number of days to
collect on its  outstanding  accounts  receivable,  additional  capital  will be
required.  There  are no  assurances  that the  Company  will be  successful  in
obtaining additional capital, and the failure to obtain additional capital would
have  an  adverse  impact  on  the  Company's  ability  to  meet  its  operating
requirements and the Company would have to materially cut back its operations.

In each of its fiscal years ending January 31, 1995 and 1994 the Company offered
a  discount  to its PAS  users to  prepay  monthly  support  fees for a one year
period.  In each of these  fiscal  years,  the  Company  generated  a minimum of
$300,000 in cash from the prepayment program.  Cash from this prepayment program
is recognized as revenue over the period benefited, generally a 12-month period.

Effective  June 14,  1994 the  Company  amended the  applicable  Certificate  of
Designation,   which  eliminated  the  Company's  obligation  to  pay  preferred
dividends on the Series A Convertible Preferred Stock, including all accrued and
unpaid dividends.  Elimination of the preferred dividends will, in the Company's
opinion  based on  historical  trends,  reduce cash  outflows  by  approximately
$482,000 over the fiscal years ending  January 31, 1995 and 1996.  The amendment
also  increased the number of common shares into which each  preferred  share is
convertible from one share to two shares and eliminated the Company's redemption
right.

On  October  7,  1994 the  Company  issued  a  promissory  note to the  Series A
Convertible Preferred  Stockholder in the amount of $100,000.  The amount is due
and payable on October 16, 1995.  The interest rate is twelve  percent (12%) per
annum, and the note is unsecured.  The note was issued to fund advance royalties
to a third party to secure the distribution  rights to certain  pediatric triage
guidelines.

The Company's  operating results continue to be inconsistent on a month-to-month
basis and are  dependent  upon  turnover in or  nonperformance  of the Company's
sales  staff,  long  product  sales  cycles  related  in part to  pricing of the
Company's products and customer budget requirements,  and to other factors, such
as uncertainties  associated with the healthcare market and economic conditions,
beyond the  control of the  Company.  The  Company,  however,  will  continue to
evaluate methods to improve and increase its product  distribution  channels and
to enhance or expand its current product lines.  The Company  believes that such
actions will help  minimize the effect of  circumstances  which could  adversely
affect the Company's operating performance.

The Company has  expanded  and will  continue to improve and enhance its product
lines in order to be more  responsive to the market.  The  Company's  management
believes that quarterly  operating results are dependent and will continue to be
dependent on the initial  license fee revenues in the  foreseeable  future.  The
Company will  continue to focus its efforts on improving  cash from  operations,
recurring  revenue and increasing its operating  income.  The recurring  monthly
revenue  from  support  fees,  material  sales and  services  is  currently  not
sufficient  to maintain a break-even  level of the Company's  current  operating
expense levels.

Additional  support staff  requirements and related  operating  expenses will be
dependent on sales levels of the Company's  products.  The Company  expects that
additional space will be taken and staff will be hired during its current fiscal
year (ending January 31, 1996) and additional  capital  resources will be needed
to fund this growth and expansion. In the past the Company has funded its growth
primarily  through its  operations  and its  existing  bank line of credit.  The
Company believes that while its current operations can be supported by available
resources,  assuming  adequate working capital  arrangements  are obtained,  the
Company's  business may no longer be funded solely by internal  operations.  The
Company is currently  evaluating ways to generate  additional sources of capital
including  obtaining  a line of  credit  through  asset-based  financing  of its
accounts receivables and a future secondary stock offering.  Although management
believes that available  borrowings  coupled with cash flow from operations will
be adequate for its operating needs for fiscal 1996, there are no assurances the
Company will be successful at raising additional capital.


Item 7.    Financial Statements

           SEE ATTACHED


Item 8.   Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

         NONE


PART III

The  information  required  here by Items 9, 10,  11 and 12 is  incorporated  by
reference to the Company's  definitive  Proxy  Statement to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission no later than May 31,
1995.

Item 13.      Exhibits and Reports on Form 8-K

A.       1.   Financial Statement Pages                Page or Method of Filing

         (1)  Report of Independent Accountants                  Page 17
         (2)  Financial Statements and notes to consolidated     Pages 18 to 29
              financial statements of the Company, including
              Balance  Sheets  as of  January  31,  1995 and
              related      Statements     of     Operations,
              Stockholders'  Equity  and Cash Flows for each
              of the  years  in the  two-year  period  ended
              January 31, 1995.

All other schedules have been omitted because of the absence of conditions under
which they are required or because the required material information is included
in the  Financial  Statements  or Notes  to the  Financial  Statements  included
herein.

         (1)  Exhibits  required by Item 601 of Regulation  S-B are set forth on
              the  Exhibit  Index to this  report  which is hereby  incorporated
              herein by this reference.

         (2)  Management  contracts and compensatory  plans required to be filed
              as an exhibit list form.

         (a)  Employment Agreements with Dr. Larry Gettman and Jeffrey Zywicki.
              Incorporated by Reference to Exhibit 10.9 of S-18 No. 33-9397-LA.

         (b)  Form of Stock Option Agreement with Key Employees and Officers.
              Incorporated by Reference to Exhibit 10.32 to Form 10-K filed for
              the year ended January 31, 1989.

         (c)  Form of Stock Option Agreement with Outside Directors.
              Incorporated by Reference to Exhibit 10.33 to Form 10-K for
              the year ended January 31, 1989.

         (d)  Key Executive Employment and Severance Agreements. Incorporated by
              Reference to Exhibit 10.44 to Form 10KSB filed for the fiscal year
              ended January 31, 1994.

         (e)  Employment  Agreement with A. Neal  Westermeyer.  Incorporated  by
              Reference  to Exhibit  10.46 to  Form-10-KSB  filed for the fiscal
              year ended January 31, 1994.

B.       Reports on Form 8-K for the fourth quarter of fiscal year 1994

              NONE

                                   SIGNATURES


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

NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
(Registrant)



By:
   ----------------------------------------
         Gregory J. Petras
         President, Chief Executive Officer


Date:             May 15, 1996



In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

Signature                            Title                         Date


/s/Gregory J. Petras
- ---------------------       President (Principal                May 15, 1996
Gregory J. Petras           Executive Officer) and
                            Director

/s/John Delmatoff
- ---------------------       Director                            May 15, 1996
John Delmatoff

/s/Gardiner S. Dutton
- ---------------------       Director                            May 15, 1996
Gardiner S. Dutton

/s/James W. Myers
- ---------------------       Director                            May 15, 1996
James W. Myers

/s/Steven D. Wood, Ph.D.
- ---------------------       Director                            May 15, 1996
Steven D. Wood, Ph.D.

/s/Jeffrey T. Zywicki  
- ---------------------       Senior Vice President-Finance,      May 15, 1996
Jeffrey T. Zywicki          Treasurer and Secretary
                            (Principal Financial and
                                     Accounting Officer)




                                  EXHIBIT INDEX


Exhibit                                              Page or
number      Description                              Method of Filing
- ------      -----------                              ----------------
  2.1       Plan of Reorganization and               Incorporated by Reference
            Agreement of Merger                      to Form 8-k filed July 13, 
                                                     1994

  3.1       Certification of Incorporation           Incorporated by Reference
                                                     of the Company to
                                                     Exhibit 3.1 of S-18
                                                     No. 33-9396-LA

  3.2       Bylaws of the Company                    Incorporated by Reference
                                                     to Exhibit 3.2 of S-18
                                                     No. 33-9396-LA

  4.1       Specimen Certificate                     Incorporated by Reference
            Representing $.001 par value             to Exhibit 4.1 of S-18
            Common Stock                             No. 33-9397-LA

  4.2       Form of Warrant to the                   Incorporated by Reference
            Underwriter                              to Exhibit 4.2 of
                                                     Amendment No. 2 to S-18
                                                     No. 33-9397-LA

  4.3       Form of Warrant to the                   Incorporated by Reference
            Advisor                                  to Exhibit 4.3 of
                                                     Amendment No. 2 to S-18
                                                     No. 33-9397-LA

10.1        Confirmation of License and              Incorporated by Reference
            Agreement Regarding Purchase             to Exhibit 10.1 of S-18
            Option and related letter                No. 33-9397-LA
            agreement dated October 2, 1986

10.2        Franchising and Licensing                Incorporated by Reference
            Agreement with The Arizona               to Exhibit 10.2 of
            Heart Institute, Ltd.                    Amendment No. 1 to S-18
                                                     No. 33-9397-LA

10.3        Assignment of Rights to The              Incorporated by Reference
            Heart Test                               to Exhibit 10.3 of S-18
                                                     No. 33-9397-LA

10.4        Shareholders Contribution and            Incorporated by Reference
            Conversion Agreement as                  to Exhibit 10.4 of S-18
            Amended, and related notes held          No. 33-9397-LA
            by Shareholders and Affiliated

10.5        Form of Outstanding Warrants             Incorporated by Reference
                                                     to Exhibit 10.5 of S-18
                                                     No. 33-9397-LA





Exhibit                                              Page or
number      Description                              Method of Filing
- ------      -----------                              ----------------
10.6        Promissory Notes in the                  Incorporated by Reference
            Aggregate amount of $100,000             to Exhibit 10.6 of S-18
            Principal                                No. 33-9397-LA

10.7        Lease for Company's Office               Incorporated by Reference
            Space dated August 22, 1986              to Exhibit 10.7 of S-18
                                                     No. 33-9397-LA

10.7.1      Amendment to Lease for                   Incorporated by Reference
            Company's Office Space dated             to Exhibit 10.7.1 to Form
            August 22, 1986                          10-K filed for the year
                                                     Ended January 31, 1987

10.8        Agreement and Plan of Merger             Incorporated by Reference
                                                     Exhibit 10.8 of S-18
                                                     No. 33-9397-LA

10.9        Employment Agreements with               Incorporated by Reference
            Dr. Larry Gettman and                    Exhibit 10.9 of S-18
            Jeffrey Zywicki                          No. 33-9397-LA

10.10       Line of Credit Documentation             Incorporated by Reference
                                                     to Exhibit 10.10 of S-18
                                                     No. 33-9397-LA

10.11       Promissory Note in the                   Incorporated by Reference
            Principal Amount of $25,801              to Exhibit 10.11 of S-18
                                                     No. 33-9397-LA

10.12       Company Indemnities                      Incorporated by Reference
                                                     to Exhibit 10.12 of S-18
                                                     No. 33-9397-LA

10.13.1     Forms of Franchise                       Incorporated by Reference
            Agreement used in 1987                   to Exhibit 10.13.1 to
                                                     Amendment No. 2 of S-18
                                                     No. 33-9397-LA

10.13.2     Forms of Franchise                       Incorporated by Reference
            Agreement used in 1986                   to Exhibit 10.13.2 to
                                                     Amendment No. 1 and
                                                     Amendment No. 2 to S-18
                                                     No. 33-9397-LA

10.13.3     Forms of Franchise Agreement             Incorporated by Reference
            used in 1985                             to Exhibit 10.13.3 to S-18
                                                     No. 33-9397-LA

10.13.4     Forms of Franchise Agreement             Incorporated by Reference
            used in 1984                             to Exhibit 10.13.4 to S-18
                                                     No. 33-9397-LA





Exhibit                                            Page or
number     Description                             Method of Filing
- ------      -----------                              ----------------
10.13.5    Franchise Agreements Executed           Incorporated by Reference
           Agreement                               to Exhibit 10.13.5 of S-18
                                                   No. 33-9397-LA

10.13.6    Existing Area Franchise                 Incorporated by Reference
           Agreement                               to Exhibit 10.13.6 of S-18
                                                   No. 33-9397-LA

10.13.7    Form of Franchise Agreement             Incorporated by Reference
           used by the Company in 1987             to Form 10-K filed for
                                                   year ended January 31,
                                                   1988

10.13.8    Form of Franchise Agreement             Incorporated by Reference
           used by the Company in 1988             to Form 10-K filed for the 
                                                   year ended January 31,1989

10.13.9    Form of Franchise Agreement             Incorporated by Reference
           used by the Company in 1989             to Form 10-K filed for the 
                                                   year ended January 31,1990

10.14      Forms of Rescission offers              Incorporated by Reference
                                                   to Exhibit 10.14 of S-18
                                                   No. 33-9397-LA

10.15      Rescission and Refund Responses         Incorporated by Reference
           for internal use of Programs            to Exhibit 10.15 of S-18
                                                   No. 33-9396-LA

10.16      Agreements with Corporations            Incorporated by Reference
           for internal use of Programs            to Exhibit 10.16 of S-18
                                                   No. 33-9397-LA

10.17      South Dakota and Wisconsin              Incorporated by Reference
           "No Action" letters and certain         to Exhibit 10.17 of
           related documents                       Amendment No. 1 to S-18
                                                   No. 33-9397-LA

10.18      Revised Exhibit A to Form of            Incorporated by Reference
           Stock Escrow Agreement required         to Exhibit 10.18 of
           by the Arizona Corporation              Amendment No. 1 to S-18
           Commission and Shareholder              No. 33-9397-LA
           lock-up agreements

10.19      Promissory Note in Principal            Incorporated by Reference
           Amount of $50,000 and related           to Exhibit 10.19 of
           materials                               Amendment No. 1 to S-18
                                                   No. 33-9397-LA

10.20      Agreement with Advisor                  Incorporated by Reference
                                                   to Exhibit 10.20 of
                                                   Amendment No. 1 to S-18
                                                   No. 33-9397-LA


Exhibit                                            Page or
number     Description                             Method of Filing
- ------      -----------                              ----------------
10.21      Notification of Option to               Incorporated by Reference
           Purchase the Personal Fitness           to Exhibit 10.21 to Form
           Profile Software                        10-K filed for the fiscal
                                                   year ended January 31, 1987

10.21.1    List of Subsidiaries                    Page 37

10.22      Promissory Note in Principal            Incorporated by Reference
           Amount of $75,000 for purchase          to Exhibit 10.22 to Form
           of Personal Fitness Profile             10-K filed for the fiscal
           Software and related materials          year ended January 31, 1987

10.23      Employment Agreement with               Incorporated by Reference
           James Wichterman                        to Exhibit 10.23 to Form
                                                   10-Q filed for the quarter 
                                                   ended April 30, 1987

10.24      Term Note Payable in the                Incorporated by Reference
           Principal Amount of $75,000             to Exhibit 10.24 to Form
                                                   10-Q filed for the
                                                   quarter ended April 30, 1987

10.25      Software Customization and              Incorporated by Reference
           License Agreement with                  to Exhibit 10.25 to Form
           Resource Center Enterprises,            10-Q filed for the
           Inc. dated May 22, 1987                 quarter ended July 31, 1987

10.26      Med Plus Corporation Distribution       Incorporated by Reference
           and Sales Agreement dated               to Exhibit 10.26 to Form
           September 19, 1987                      10-Q filed for the quarter 
                                                   ended October 31, 1987

10.27      Distribution Agreements                 Incorporated by Reference
           for Marketing Consultants               to exhibit 10.27 to Form
                                                   10-Q filed for the quarter 
                                                   ended October 31, 1987  

10.28      Consulting, Development                 Incorporated by Reference
           and License Agreement with              to Exhibit 10.28 to Form
           Humana Inc., dated December             10-K filed for the year
           31, 1987                                ended January 31, 1988

10.29      Agreement with Healthscan, Inc.         Incorporated by Reference
           to discontinue use of Healthscan        to Exhibit 10.29 to Form
                                                   10-K filed for the year
                                                   ended January 31, 1988

10.30      Stock Option Letter with                Incorporated by Reference
           Jim Wichterman                          to Exhibit 10.30 to Form
                                                   10-K filed for the year
                                                   ended January 31, 1988



Exhibit                                            Page or
number     Description                             Method of Filing
- ------      -----------                              ----------------
10.31      Employment Agreement with               Incorporated by Reference
           Dan Bergman                             to Exhibit 10.31 to Form
                                                   10-K filed for the year
                                                   ended January 31, 1988

10.32      Form of Stock Option Agreement          Incorporated by Reference
           with Key Employees and Officers         to Exhibit 10.32 to Form
                                                   10-K filed for the year
                                                   ended January 31, 1989

10.33      Form of Stock Option Agreement          Incorporated by Reference
           with Outside Directors                  to Exhibit 10.33 to form
                                                   10-K filed for the year
                                                   ended January 31, 1989

10.34      Severance Agreement with                Incorporated by Reference
           Gregory J. Petras                       to Exhibit 10.34 to Form
                                                   10-K filed for the year
                                                   ended January 31, 1989

10.35      $100,000 Installment Note               Incorporated by Reference
           Payable to Three Carollo                to Exhibit 10.35 to Form
           Partnership                             10-Q filed for the quarter 
                                                   ended July 31, 1989  

10.36      Purchase, Consulting and                Incorporated by Reference
           Distribution Agreement with             to Exhibit 10.36 to Form
           Micromedex, Inc.                        10-K filed for the fiscal
                                                   year ended January 31, 1991

10.37      $125,000 Installment Note               Incorporated by Reference
           Payable to Gardiner S. Dutton           to Exhibit 10.37 to Form
           as Agent                                10-Q for the quarter ended 
                                                   July 31, 1990  

10.38      Asset Purchase Agreement with           Incorporated by Reference
           Prentice Hall, Inc. to purchase         to Exhibit 10.38 to Form
           Riskscan                                July 31, 1990

10.39      Lease for Company's Office Space        Incorporated by Reference
           dated October 1990                      to Exhibit 10.39 to Form 10-K
                                                   filed for the fiscal year 
                                                   ended January 31, 1991

10.40      Exclusive Distributor Agreement         Incorporated by Reference to 
           with Vim & Vigor, Inc.                  Exhibit 10.40 to Form 10-K 
                                                   filed for the fiscal year 
                                                   ended January 31, 1992.

10.41      Exclusive Agency Agreement              Incorporated by Reference to 
           with Joseph Stevens Group, Inc.         Exhibit 10.41 to Form 10-K 
                                                   filed for the fiscal year 
                                                   ended January 31, 1992





Exhibit                                            Page or
number     Description                             Method of Filing
- ------      -----------                              ----------------
10.42      Development and Distribution            Incorporated by Reference to 
           Agreement with Parlay                   Exhibit 10.42 to Form 10-KSB 
           International Communication, Inc.       filed for fiscal year ended 
                                                   January 31, 1993

10.43      Amended and Restated Purchase,          Incorporated by Reference to 
           Consulting and Distribution             Exhibit 10.43 to From 10-KSB 
           Agreement with Micromedex, Inc.         filed for fiscal year ended 
                                                   January 31, 1993

10.44      Employment Agreement with Gregory J.    Incorporated by Reference to
           Petras and Form Other key Executives    the Form 10-KSB filed for the
                                                   fiscal year ended January 31,
                                                   1993

10.45      1988 Stock Option Plan                  Incorporated by Reference to
                                                   1988 Proxy statement

10.46      Employment Agreement with               Incorporated by Reference to
           A. Neal Westermeyer                     Exhibit 10.46 to Form 10-KSB
                                                   filed for fiscal year ended
                                                   January 31, 1994

10.47      Amendment and Restated Certificate      Incorporated by Reference to
           of Designation Agreement of Series A    the Form 10-QSB filed for the
           Preferred Stock dated, June 14, 1994    fiscal quarter ended April  
                                                   30, 1994

10.48      Pediatric Protocol Publishing           Incorporated by Reference  to
           Agreement with Barton D. Schmitt        Exhibit 10.48 to  Form 10-KSB
           M.D.                                    for  the  fiscal  year  ended
                                                   January 31, 1995

10.49      Consulting Agreement with               Incorporated by Reference  to
           Steven Poole, M.D.                      Exhibit 10.49 to  Form 10-KSB
                                                   for  the  fiscal  year  ended
                                                   January 31, 1995             

10.50      First Amendment to Amended and          Incorporated by Reference  to
           Restated Purchase, Consulting and       Exhibit 10.50 to  Form 10-KSB
           Distribution Agreement                  for  the  fiscal  year  ended
                                                   January 31, 1995             



                  NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
                  AND SUBSIDIARIES

                  CONSOLIDATED FINANCIAL STATEMENTS
                  JANUARY 31, 1995
                  TOGETHER WITH REPORT OF
                  INDEPENDENT PUBLIC ACCOUNTANTS

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To National Health Enhancement Systems, Inc.:


We have audited the accompanying  consolidated  balance sheet of NATIONAL HEALTH
ENHANCEMENT  SYSTEMS,  INC.  (a Delaware  corporation)  and  subsidiaries  as of
January  31,  1995 (as  restated  - see Note 1),  and the  related  consolidated
statements of  operations,  changes in  stockholders'  equity and cash flows for
each of the two years in the period  ended  January 31, 1995 (as  restated - see
Note 1). 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 National Health  Enhancement
Systems,  Inc. and subsidiaries as of January 31, 1995 (as restated-See Note 1),
and the  results  of their  operations  and their cash flows for each of the two
years in the  period  ended  January  31,  1995  (as  restated-See  Note 1),  in
conformity with generally accepted accounting principles.


                                                            ARTHUR ANDERSEN LLP


Phoenix, Arizona,
  May 14, 1996.



           NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                   JANUARY 31, 1995 (AS RESTATED - SEE NOTE 1)


                                     ASSETS


                                                                                                        
CURRENT ASSETS:
   Cash and cash equivalents (Notes 2 and 3)                                                      $  1,480,765
   Accounts receivable, net of allowance for doubtful accounts
     of $567,000 (Notes 2 and 3)                                                                     3,360,909
   Prepaid, deferred expenses and supplies (Note 2)                                                    413,288
                                                                                                 -------------
                  Total current assets                                                               5,254,962

CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of
   accumulated amortization of $604,000 (Note 2)                                                       749,370

PROPERTY AND EQUIPMENT, net (Notes 2 and 3)                                                            825,939

EXCESS OF PURCHASE PRICE OVER RELATED NET ASSETS
   ACQUIRED (Notes 1 and 2)                                                                            631,067

OTHER ASSETS (Note 2)                                                                                  468,968
                                                                                                  ------------
                                                                                                  $  7,930,306
                                                                                                  ============

                                         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current installments of notes payable and obligations under
     capital leases (Notes 1 and 3)                                                               $  1,390,813
   Accounts payable                                                                                  1,323,235
   Accrued liabilities (Note 5)                                                                      1,977,692
   Deferred revenue (Note 2)                                                                         2,267,589
                                                                                                  ------------
                  Total current liabilities                                                          6,959,329
                                                                                                  ------------

NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL
   LEASES, net of current installments (Note 3)                                                        252,270
                                                                                                  ------------

DEFERRED REVENUE, net of current portion (Note 2)                                                      273,161
                                                                                                  ------------

COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 3, 4, 6 and 8)

STOCKHOLDERS' EQUITY (Notes 1 and 6):
   Series A  convertible  preferred  stock,  $.001 par value,  1,000,000  shares
     authorized, 125,000 shares issued and outstanding;
     liquidation preference over common stockholders of $2.40 per share                                    125
   Common stock, $.001 par value, 5,000,000 shares authorized,
     4,163,636 shares issued and 3,791,220 shares outstanding                                            3,792
   Capital contributed in excess of par value                                                        3,442,241
   Accumulated deficit, as restated (Note 1)                                                        (2,997,047)
   Less:  treasury stock, 3,568 shares, at cost                                                         (3,565)
                                                                                                  ------------
                                                                                                       445,546
                                                                                                  ------------
                                                                                                  $  7,930,306
                                                                                                  ============


 The accompanying notes are an integral part of this consolidated balance sheet.

           NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  FOR THE YEARS ENDED JANUARY 31, 1995 AND 1994


                                                                                      1995              1994
                                                                                  ------------     -------------
                                                                                   as restated       as restated
                                                                                     (Note 1)          (Note 1)

                                                                                                       
REVENUES (Note 2):
   License fees                                                                   $   6,647,145    $   5,488,566
   Support fees, marketing services and material sales                                6,703,123        5,305,510
                                                                                  -------------    -------------
                  Total revenues                                                     13,350,268       10,794,076
                                                                                  -------------    -------------

OPERATING EXPENSES:
   Cost of initial license fees                                                       1,900,103        1,495,332
   Cost of materials sold                                                             1,854,255        1,335,405
   Selling, product development and support                                           7,355,514        5,307,705
   General and administrative                                                         1,762,454        1,766,521
   Depreciation and amortization                                                        493,870          261,959
   Provision for doubtful accounts                                                      787,562          266,773
                                                                                  -------------    -------------
                  Total operating expenses                                           14,153,758       10,433,695
                                                                                  -------------    -------------

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES                                        (803,490)         360,381

PROVISION FOR INCOME TAXES (Note 7)                                                          -            12,000
                                                                                  -------------    -------------
                  Net income (loss)                                               $    (803,490)   $     348,381
                                                                                  =============    =============

PREFERRED STOCK DIVIDENDS (Note 6)                                                       27,763         (168,248)
                                                                                  -------------    -------------

NET INCOME (LOSS) AVAILABLE FOR COMMON
   STOCKHOLDERS                                                                   $    (775,727)   $     180,133
                                                                                  =============    =============

NET INCOME (LOSS) PER COMMON SHARE (Note 6)                                       $        (.21)   $         .04
                                                                                  =============    =============

WEIGHTED AVERAGE SHARES OUTSTANDING (Note 6)                                          3,780,346        4,175,610
                                                                                  =============    =============

  The accompanying notes are an integral part of these consolidated statements.

           NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES


           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

     FOR THE YEARS ENDED JANUARY 31, 1995 AND 1994 (AS RESTATED-SEE NOTE 1)



                                                                                                                        Capital
                                                         Series A Convertible                                         Contributed
                                                            Preferred Stock                 Common Stock             In Excess of   
                                                         Shares         Amount         Shares          Amount          Par Value    
                                                     -------------   -------------  -------------  -------------   -----------------
                                                                                                                
BALANCE AT JANUARY 31, 1993, as previously
   reported                                              125,000       $     125       3,286,012     $   3,286       $   3,051,239  
     Less- Adjustment for the cumulative
       effect of conforming the Company's
       revenue recognition policy with AICPA
       Statement of Position 91-1, "Software
       Revenue Recognition" (Note 1)                          -               -               -             -                   -   
                                                       ---------       ---------     -----------     ---------       -------------  

BALANCE AT JANUARY 31, 1993, as restated
   (Note 1)                                              125,000             125       3,286,012         3,286           3,051,239  
     Issuance of common stock - FSG
       acquisition (Note 1)                                   -               -          311,112           311             242,816  
     Stock options exercised                                  -               -           35,000            35              16,681  
     Issuance of common stock (Note 8)                        -               -           20,000            20                 (10) 
     Net income, as restated (Note 1)                         -               -               -             -                   -   
     Convertible preferred stock dividends                    -               -               -             -                   -   
                                                       ---------       ---------     -----------     ---------       -------------  

BALANCE AT JANUARY 31, 1994, as restated
   (Note 1)                                              125,000             125       3,652,124         3,652           3,310,726  
     Stock options exercised                                  -               -           63,500            64              37,096  
     Shares released from escrow - FSG (Note 1)               -               -           75,596            76              94,419  
     Preferred dividends forgiven (Note 6)                    -               -               -             -                   -   
     Net loss, as restated (Note 1)                           -               -               -             -                   -   
                                                       ---------       ---------     -----------     ---------       -------------  

BALANCE AT JANUARY 31, 1995, as restated
   (Note 1)                                              125,000       $     125       3,791,220     $   3,792       $   3,442,241  
                                                       =========       =========     ===========     =========       =============  




                                                            Accumulated       Treasury                              
                                                              Deficit           Stock          Total     
                                                         ----------------  -------------  ----------     
                                                                                             
BALANCE AT JANUARY 31, 1993, as previously                                                               
   reported                                               $   (1,747,806)    $  (3,565)   $   1,303,279  
     Less- Adjustment for the cumulative                                                                 
       effect of conforming the Company's
       revenue recognition policy with AICPA                                                              
       Statement of Position 91-1, "Software                                                             
       Revenue Recognition" (Note 1)                            (653,647)           -          (653,647) 
                                                          --------------     ---------    -------------  
                                                                                                         
BALANCE AT JANUARY 31, 1993, as restated                                                                 
   (Note 1)                                                   (2,401,453)       (3,565)         649,632  
     Issuance of common stock - FSG                                                                      
       acquisition (Note 1)                                           -             -           243,127  
     Stock options exercised                                          -             -            16,716  
     Issuance of common stock (Note 8)                                -             -                10  
     Net income, as restated (Note 1)                            348,381            -           348,381  
     Convertible preferred stock dividends                      (168,248)           -          (168,248) 
                                                          --------------     ---------    -------------  
                                                                                                         
BALANCE AT JANUARY 31, 1994, as restated                                                                 
   (Note 1)                                                   (2,221,320)       (3,565)       1,089,618  
     Stock options exercised                                          -             -            37,160  
     Shares released from escrow - FSG (Note 1)                       -             -            94,495  
     Preferred dividends forgiven (Note 6)                        27,763            -            27,763  
     Net loss, as restated (Note 1)                             (803,490)           -          (803,490) 
                                                          --------------     ---------    -------------  
                                                                                                         
BALANCE AT JANUARY 31, 1995, as restated                                                                 
 (Note 1)                                                 $   (2,997,047)    $  (3,565)   $     445,546  
                                                          ==============     =========    =============  

 The accompanying notes are an integral part of these consolidated statements.

           NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  FOR THE YEARS ENDED JANUARY 31, 1995 AND 1994


                                                                                          1995           1994
                                                                                       ----------     -----------
                                                                                       as restated    as restated
                                                                                        (Note 1)       (Note 1)
                                                                                                       
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                                 $   (803,490)  $    348,381
   Adjustments to reconcile net income (loss) to net cash provided
     by operating activities-
       Depreciation and amortization                                                      493,870        261,959
       Provision for doubtful accounts                                                    787,562        266,773
       Changes in assets and liabilities-
         Increase in accounts receivable                                               (1,515,148)    (1,107,080)
         Decrease (increase) in prepaid, deferred expenses and supplies                    61,052        (60,670)
         Increase in accounts payable                                                     312,594         38,921
         Increase in accrued liabilities                                                  213,280        495,644
         Increase in deferred revenue                                                     868,967        579,866
                                                                                     ------------   ------------

                  Net cash provided by operating activities                               418,687        823,794
                                                                                     ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                                     (90,447)       (68,401)
   Payments for capitalized software and other development costs                         (635,085)      (271,501)
   Increase in other assets                                                               (18,781)       (93,007)
   Cash paid for the acquisition of First Strategic Group and related costs                    -         (94,058)
                                                                                     ------------   ------------

                  Net cash used in investing activities                                  (744,313)      (526,967)
                                                                                     ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options                                                 37,160         16,716
   Proceeds from issuance of notes payable                                              2,850,000      1,260,000
   Principal payments on notes payable and capital leases                              (2,237,935)    (1,295,823)
   Payments of dividends on convertible preferred stock                                   (42,431)      (125,817)
                                                                                     ------------   ------------

                  Net cash provided by (used in) financing activities                     606,794       (144,924)
                                                                                     ------------   ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                 281,168        151,903

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                          1,199,597      1,047,694
                                                                                     ------------   ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR (Notes 2 and 3)                             $  1,480,765   $  1,199,597
                                                                                     ============   ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest                                                            $    139,000   $     55,000
                                                                                     ============   ============

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND
     INVESTING ACTIVITIES:
       Property and equipment acquired under capital leases                          $    339,681   $    263,465
                                                                                     ============   ============

       As part of the acquisition of First  Strategic  Group, in fiscal 1995 and
         1994, the Company issued 75,596 and 311,112  shares,  respectively,  of
         common stock to the former owners (Note 1).

  The accompanying notes are an integral part of these consolidated statements.

           NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                JANUARY 31, 1995




(1)   ORGANIZATION:

National Health Enhancement Systems, Inc. (the Company) was incorporated in July
1983 as AHI Limited  for the  purpose of  developing,  licensing  and  marketing
health evaluation programs to hospitals, medical groups, clinics and physicians.
In October 1986,  the Company  changed its name to National  Health  Enhancement
Systems, Inc. and reincorporated in the State of Delaware. The Company presently
distributes  proprietary  software-supported  products and services  designed to
assist healthcare providers reduce the cost of healthcare and improve service to
their customers.

At January 31, 1995, the Company had a working capital  deficit.  The deficit in
working  capital was  primarily  caused by the  Company's net loss during fiscal
1995. The Company has also experienced an increase in its accounts receivable at
January 31, 1995  compared to January 31, 1994,  due to extended  payment  terms
offered to certain  customers.  The Company is  currently  dependent on its bank
lines of credit (Note 3) for its daily operating cash  requirements.  Due to the
Company's  net loss in fiscal  1995,  the bank reduced the  aggregate  available
borrowings  under the lines of credit  from $1 million at January 31,  1995,  to
$825,000.  The lines of  credit  expire  in May  1995.  Renewal  of the lines is
subject to certain  conditions  which are described in Note 3. If the Company is
not successful in securing an extension of the lines of credit,  it will have to
seek  additional  sources of capital.  The Company has taken steps to reduce the
time  required to collect  accounts  receivable,  primarily by reducing  payment
terms. In addition,  the borrowings  under the lines of credit were paid in full
subsequent to year-end. Although management believes the lines of credit will be
renewed,  the Company  continues to seek alternative  sources of capital for its
working capital needs.  Management  believes that available  borrowings  coupled
with cash flows from  operations  will be adequate for its  operating  needs for
fiscal 1996.

         Fourth Quarter Operating Results

During  the  fourth  quarter  of  fiscal  1995,  the  Company  had a net loss of
approximately  $950,000 (as restated-see below). The net loss resulted primarily
from the  write-off  of certain  accounts  receivable  due from  three  separate
organizations  who defaulted on their  obligations  during the fourth quarter in
the amount of approximately  $543,000.  In addition,  during the fourth quarter,
the  Company was  negotiating  a  significant  agreement  with a large  national
hospital  organization that had initially  selected the Company as its preferred
vendor. The Company directed significant selling efforts towards finalizing this
agreement  which  ultimately did not  materialize.  As a result of the Company's
efforts to finalize this  agreement,  management  believes it  experienced  lost
opportunity  with  respect  to other  potential  sales the  Company  might  have
otherwise pursued.




                                      -2-

         Acquisition of First Strategic Group, Ltd.

In April 1993,  the Company  acquired,  by merger  into a newly  formed  Company
subsidiary, all of the assets and business of First Strategic Group, Ltd. (FSG),
a  California  corporation.  The  Company  paid  $50,000 in cash,  issued a note
payable of $250,000 and issued  755,556 shares of common stock of the Company in
exchange for all of the issued and  outstanding  capital  stock of FSG. The note
was paid in full during 1993. Of the common stock issued by the Company, 311,112
shares  were  issued at the time of the  merger and 75,596  shares  were  issued
effective  February 1, 1994,  upon FSG  meeting  their  fiscal 1994  performance
target.  The  remaining  shares are held in escrow and will be  delivered to the
former owners of FSG upon meeting  certain  performance  targets as specified in
the  agreement.  The shares held in escrow are not  included in the earnings per
share computation as such shares are not deemed outstanding.

The following represents the unaudited pro forma statement of operations for the
fiscal year ended  January  31, 1994 (as  restated - see below), of the Company
and FSG as if the  acquisition  occurred  on  February  1, 1993.  The  unaudited
results have been prepared for  comparative  purposes only and do not purport to
be indicative of the results of operations  which  actually  would have resulted
had the merger been in effect as of February 1, 1993,  (amounts in 000's  except
per share amounts):

         Revenues                                                $   10,806
         Net income                                              $      210

         Net income available for common stockholders            $       42
                                                                 ==========

         Net income per common share                             $     .01
                                                                 ==========

         Weighted average shares outstanding                          4,254
                                                                 ==========

FSG  maintains  a  market  position  as  healthcare  marketing  and  advertising
strategists  and  emphasizes  the role of strategic  planning in the  healthcare
market.  The Company believes that the acquisition of FSG supports the Company's
short- and long-term strategic goals.

         Restatement of Previously Issued Financial Statements

In connection with its fiscal 1996 year-end closing, the Company determined that
the application of its accounting policy regarding  recognizing  revenues on its
sales of software products and related services did not comply, in all respects,
with the  technical  requirements  and  interpretations  of AICPA  Statement  of
Position 91-1,  "Software  Revenue  Recognition"  (SOP 91-1).  Accordingly,  the
Company has conformed its accounting policy and has  retroactively  restated its
previously  issued financial  statements for fiscal 1994 and 1995 to give effect
to full  compliance with SOP 91-1. The cumulative  effect of $653,647,  has been
reflected as an adjustment to the accumulated deficit balance of $1,747,806,  as
of January 31, 1993, as previously reported.  Additionally, the Company's fiscal
1995 quarterly consolidated financial statements have also been restated.


                                      -3-
The effect of the change on the Company's fiscal 1994 and 1995 operating results
is as follows:



                                                      Fiscal 1994                         Fiscal 1995
                                           -------------------------------         --------------------------
                                              As Reported      As Restated        As Reported     As Restated
                                           ---------------    -------------       -----------    -------------
                                                                                     
         Total revenues                    $    11,216,526    $  10,794,076   $    13,061,898    $  13,350,268
         Income (loss) before
           provision for income
           taxes                                   634,973          360,381          (985,680)        (803,490)
         Net income (loss)                         622,973          348,381          (985,680)        (803,490)
         Income (loss) available for
           common stockholders                     454,725          180,133          (957,917)        (775,727)
         Income (loss) per share                      .11               .04              (.26)            (.21)
         Accumulated deficit                    (1,293,081)      (2,221,320)       (2,250,998)      (2,997,047)
         Stockholders' equity                    2,017,857        1,089,618         1,191,595          445,546


On January 12, 1996, the Board of Directors authorized a two-for-one stock split
of the  Company's  common  stock in the form of a 100% stock  dividend  to those
shareholders  of record as of January 25, 1996.  All share and per share amounts
have been restated for all periods to reflect this split.

(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         Principles of Consolidation

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

         Cash Equivalents

Cash  equivalents  consist  primarily of investments in bank money market funds.
The Company  considers  investments  with initial  maturities of three months or
less to be cash  equivalents.  Cash and cash equivalents  include $500,000 which
serves as collateral for a bank line of credit (Note 3).

         Capitalized Software Development Costs

The Company capitalizes  software  development costs incurred in connection with
the  development  of its software.  Amortization  expense is provided  using the
straight-line method over the software's estimated economic life of three years.
All research and development costs incurred by the Company prior to establishing
technological   feasibility  are  expensed  as  incurred.   Total  research  and
development  costs  expensed  during the years ended  January 31, 1995 and 1994,
were approximately $593,000 and $543,000, respectively.

                                      -4-

         Property and Equipment

Property  and  equipment  are  stated  at cost.  Depreciation  on  property  and
equipment is provided using the  straight-line  method over the estimated useful
lives of the assets of three to five years.  Property and  equipment  held under
capital leases and leasehold  improvements are amortized using the straight-line
method  over the  shorter of the lease  term or  estimated  useful  lives of the
assets.

At January 31, 1995, property and equipment consisted of the following:




                                                                                             
         Computer equipment                                                                     $    394,138
         Office furniture and equipment                                                              235,963
         Assets held under capital leases, primarily computer equipment                              871,246
         Leasehold improvements                                                                       37,272
                                                                                                ------------
                                                                                                   1,538,619
         Accumulated depreciation                                                                   (712,680)
                                                                                                ------------
                                                                                                $    825,939
                                                                                                ============
         Excess of Purchase Price Over Related Net Assets Acquired


The excess of purchase price over related net assets acquired  resulted from the
acquisition  of FSG described in Note 1, and is being  amortized  over ten years
using the straight-line  method.  Amortization expense was approximately $77,000
and $49,000 for the years ended January 31, 1995 and 1994, respectively.

         Other Assets

Other assets include  approximately  $320,000  representing  accounts receivable
from  customers  with terms in excess of one year.  These accounts are generally
due over  periods  ranging  from 18 to 36 months.  Interest  has been imputed on
these amounts at 10%.

         Revenue Recognition

Revenue on sales of the  Company's  software  products  and related  services is
recognized in  accordance  with  Statement of Position  91-1,  Software  Revenue
Recognition.  Accordingly,  initial  license fees are recognized as revenue when
the Company receives an executed license agreement and all material services and
conditions  (primarily  delivery of the software) relating to the sale have been
substantially  performed.  Revenue  from  software  license  fees related to the
Company's obligation to provide certain  post-contract  customer support without
charge is  unbundled  from the license fee at its fair value and is deferred and
recognized over the contract  support period.  The associated  costs incurred by
the Company related to providing such support,  primarily  royalty fees incurred
to maintain the currency of medical  technical  data  included in the  Company's
software  products,  is also deferred and recognized over the period  benefited.
Deferred  expenses  totaled  $122,000 at January 31,  1995.  Revenues for annual
renewals  of  support  contracts  are  recognized  over the term of the  related
contracts,  generally  12 months.  Revenue  for  strategic  plans and  marketing
projects performed by FSG is recognized on the percentage-of-completion  method.
The  percentage  complete  is  determined  by  relating  costs  incurred  to the
estimated  total costs at completion.  When the estimate for a specific  service
indicates  a loss,  the entire loss is  recognized.  Deferred  revenue  includes
amounts which

                                      -5-

represent  the  excess of  billings  to date over the amount of costs and profit
recognized on the remaining jobs in progress. Deferred revenue also reflects the
prepayment of support fees and materials by licensees.

         Concentrations of Credit Risk

Financial  instruments which potentially expose the Company to concentrations of
credit risk, as defined by Statement of Financial  Accounting Standards No. 105,
"Disclosure of Information  About Financial  Instruments With Off-Balance  Sheet
Risk and Financial  Investments  With  Concentrations  of Credit Risk,"  consist
primarily  of cash and cash  equivalents  and accounts  receivable.  The Company
places its cash and cash  equivalents with high quality  financial  institutions
and limits the amount of credit exposure to any one financial institution.

The Company  sells its products  and  services to  customers  in the  healthcare
industry  throughout  the  United  States.  Concentrations  of credit  risk with
respect to accounts  receivable are limited due to the geographic  diversity and
large number of customers  comprising  the Company's  customer base. The Company
performs credit evaluations of its customers, but does not require collateral to
support  receivable  balances.  An  allowance  for  doubtful  accounts  has been
established based on factors  surrounding the credit risk of specific borrowers,
historical trends and other information.

         Use of Estimates

The preparation of financial  statements in accordance  with generally  accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial  statements and the reported
amounts of revenues and expenses  during the reported  periods.  Actual  results
could differ from those estimates.

         Fair Value of Financial Instruments

The  Company's  financial  instruments  as defined  by  Statement  of  Financial
Accounting  Standards  No.  107,  Disclosures  About  Fair  Value  of  Financial
Instruments,  include cash and cash equivalents,  accounts receivable,  accounts
payable and notes  payable.  The  carrying  value of cash and cash  equivalents,
accounts receivable and accounts payable approximate fair value due to the short
maturity of these  instruments.  The  Company's  notes  payable bear interest at
rates indexed to the prime rate;  therefore,  the carrying  amounts  approximate
fair value.

         Recently Issued Accounting Standards

Statement  of  Financial  Accounting  Standards  No.  121,  Accounting  for  the
Impairment  of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of
(SFAS No.  121),  which is required to be adopted by the Company in fiscal 1997,
requires that  long-lived  assets be reviewed for impairment  whenever events or
circumstances  indicate  that  the  carrying  amount  of the  asset  may  not be
recoverable.  If the sum of expected future cash flows (undiscounted and without
interest  charges)  from an asset to be held and used in operations is less than
the carrying  value of the asset,  an impairment  loss must be recognized in the
amount  of the  difference  between

                                      -6-

the carrying value and the fair value. Currently, management does not expect the
adoption of SFAS No. 121 to have a material  effect on the  Company's  financial
position or results of operations.

Statement of Financial  Accounting Standards No. 123, Accounting for Stock-Based
Compensation  (SFAS No. 123), is required to be adopted by the Company in fiscal
1997.  As permitted  by SFAS No. 123,  the Company will  continue to account for
stock  transactions with its employees  pursuant to Accounting  Principles Board
Opinion  No. 25,  Accounting  for Stock  Issued to  Employees.  Therefore,  this
statement is not expected to have a material  effect on the Company's  financial
position or results of operations.  SFAS No. 123 requires companies which do not
choose to account for the effects of stock based  compensation  in the financial
statements  to disclose the pro forma effects on earnings and earnings per share
as if such accounting had occurred.

(3)   NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES:

Notes payable and obligations  under capital leases at January 31, 1995, were as
follows:

     Bank lines of credit, interest at the bank's prime rate
     plus 1% with a 7.5% floor (7.5% at January  31,  1995),
     secured by accounts  receivable  and a cash  collateral
     requirement  as described  below;  the lines mature May
     1995                                                         $   1,000,000

     Note payable to bank, interest at the bank's prime rate
     plus  1.5%  with an 8.0%  floor  (8.0% at  January  31,
     1995); unsecured                                                    45,562

     Note payable to bank, interest at the bank's prime rate
     plus 3% (9.5% at January  31,  1995),  matures  October
     1995,  guaranteed  by two  officers of FSG,  secured by
     accounts receivable and equipment                                    8,200

     Note payable to preferred stockholder, interest at 12%,
     matures October 1995, unsecured                                     84,151

     Obligations   under  capital  leases,   interest  rates
     ranging from 11% to 28%,  maturities  through  November
     1999, secured by computers and other equipment                     505,170
                                                                  -------------
                                                                      1,643,083
     Less- Current installments                                      (1,390,813)
                                                                  -------------
                                                                  $     252,270
                                                                  =============

The lines of credit and note payable  agreements require the Company to maintain
compliance with certain  covenants  including the maintenance of working capital
and debt to equity ratios as defined in the agreements. At January 31, 1995, the
Company was not in compliance  with certain  covenants  under these  agreements.
Although  the bank has  waived  compliance  with  these  covenants  through  the
maturity  dates of these  agreements  (May 1995),  renewal of the  agreements is
subject to the Company meeting certain renewal  requirements,  including,  among
other things,  receipt of, or commitment of, additional  capital, as defined, of
$1,500,000 and attaining  $175,000 of net income for the Company's first quarter
of operations ending April 30, 1995. As a result of the events of noncompliance,
the amount available under the lines were reduced 


                                       -7-

from $1 million at January 31, 1995,  to $825,000.  The bank lines of credit are
collateralized  by a  $500,000  deposit  with  the bank  (Note  2) and  accounts
receivable.  The  deposit  is  included  in cash  and  cash  equivalents  in the
accompanying consolidated financial statements.

Future  maturities of notes payable and obligations  under capital leases are as
follows as of January 31, 1995:

                                                     Notes           Capital
   Fiscal Year                                      Payable          Leases
                                                -------------     -------------
      1996                                      $   1,137,913     $     305,216
      1997                                                 -            232,730
      1998                                                 -             70,207
      1999                                                 -              6,288
      2000                                                 -              5,240
                                                -------------     -------------
                                                    1,137,913           619,681
      Less - Amounts representing interest                 -           (114,511)
                                                -------------     -------------

                                                $   1,137,913     $     505,170
                                                =============     =============

(4)   COMMITMENTS:

The  Company  leases  its  office   facilities  and  certain   equipment   under
noncancelable  operating leases expiring through fiscal 2001. The leases include
options to extend for additional  periods at the then  prevailing  market rates.
Rent expense was approximately $296,000 and $227,000 for the years ended January
31, 1995 and 1994, respectively.  Future minimum payments under these leases are
as follows as of January 31, 1995:

               Fiscal Year

                  1996                               $     281,261
                  1997                                      84,957
                  1998                                      69,359
                  1999                                      66,864
                  2000                                      66,864
                  Thereafter                                22,288
                                                     -------------

                                                     $     591,593
                                                     =============



                                      -8-

The Company has entered into certain  exclusive  agreements with product support
vendors which require the payment of royalties on products sold and also require
minimum annual purchases of products to maintain the exclusivity associated with
these  agreements.  Future  minimum  obligations  under these  agreements are as
follows as of January 31, 1995:

                        Fiscal Year

                           1996                        $     1,576,000
                           1997                              1,251,000
                           1998                              1,363,000
                           1999                              1,487,000
                           2000                              1,581,000
                           Thereafter                        3,461,000
                                                       ---------------

                                                       $    10,719,000
                                                       ===============
(5)   ACCRUED LIABILITIES:

Accrued liabilities at January 31, 1995, were as follows:

                  Accrued product cost of sales        $     253,097
                  Accrued payroll and commissions            511,173
                  Accrued royalties (Note 4)                 760,686
                  Other accrued liabilities                  452,736
                                                       -------------

                                                       $   1,977,692
                                                       =============
(6)   STOCKHOLDERS' EQUITY:

         Stock Option Plan

During the fiscal year ended  January  31,  1989,  the Company  adopted the 1988
Stock Option Plan (the Plan).  The Plan, as amended,  will terminate in May 1998
and provides for the grant of 700,000 incentive and 700,000  nonqualified  stock
options.  The Company has reserved 1,400,000 shares of common stock for exercise
of options under the Plan.  Key  employees  are eligible for both  incentive and
nonqualified stock options. Officers and outside directors are eligible only for
nonqualified  stock  options.  The Board of Directors,  within the limits of the
provisions of the Plan,  shall  determine the period over which granted  options
become exercisable.




                                      -9-

A summary  of stock  option  activity  under  the Plan for the two  years  ended
January 31, 1995, follows:



                                                                                 Options Outstanding
                                                          Options       ----------------------------------
                                                         Available                             Exercise
                                                         For Grant         Shares              Price Range
                                                       ------------     -------------        -------------
                                                                                       

         Balance at January 31, 1993                        591,500           711,000          $.13 - $.79
              Granted                                      (392,000)          392,000        $1.32 - $1.44
              Exercised                                          -            (35,000)         $.45 - $.72
                                                       ------------     -------------

         Balance at January 31, 1994                        199,500         1,068,000         $.13 - $1.44
              Granted                                      (317,000)          317,000        $1.31 - $1.81
              Exercised                                          -            (63,500)         $.44 - $.77
              Canceled                                      232,000          (232,000)
                                                       ------------     -------------

         Balance at January 31, 1995                        114,500         1,089,500         $.13 - $1.81
                                                       ============     =============



Options for 865,000 shares were exercisable at January 31, 1995.

         Series A Convertible Preferred Stock

On August 18, 1992,  the Company  issued  125,000 shares of Series A Convertible
Preferred  Stock (the  Preferred  Stock) at $2.40 per  share.  The  Company  was
required  to pay a  quarterly  dividend  equal to a  certain  percentage  of the
Company's gross quarterly  revenue (the cumulative  percentage based dividend as
defined in the Preferred Stock  Agreement)  through January 31, 2001.  Effective
February 1, 1994,  the Preferred  Stock  Agreement was amended.  Pursuant to the
amendment,  each  share of the  Preferred  Stock  shall be, at the option of the
holder, convertible into four shares of the Company's common stock. In addition,
the holder of the  Preferred  Stock is  entitled to four votes for each share of
Preferred Stock.  Upon liquidation or dissolution of the Company,  the holder of
the Preferred Stock shall have liquidating  preferences equal to $2.40 per share
of Preferred  Stock.  The amendment  eliminated all rights to receive  dividends
subsequent to the effective date. The amount of accrued and unpaid  dividends of
$27,763 at January 31, 1994, was reclassified to retained earnings.

         Net Income (Loss) Per Share

Net income (loss) per share is computed by dividing net income (loss)  available
for  common  stockholders  by the  weighted  average  number  of  common  shares
outstanding.  The number of weighted average shares of common stock  outstanding
during 1995 does not include certain common stock  equivalents  (Preferred Stock
and options) as their effect on earnings per share would be antidilutive.  Fully
diluted  earnings  per share is not  presented  for fiscal 1994 as the effect of
converting the Company's convertible preferred stock would be anti-dilutive.

                                      -10-

(7)  INCOME TAXES:

The Company  accounts  for income  taxes under the  provisions  of  Statement of
Financial  Accounting  Standards No. 109,  Accounting for Income Taxes (SFAS No.
109).  SFAS No. 109 requires  deferred  income tax assets and  liabilities to be
computed based upon cumulative temporary differences between financial reporting
and taxable income, carryforwards available and enacted tax law.

Income tax expense differs from the amount computed by applying the U.S. federal
income  tax  rate of 34% to  income  before  income  taxes  as a  result  of the
following:



                                                                                  1995             1994
                                                                             -------------     --------
                                                                                          

   Expected income tax expense (benefit) at 34%                              $    (273,000)    $     123,000
   Reconciling items:
     State income taxes, net of federal income tax benefit                         (50,000)           21,000
     Amortization of excess purchase price and other                                53,000                -
     Alternative minimum tax                                                            -              2,000
     Increase in valuation allowance                                               270,000           110,000
     Other, including effect of utilizing a net operating
       loss carryforward in accordance with SFAS No. 109                                -           (244,000)
                                                                             -------------     -------------

   Current provision for income taxes, of which
     $2,000 is federal and $10,000 is state in 1994                          $          -      $      12,000
                                                                             =============     =============


The components of net deferred taxes as of January 31, 1995, are as follows:

     Deferred tax assets (liabilities):
       Allowance for doubtful accounts                      $     227,000
       Accrued liabilities                                        256,000
       Deferred revenue                                           421,000
       Net operating loss and AMT credit carryforwards            452,000
       Capitalized software costs                                (297,000)
       Tax depreciation in excess of book depreciation            (78,000)
       Valuation allowance                                       (981,000)
                                                            -------------

                                                            $          -
                                                            =============

A valuation  allowance is provided when it is uncertain that some portion or all
of the deferred tax asset will be recognized.  The valuation allowance increased
during the year ended  January 31,  1995,  due to the  operating  history of the
Company.

In fiscal 1994,  the Company  utilized  approximately  $640,000 of net operating
losses carried  forward from prior years to offset pretax income.  As of January
31, 1995, the Company had remaining net operating loss carryforwards for federal
income tax purposes of approximately $1 million to offset future taxable income,
expiring through the year 2007.

                                      -11-

(8)  RELATED PARTY TRANSACTIONS:

During fiscal 1994, in connection with the issuance of the convertible preferred
stock described in Note 6, the Company issued 20,000 shares of common stock to a
company  of which a board  member is an owner and a member  of  management.  The
shares were issued in exchange for professional services rendered.