CARESCIENCE INC, S-1/A, 2000-06-07

CARESCIENCE INC
S-1/A, 2000-06-07
BUSINESS SERVICES, NEC

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 2000

REGISTRATION STATEMENT NO. 333-32376
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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PRE-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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CARESCIENCE, INC.
(Exact name of Registrant as specified in its charter)

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<S> <C> <C>
PENNSYLVANIA 7374 23-2703715
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code No.) Identification Number)
</TABLE>

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3600 MARKET STREET, 6TH FLOOR
PHILADELPHIA, PA 19104
215/387-9401
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)

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DAVID J. BRAILER
Chairman and Chief Executive Officer
CareScience, Inc.
3600 Market Street, 6th Floor
Philadelphia, PA 19104
215/387-9401

(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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Copies to:

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<S> <C>
JOHN F. BALES, III, ESQ. OTHON A. PROUNIS, ESQ.
Morgan, Lewis & Bockius LLP Reboul, MacMurray, Hewitt, Maynard &
1701 Market Street Kristol
Philadelphia, PA 19103 45 Rockefeller Plaza
215/963-5000 New York, NY 10111
212/841-5700
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If the only securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.

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SUBJECT TO COMPLETION, DATED JUNE 5, 2000

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[LOGO]

4,000,000 SHARES

COMMON STOCK

This is the initial public offering of CareScience, Inc., and we are offering
4,000,000 shares of our common stock. We anticipate that the initial public
offering price will be between $15.00 and $17.00 per share.

We have applied to list our common stock on the Nasdaq National Market under
the symbol "CARE."

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS CARESCIENCE
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>

We have granted the underwriters the right to purchase 600,000 additional
shares to cover over-allotments.

DEUTSCHE BANC ALEX. BROWN

ROBERTSON STEPHENS

THOMAS WEISEL PARTNERS LLC

The date of this prospectus is , 2000
<PAGE>
EXPLANATORY NOTE

On June 5, 2000, CareScience, Inc. (the "Company") filed Amendment No. 2 to
the Company's Registration Statement on Form S-1, filing no. 333-32376 (the
"Registration Statement"). While the EDGAR version of the Amendment to the
Registration Statement was filed correctly, the courtesy copy filed in PDF
format contained inaccurate information. The attached courtesy copy in PDF
format has been corrected.
<PAGE>
TABLE OF CONTENTS

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PAGE
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Prospectus Summary..................... 1
Risk Factors........................... 6
Forward-Looking Statements............. 15
Use of Proceeds........................ 16
Dividend Policy........................ 16
Capitalization......................... 17
Dilution............................... 18
Selected Financial Data................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 27
</TABLE>

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PAGE
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Management............................. 47
Certain Transactions................... 56
Principal Shareholders................. 57
Description of Capital Stock........... 59
Shares Eligible for Future Sale........ 63
Underwriting........................... 65
Lawyers................................ 67
Experts................................ 67
Where You Can Find Additional
Information.......................... 68
Index to Financial Statements.......... F-1
</TABLE>

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted.
Neither the delivery of this prospectus nor the sale of common stock means that
information contained in this prospectus is correct after the date of this
prospectus, except that we will update the prospectus when required by law.

UNTIL , 2000, 25 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL
DEALERS THAT BUY, SELL OR TRADE IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. DEALERS
ARE ALSO OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD CAREFULLY READ THE
ENTIRE PROSPECTUS, INCLUDING THE RISK FACTORS SECTION STARTING ON PAGE 6 AND THE
FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION.

OUR BUSINESS

CareScience provides Internet-based tools designed to improve the quality
and efficiency of health care. Our products apply our proprietary mathematical
and rules-based procedures, which we refer to collectively as clinical
algorithms, to clinical data. We use these clinical algorithms, along with our
data collection and storage technologies, to perform complex clinical analyses.
Our customers use our products to identify clinical inefficiencies and medical
errors and monitor the results of implemented solutions. Additionally, we
facilitate the sharing of clinical information over the Internet among local
health care constituents. We believe our solutions improve our customers'
business performance by:

- improving clinical processes;

- lowering the cost of management oversight; and

- improving the way health care constituents interact.

We currently sell our products to hospitals, health care systems, health
plans and pharmaceutical manufacturers.

According to the Health Care Financing Administration, annual health care
spending in the United States exceeds $1.2 trillion and is expected to grow to
$2.2 trillion by 2008. Current on-line efforts are primarily seeking to change
administrative and financial processes, but do not address the significant
majority of health care spending that arises from the process of medical
decision-making, treatment choice and therapeutic efficacy. Moreover, in
addition to being the eighth-leading cause of mortality in the United States,
medical errors add substantial costs to and drive consumer dissatisfaction with
the delivery of care. We estimate that hospitals, health plans and
pharmaceutical companies spend more than $35 billion annually to manage
treatment decisions and attempt to control clinical costs. As inefficiencies
within the health care system consume enormous resources, as well as pose
medical risks to consumers, constituents are seeking to gain control of and
measure clinical processes in order to increase quality and enhance efficiency.

OUR SOLUTION AND PRODUCTS

We provide an integrated suite of Internet-based products to gather, store,
analyze and disseminate clinical information. We believe our products provide
health care constituents with the most comprehensive, robust and clinically
credible tools for clinical-process management. Our proprietary clinical
algorithms, which we license pursuant to a 30-year exclusive agreement, were
developed at the University of Pennsylvania School of Medicine and The Wharton
School with over $30 million in grants. Our products are described below:

- CADUCIS.COM enables hospitals, health systems and health plans to
understand how to improve clinical efficiency and reduce medical errors.
As an application service provider, we offer our customers cost-effective
access to remotely hosted data supported by our sophisticated processing
technology and analysis methods.

- CARESTANDARD.COM is designed to allow local health care constituents to
securely share clinical data over the Internet using more than 60
applications from third-party vendors. We

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are creating our pilot Care Exchange to enable health care constituents in
Santa Barbara County, California to securely share clinical information.

- CARESCRIPT.COM uses our proprietary databases and analytic tools to enable
pharmaceutical and biotechnology companies to optimize the drug
development process.

- CARELEADER.COM, which we expect to introduce in 2001, will support
physicians at the point of care by allowing them to access their patients'
clinical data, see the types of treatment that are typically provided to
comparable patients, identify physicians or hospitals with particular
experience or outcomes and review their performance relative to peers.

- CARESENSE.COM, which we also expect to introduce in 2001, will allow
consumers to access information to guide their self-care decisions and to
support their relationship with their physicians.

OUR STRATEGY

Our objective is to become the leading provider of Internet-based products
to facilitate improvements in health care quality and efficiency. The primary
components of our strategy include:

- offer community-based solutions;

- develop new products based on our proprietary knowledge and data assets;

- cross-sell products;

- leverage our technology platform; and

- pursue targeted strategic relationships and acquisitions.

Our headquarters are located at 3600 Market Street, 6th Floor, Philadelphia,
PA 19104 and our telephone number is 215/387-9401. Our Web site can be found at
www.CareScience.com. The information contained on our Web site does not
constitute part of this prospectus.

2
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THE OFFERING

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<S> <C>
Common stock offered by CareScience,
Inc..................................... 4,000,000 shares

Common stock to be outstanding after this
offering................................ 12,669,351 shares

Use of proceeds........................... For redemption of mandatorily redeemable preferred
stock, payment of dividends declared on the series C, D
and E convertible preferred stock and general corporate
purposes, including working capital and expenditures for
our new product lines and, potentially, for acquisitions
if such opportunities arise in the future. See the
section entitled Use of Proceeds for more information.

Proposed Nasdaq National Market symbol.... CARE
</TABLE>

The number of shares to be outstanding upon completion of this offering is
based on 8,669,351 shares outstanding as of March 31, 2000. The number of shares
outstanding assumes the redemption for, or conversion into, common stock of all
of our convertible preferred stock outstanding on that date, and excludes
2,548,632 shares of common stock that will be reserved for issuance under our
stock option plans upon completion of this offering, of which 1,727,110 shares
were subject to outstanding options. Our convertible preferred stock will
convert or be redeemed immediately prior to the consummation of this offering
into common stock, resulting in 5,281,451 shares of common stock to be issued
upon conversion of or redemption for all preferred stock.

These numbers include the issuance of 262,500 shares of our common stock,
assuming a price per share of $16.00, in lieu of a payment of $4.2 million for
the redemption of our series F preferred stock. The series F preferred stock
will not be issued and no shares of common stock will be issued in redemption of
series F preferred stock if the price per share in this offering is greater than
$18.27.

Please see the section of this prospectus entitled Capitalization for a more
complete discussion regarding the outstanding shares of our common stock and
options to purchase our common stock and other related matters.

3
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

You should read the data set forth below together with our Management's
Discussion and Analysis of Financial Condition and Results of Operations and our
financial statements and related notes included elsewhere in this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 585 $ 1,116 $ 1,041 $ 2,552 $ 4,351 $ 718 $ 1,629
Gross profit (loss)............... 384 230 (453) 648 1,842 207 603
Operating loss.................... (109) (2,010) (4,249) (4,190) (3,748) (1,088) (1,900)
Net loss(1)....................... (89) (1,933) (4,296) (4,608) (3,670) (1,061) (1,879)
Net loss applicable to common
shareholders.................... (89) (1,933) (4,296) (4,617) (4,071) (1,155) (1,994)
Net loss per common share:
Basic and diluted............... $(0.02) $ (0.54) $ (1.27) $ (1.36) $ (1.20) $ (0.34) $ (0.59)
Weighted average shares
outstanding:
Basic and diluted............... 3,628 3,558 3,388 3,388 3,388 3,388 3,388
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED(3)
-------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 2,003 $ 2,003 $54,009
Working capital......................................... (1,560) (3,015) 50,766
Total assets............................................ 4,512 4,512 56,165
Capital lease obligations, less current portion......... 481 481 481
Mandatorily redeemable preferred stock.................. 4,797 4,892 --
Total shareholders' equity.............................. (5,299) (6,849) 51,471
</TABLE>

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(1) Before accretion of redemption premium on preferred stock.

(2) Pro forma gives effect to:

- the conversion of series C, D and E convertible preferred stock into
5,018,951 shares of common stock;

- the issuance, upon the conversion of the series C convertible preferred
stock, of series F redeemable preferred stock, with a redemption value of
$4.2 million, and the simultaneous redemption of the series F redeemable
preferred stock for 262,500 shares of common stock, assuming an offering
price of $16.00 per share;

- the accretion of the redemption value of the series G preferred stock
through June 2000; and

- the declaration of a dividend of $1.5 million (calculated at 8% per annum
through June 2000) payable to the series C, D and E convertible preferred
shareholders from the proceeds of this offering.

(3) As adjusted for the issuance of 4,000,000 shares of common stock at an
assumed offering price of $16.00 per share, the redemption of all the
mandatorily redeemable series G preferred stock and the dividend paid on the
series C, D and E convertible preferred stock upon consummation of this
offering.

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We have applied for the following United States trademarks: CareScience.com;
eCare. Better Care.; CaduCIS Manager; CaduCIS Alliance; CaduCIS Net; CaduCIS
Query; CaduCIS.com; and Care Management Science. Other trademarks and tradenames
appearing in this prospectus are the property of their respective owners.

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

UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES:

- THE UNDERWRITERS HAVE NOT EXERCISED THEIR OPTION TO PURCHASE ADDITIONAL
SHARES;

- THE REDEMPTION OF OUR MANDATORILY REDEEMABLE PREFERRED STOCK FOR CASH AND
COMMON STOCK AND THE CONVERSION OF ALL SHARES OF OUR CONVERTIBLE PREFERRED
STOCK INTO SHARES OF OUR COMMON STOCK UPON COMPLETION OF THIS OFFERING;
AND

- THE FILING OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
INCREASE OUR AUTHORIZED COMMON STOCK AND DECREASE OUR AUTHORIZED PREFERRED
STOCK.

5
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RISK FACTORS

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US. ADDITIONAL RISKS
AND UNCERTAINTIES THAT WE ARE UNAWARE OF, OR THAT WE CURRENTLY DEEM IMMATERIAL,
ALSO MAY BECOME IMPORTANT FACTORS THAT AFFECT US.

IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN THAT CASE,
THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT.

RISKS RELATED TO OUR BUSINESS

OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE OPERATE IN A NEW INDUSTRY AND
OUR OPERATING HISTORY IS LIMITED.

Because of our limited operating history it is difficult to evaluate our
business and prospects. We launched our first Internet-based product in 1996.
Our business presents the difficulties and expenses frequently encountered by
companies in the early stage of development, coupled with the risks and
uncertainties faced by companies in new and evolving markets such as the market
for Internet-based software applications. We may not be able to successfully
address these challenges. If we fail to do so, we may continue to incur losses
and the market price of our common stock would likely decline.

WE HAVE A HISTORY OF LOSSES AND EXPECT OUR LOSSES TO CONTINUE.

We have incurred net operating losses and negative cash flows from operating
activities from our inception. As of March 31, 2000, we had an accumulated
deficit of $17.0 million. We expect to incur increasing net operating losses and
negative cash flows for the foreseeable future. We will incur direct expenses
associated with the further development and marketing of our existing products
and with new product development. We expect our expenses to increase
significantly in the future as we continue to hire additional personnel in all
areas of our business. Our success depends on our ability to increase revenues
to offset expenses. We may not be able to generate sufficient revenues to offset
these expenses or to achieve profitability. If we do achieve profitability, we
may not sustain or increase profitability on a quarterly or annual basis in the
future.

THE PROPRIETARY TECHNOLOGY WE OWN OR LICENSE MAY BE SUBJECTED TO INFRINGEMENT
CLAIMS OR DISAGREEMENTS WITH THE LICENSOR WHICH COULD BE COSTLY TO RESOLVE.

The intellectual property we own or license is important to our business. We
could be subject to intellectual property infringement claims as the number of
our competitors grows and the functionality of our applications overlaps with
competitive offerings. These claims, even if not meritorious, could be expensive
to defend and divert our attention from operating our business. If we become
liable to third parties for infringing their intellectual property rights, we
could be required to pay a substantial damage award and to develop noninfringing
technology, obtain a license or cease selling the applications that contain the
infringing intellectual property. We may be unable to develop non-infringing
technology or obtain a license on commercially reasonable terms. In addition, we
may not be able to protect against misappropriation of our intellectual
property. We have no patents, but instead license important technology from the
University of Pennsylvania. Consequently, infringement claims against the
University of Pennsylvania or disagreements between the University and us
pertaining to our licensed technology could have a material adverse effect on
our operations. Third parties may infringe upon our intellectual property rights
or the rights we have

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licensed from the University. We may not detect this unauthorized use, and we
may be unable to enforce our rights.

WE DEPEND ON AN EXCLUSIVE LICENSE WITH THE UNIVERSITY OF PENNSYLVANIA FOR OUR
TECHNOLOGY, AND THE LOSS OF THIS LICENSE WOULD IMPAIR OUR ABILITY TO DEVELOP OUR
BUSINESS.

Our ability to use our technology and compete effectively in our industry
would be impaired if our exclusive license agreement with the University of
Pennsylvania were terminated. Under the license agreement, we are required to
make royalty payments to the University based on a percentage of the fees we
earn through the sublicensing and servicing of the technology and information
received from the University under the license agreement. In order to maintain
the exclusivity of our license with the University, we are required to pay a
minimum of $75,000 per year in royalties. If we do not make these minimum
royalty payments, the University may terminate the exclusive status of our
license under the agreement, and, in effect, license the technology to our
competitors. In addition, under the license agreement the University retains the
right, after consultation and negotiation with us, to publish a description of
the technology without our consent, whether or not any intellectual property
protection on this technology has been filed. If the University were to license
the technology to our competitors or were to publish the technology, our
revenues may decrease significantly and we may not be able to develop or
maintain customer and strategic relationships. In addition, if we pay the
University less than $20,000 in royalties, the University may terminate our
license entirely. In the event that the University chose not to license the
technology to us at all, we may not be able to develop similar alternative
technology or negotiate a new license agreement with another licensor. If we
were not able to develop alternative technology or acquire a new license, we may
not be able to maintain our business operations.

WE COULD BE LIABLE FOR INFORMATION RETRIEVED FROM OUR WEB SITES AND INCUR
SIGNIFICANT COSTS FROM RESULTING CLAIMS.

We may be subject to third-party claims for defamation, negligence,
copyright or trademark infringement or other theories based on the nature and
content of the information we supply to our customers through our Internet-based
applications. These types of claims have been brought, sometimes successfully,
against on-line services in the past. We could be subject to liability with
respect to content that may be accessible through our Web site or third-party
Web sites linked from our Web site. For example, claims could be made against us
if a subscriber or consumer relies on health care information accessed through
our Web site to their detriment. Even if claims do not result in liability to
us, we could incur significant costs in investigating and defending against them
and in implementing measures to reduce our exposure to any possible liability.
Our insurance may not cover potential claims of this type or may not be adequate
to cover all costs incurred in defense of potential claims or to indemnify us
for all liability that may be imposed.

WE MAY EXPERIENCE SYSTEM FAILURES WHICH COULD INTERRUPT OUR SERVICE AND DAMAGE
OUR CUSTOMER RELATIONSHIPS.

We have experienced periodic system interruptions in the past, and may in
the future. Our experience has been that interruptions in any month are seldom
more than a few hours. However, any significant interruption in our services or
degradation in response time could result in a loss of potential or existing
customers or strategic partners and, if sustained or repeated, could reduce the
attractiveness of our products to customers and partners. Although we maintain
insurance for our business, it may not be adequate to compensate us for all
losses that may occur or to reimburse costs associated with business
interruptions. We currently operate our application service provider system and
components in a single service location.

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THE HEALTH CARE INDUSTRY MAY NOT ACCEPT OUR SOLUTIONS OR BUY OUR PRODUCTS WHICH
WOULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.

We must attract a significant number of customers throughout the health care
industry or our financial results will be adversely affected. To date, the
health care industry has been resistant to adopting new information technology
solutions. We believe that complexities in the nature of health care data that
we process and analyze have hindered the development and acceptance of
information technology solutions by the industry. Conversion from traditional
methods to electronic information exchange may not occur as rapidly as we
anticipate. Even if the conversion does occur as rapidly as we expect, health
care industry participants may use applications and services offered by others.

We believe that we must gain significant market share with our applications
and services before our competitors introduce alternative products, applications
or services with features similar to our current or proposed offerings. Our
business plan is based on our belief that the value and market appeal of our
solution will grow as the number of participants and the scope of services
available on our platform increases. In addition, we expect to generate a
significant portion of our revenue from subscription and transaction-based fees
based on patient admissions and encounters. Consequently, any significant
shortfall in the number of subscribers or transactions occurring over our
platform would adversely affect our financial results.

OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD
ADVERSELY AFFECT THE PRICE OF OUR STOCK.

We expect quarterly revenues, expenses and operating results to fluctuate
significantly in the future. These fluctuations may cause our stock price to
decline. These fluctuations may result from a variety of factors, some of which
are outside of our control. These factors include:

- expansion or contraction of our customer base;

- the amount and timing of costs related to product development and
marketing efforts or other initiatives;

- the timing of our introduction of new products and the market acceptance
of those products;

- the timing of contracts with strategic partners and other parties;

- the level of acceptance of the Internet by the health care industry; and

- technical difficulties, system downtime, undetected software errors and
other problems affecting our products or the Internet generally.

We expect to increase activities and spending in substantially all of our
operational areas. We base our expense levels in part upon our expectations
concerning future revenue and these expense levels are relatively fixed in the
short-term. If we have lower revenue, we may not be able to reduce our spending
in the short-term in response. These factors may prevent us from meeting the
earnings estimates of securities analysts or investors and our stock price could
suffer.

BECAUSE OUR REVENUES ARE DEPENDENT ON A LIMITED NUMBER OF PRODUCT LINES, THE
FAILURE OF ANY ONE OF THESE PRODUCT LINES WOULD SIGNIFICANTLY DECREASE OUR
REVENUES.

We currently derive our revenue from our CaduCIS.com, CareStandard.com and
CareScript.com Internet-based applications. Because our revenues are dependent
on only a few product lines, the failure of any one of them to achieve market
acceptance would significantly decrease our revenue. As our customers' needs
change, our existing suite of applications may become inefficient or obsolete
and will likely require modifications or improvements. The addition of

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new products or services will also require us to continually improve the
technology underlying our applications. These requirements could be significant,
and we may be unable to meet them or may incur unanticipated product development
expenses or delays. If we fail to respond quickly and efficiently to our
customers' needs, or if our new applications and product offerings do not
achieve market acceptance, the market for our products would likely decline.

Our business will suffer if we do not expand the breadth of our applications
quickly. We currently offer a limited number of applications on our platform and
our future success depends on quickly introducing new applications to expand the
utility of our products to our existing customer base and generate new
customers. We are developing enhancements to our systems to permit access to
some of our applications by physicians and consumers. We have recently
introduced applications for use by the pharmaceutical industry, which
constitutes a new customer base for us. Each of our applications must integrate
with our computer systems and platform. Developing these applications will be
expensive and time consuming. Even if we are successful, these applications may
never achieve market acceptance.

TERMINATION OF ONE OR MORE OF OUR SIGNIFICANT CONTRACTS WOULD CAUSE A
SIGNIFICANT DECLINE IN OUR REVENUE.

We currently generate much of our revenue from a limited number of
contractual relationships. During the year ended December 31, 1999 and for the
three months ended March 31, 1999, we generated 11% and 16%, respectively, of
our revenue from our largest customer, Providence Health System. During the year
ended December 31, 1999 and for the three months ended March 31, 2000, we
generated 21% and 24%, respectively, of our revenue from our development
partner, California Healthcare Foundation. Termination of either of these
contractual relationships would significantly decrease our revenue and have a
material adverse effect on our operations. These entities may terminate their
contracts for cause or upon expiration of their agreements in 2002 and 2003,
respectively. In addition, one of our customers, Foundation Health Systems,
accounted for 53% and 37% of our revenue in 1997 and 1998, respectively.

FAILURE TO MANAGE OUR GROWTH WOULD ADVERSELY AFFECT OUR OPERATIONS.

Our growth has placed significant demands on all aspects of our business,
including our administrative, technical and financial personnel and systems. We
expect future growth which may further strain our management, financial and
other resources. Our systems, procedures, controls and existing space may not
adequately support expansion of our operations. Our future operating results
will substantially depend on the ability of our officers and key employees to
manage changing business conditions and to implement and improve our technical,
administrative, financial control and reporting systems. Failure to respond to
and manage changing business conditions and continued growth could materially
and adversely affect the quality of our services, our ability to retain key
personnel and our results of operations.

WE FACE INTENSE COMPETITION AND MAY BE UNABLE TO COMPETE SUCCESSFULLY WHICH
WOULD ADVERSELY EFFECT OUR FINANCIAL RESULTS.

The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of Web sites on the Internet competing for users'
attention has proliferated with no substantial barriers to entry, and we expect
that competition will continue to intensify. Any pricing pressures, reduced
margins or loss of market share resulting from our failure to compete
effectively would materially and adversely affect our financial results.

9
<PAGE>
We expect competition in our markets to increase significantly as new
companies enter the market and current competitors expand their product lines
and services. Many of these potential competitors are likely to enjoy
substantial competitive advantages, including:

- greater resources that can be devoted to the development, promotion and
sale of their services;

- longer operating histories;

- greater financial, technical and marketing resources;

- greater name recognition; and

- larger customer bases.

THE LOSS OF ANY OF OUR KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS.

Our future success depends, in significant part, upon the continued service
of our senior management and other key personnel. The loss of the services of
David J. Brailer, our Chief Executive Officer, Ronald A. Paulus, our President,
or one or more of our other executive officers or key employees could have a
material adverse effect on our operations. Our future success also depends on
our ability to attract and retain highly qualified technical, sales, customer
service and managerial personnel. Competition for qualified personnel is
intense, and we may not be able to attract or retain a sufficient number of
highly qualified employees in the future. Failure to hire and retain personnel
in key positions could materially and adversely affect our operations and,
consequently, our financial results.

OUR FAILURE TO DEVELOP STRATEGIC RELATIONSHIPS COULD ADVERSELY AFFECT OUR
ABILITY TO DEVELOP NEW PRODUCTS.

If we fail to form new strategic alliances with industry partners, fail to
maintain existing alliances or if we form alliances with partners which do not
perform well, we will have difficulty gaining acceptance of our products.

Our development of new and expanded applications for our products will be
enhanced by forming strategic alliances with industry partners. While we believe
that we will form these alliances, we have not yet negotiated many of these
strategic alliances and there is no guarantee that we can consummate these
alliances on commercially reasonable terms.

To be successful, we must establish and maintain strategic relationships
with leaders in a number of health care industry segments. Strategic
relationships are critical to our success because we believe that these
relationships will enable us to:

- extend the reach of our applications and services to the various
participants in the health care industry;

- obtain specialized health care expertise;

- develop and deploy new applications;

- further enhance CareScience brands; and

- generate revenue.

Entering into strategic relationships is complicated because some of our
future partners may decide to compete with us. In addition, we may not be able
to establish relationships with key participants in the health care industry if
we have established relationships with competitors of these key participants.
Consequently, it is important that our customers and partners perceive us as

10
<PAGE>

independent of any particular customer or partner. Any substantial relationship
which we have, or develop, with a partner or customer could adversely impact
that perception of independence and make it difficult to enter into strategic
relationships or sell our products to other customers. Most of our revenue is
generated by a small number of significant contracts, which could affect the
perception of our independence; however, we have not experienced any
difficulties in forming strategic relationships in the past for this reason.
Moreover, many potential partners may resist working with us until we have
successfully introduced our applications and services and our applications and
services have achieved market acceptance.

Once we have established strategic relationships, we will depend on our
partners' abilities to generate increased acceptance and use of our platform,
applications and services. We have limited experience in establishing and
maintaining strategic relationships with health care industry participants. If,
in the future, we lose any strategic relationships or fail to establish
additional relationships, or if our strategic partners fail to actively pursue
additional business relationships and partnerships, we would not be able to
execute our business plans and our business would suffer significantly. We may
not experience increased use of our platform, applications and services even if
we establish and maintain these strategic relationships.

OUR FAILURE TO USE NEW TECHNOLOGIES EFFECTIVELY OR TO ADAPT EMERGING INDUSTRY
STANDARDS WOULD ADVERSELY AFFECT OUR ABILITY TO COMPETE.

To be competitive, we must license leading technologies, enhance our
existing services and content, develop new technologies that address the
increasingly sophisticated and varied needs of health care professionals and
consumers and respond to technological advances and emerging industry standards
and practices on a timely and cost-effective basis. We may not be successful in
using new technologies effectively or adapting our Internet-based applications
and proprietary or licensed technology to user requirements or emerging industry
standards, because those new technologies may not easily integrate with our
existing platform. In addition, we may be unable to implement or adapt new
technologies in a cost-effective manner.

OUR FAILURE TO ADAPT OUR TECHNOLOGY TO OUR CUSTOMERS' NEEDS OR TO HANDLE HIGH
LEVELS OF CUSTOMER ACTIVITY WOULD ADVERSELY AFFECT OUR ABILITY TO INCREASE
REVENUE.

Our ability to increase revenue in the future will be adversely affected if
our technology is not able to handle high levels of customer activity on our Web
site or if our technology fails to meet our customers' performance standards.

So far, we have processed a limited number and variety of transactions using
our technology. Similarly, a limited number of health care participants use our
products. We anticipate substantial increased demands on our system as our
business and applications expand. Our systems may not accommodate increased use
while maintaining acceptable performance. We must continue to expand and adapt
our network infrastructure to accommodate additional users, increased
transaction volumes and changing customer requirements. This expansion and
adaptation will be expensive and may divert our attention from other activities.

Our user agreements with our customers generally contain only limited
performance standards. However, our customers do have performance expectations
and if we fail to meet these expectations, our customers could become
dissatisfied and terminate their agreements with us. The loss of some of our
user agreements could significantly impact our financial results. We may be
unable to expand or adapt our network infrastructure to meet additional demand
or our customers' changing needs on a timely basis and at a commercially
reasonable cost, or at all.

11
<PAGE>
FAILURE BY OUR SERVICE PROVIDERS COULD INTERRUPT OUR BUSINESS AND DAMAGE OUR
CUSTOMER RELATIONSHIPS.

Our service providers enable us to connect to the Internet. Any problems
with these or other services that result in interruptions of our services or a
failure of our services to function as desired could cause customer complaints
and attrition and could materially and adversely affect our operations. We may
have no means of replacing these services or, in the case of services which we
are obligated to use exclusively, we may be prohibited from replacing these
services, on a timely basis or at all, if those services are inadequate or in
the event of a service interruption or failure. To operate without interruption,
our service and content providers must guard against:

- damage from fire, power loss and other natural disasters;

- communications failures;

- software and hardware errors, failures or crashes;

- security breaches, computer viruses and similar disruptive problems; and

- other potential interruptions.

Interruptions may occur and any material interruptions could adversely
impact our operations and our relationship with our customers.

WE MAY NEED TO OBTAIN ADDITIONAL CAPITAL AND FAILURE TO DO SO MAY LIMIT OUR
GROWTH.

We expect that the money generated from this offering, combined with our
current cash resources, will be sufficient to meet our requirements through the
end of 2001. However, we may need to raise additional financing to support
expansion, develop new or enhanced applications and services, respond to
competitive pressures, acquire complementary businesses or technologies or take
advantage of unanticipated opportunities. Failure to raise additional capital,
if needed, will adversely effect our operations and stock price. At the time we
need additional financing, the state of our operations or market conditions
generally may not be favorable, and we may be unable to raise any additional
amounts on reasonable terms, if at all, when they are needed. We may need to
raise additional funds by selling debt or equity securities, by entering into
strategic relationships or through other arrangements.

In addition, if we sell additional equity securities, your percentage
ownership in us will decrease. If we sell debt securities, the interest payments
we would have to make to the holders of those securities would reduce our
earnings.

OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES WILL HAVE SIGNIFICANT CONTROL
OVER US AND THEIR INTERESTS MAY DIFFER FROM YOURS.

After this offering, our directors and management will beneficially own or
control approximately 47.4% of our common stock. If these people act together,
they will be able to significantly influence our management, affairs and all
matters requiring shareholder approval. This concentration of ownership may have
the effect of delaying, deferring or preventing an acquisition of us and may
adversely affect the market price of our common stock.

12
<PAGE>
RISKS RELATED TO OUR INDUSTRY

HEALTH INFORMATION IS SUBJECT TO POTENTIAL GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES AND CHANGES MAY REQUIRE US TO ALTER OUR BUSINESS.

Our business is subject to potential government regulation. Existing as well
as new laws and regulations could affect how we do business and materially and
adversely affect our financial results. There are currently few laws or
regulations that specifically regulate communications or commerce on the
Internet. However, laws and regulations may be adopted with respect to the
Internet or other on-line services covering issues such as:

- user privacy;

- pricing;

- content;

- copyrights;

- distribution; and

- characteristics and quality of products and services.

Internet user privacy has become an issue both in the United States and
abroad. Current United States privacy law consists of a few disparate statutes
directed at specific industries that collect personal data, none of which
specifically covers the collection of personal information on-line. The United
States or foreign nations may adopt legislation purporting to protect the
privacy of personal information. Any privacy legislation could affect the way in
which we are allowed to conduct our business, especially those aspects that
involve the collection or use of personal information, and could have a material
adverse effect on our business. Moreover, it may take years to determine the
extent to which existing laws governing issues such as property ownership,
libel, negligence and personal privacy are applicable to the Internet.

Currently, our operations are not regulated by any health care agency.
However, with regard to health care issues on the Internet, the Health Insurance
Portability and Accountability Act of 1996 mandated the use of standard
transactions, standard identifiers, security and other provisions by the year
2000. Pursuant to that Act, the U.S. Department of Health and Human Services has
promulgated proposed regulations which set standards for privacy of individually
identifiable health information. It will be necessary for our technology
platform and for the applications that we provide to be in compliance with the
proposed regulations when adopted in final form. These regulations would define
specified information about an individual as protected health information and
would set forth the steps that persons storing or transmitting the information
must take to ensure its confidentiality. Our internal procedures and policies
for handling of confidential information, as well as our contractual
relationships with others with whom we share information, will have to comply
with these regulations. We do not expect to significantly modify our products or
business operations or materially increase our expenses in response to currently
proposed regulations. However, final rules have not been adopted, and the Health
Insurance Portability and Accountability Act of 1996 does not prevent states
from implementing more stringent rules or regulations.

Furthermore, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services. Because the
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure in many areas, local exchange carriers have
petitioned the Federal Communications Commission to regulate Internet service
providers and on-line service providers in a manner similar to long distance
telephone carriers and to impose access fees on the Internet service providers
and on-line service providers.

13
<PAGE>
CHANGES IN THE HEALTH CARE INDUSTRY COULD ADVERSELY AFFECT OUR OPERATIONS.

The health care industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of health care organizations. Changes in
current health care financing and reimbursement systems could cause us to make
unplanned changes to our applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our applications
and services by health care participants. Federal and state legislatures have
periodically considered programs to reform or amend the United States health
care system at both the federal and state level. These programs may contain
proposals to increase governmental involvement in health care, lower
reimbursement rates or otherwise change the environment in which health care
industry participants operate. Health care industry participants may respond by
reducing their investments or postponing investment decisions, including
investments in our applications and services.

OUR BUSINESS WILL SUFFER IF COMMERCIAL USERS DO NOT ACCEPT INTERNET SOLUTIONS.

Our business model depends on the adoption of Internet solutions by
commercial users. Our business could suffer dramatically if Internet solutions
are not accepted or not perceived to be effective. The Internet may not prove to
be a viable commercial marketplace.

We expect Internet use to grow in number of users and volume of traffic. The
Internet infrastructure may be unable to support the demands placed on it by
this continued growth.

OUR INDUSTRY IS EVOLVING AND WE MAY NOT ADAPT SUCCESSFULLY.

The new and rapidly evolving Internet market may cause us to incur
substantial costs in responding to changes in that market or, if we fail to
respond to such changes, cause our revenues to decline as our customers switch
to newer, better technology. Advances in software technology occur frequently,
and we may not respond rapidly enough to the introduction of better software to
maintain our customer base in the future. We will not be successful in the
Internet market, unless, among other things, we:

- increase awareness of our CareScience brands and continue to develop
customer loyalty;

- provide useful health care analysis services to subscribers at attractive
prices;

- respond to competitive and technological developments; and

- build an operations structure to support our business.

RISKS RELATING TO THIS OFFERING

OUR COMMON STOCK PRICE MAY BE VOLATILE.

You may not be able to resell your shares at or above the initial public
offering price due to a number of factors, including:

- actual or anticipated quarterly variations in our operating results;

- changes in expectations of future financial performance or changes in
estimates of securities analysts;

- announcements of technological innovations;

- announcements relating to strategic relationships;

- customer relationship developments; and

- conditions affecting the Internet or health care industries, in general.

14
<PAGE>
The trading price of our common stock may be volatile. Initial public
offerings by technology companies have been accompanied by substantial share
price and trading volume changes in the first days and weeks after the
securities were publicly traded. The stock market in general, and the market for
technology and Internet-related companies in particular, has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of our common stock, regardless of our actual operating
performance.

In the past, securities class action litigation has often been instituted
following periods of volatility in the market price of a company's securities.
If this were to happen to us, that litigation could be expensive and would
divert management's attention.

The initial public offering price will be established by negotiation between
the underwriters and us. You should read the Underwriting section for a more
complete discussion of the factors determining the initial public offering
price.

FUTURE SALES OF SHARES COULD ADVERSELY AFFECT OUR STOCK PRICE.

The market price for our common stock could fall dramatically if our
shareholders sell large amounts of our common stock in the public market
following this offering. These sales, or the possibility that these sales may
occur, could make it more difficult for us to sell equity or equity-related
securities in the future. Excluding the 4,000,000 shares of common stock offered
hereby and assuming no exercise of the underwriters' over-allotment option, upon
the consummation of this offering, there will be 8,669,351 shares of common
stock outstanding none of which will be freely tradable without restriction in
the public market. Beginning 180 days after the effective date of our
registration statement, all restricted shares will become eligible for sale in
the public market when underwriter's lock-up agreements expire unless Deutsche
Bank Securities Inc., as representative of the underwriters, elects, in its sole
discretion, to release these shares from the lock-up agreements earlier. These
shares include 5,281,451 which may be sold to pursuant registration rights
granted by us. Please see the section entitled Shares Eligible for Future Sale
for a description of sales that may occur in the future.

NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE TANGIBLE PRO
FORMA NET BOOK VALUE OF THEIR SHARES.

The initial public offering price will be substantially higher than the pro
forma net tangible book value per share of our common stock. Pro forma net
tangible book value per share represents the amount of our total pro forma
tangible assets reduced by the amount of our total pro forma liabilities,
divided by the number of pro forma shares of common stock outstanding. As of
March 31, 2000, our pro forma net tangible book value per share was $(0.83). As
of March 31, 2000, our pro forma net tangible book value, on an as adjusted
basis after giving effect to the redemption of our mandatorily redeemable
preferred stock, the payment of dividends declared on the series C, D and E
convertible preferred stock and the sale of the 4,000,000 shares of common
stock, based on an assumed initial public offering price of $16.00 per share and
after deducting the underwriting discounts and commissions and other estimated
offering expenses, would have been approximately $3.53 per share. This
represents an immediate dilution to investors in this offering of $12.47 per
share.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often accompanied by word
such as "believes", "anticipates", "plans", "expects" and similar expressions.
These statements include, without limitation, statements

15
<PAGE>
about our market opportunity, our growth strategy, competition, expected
activities and future investments and the adequacy of our available cash
resources. These statements may be found in the sections of this prospectus
entitled Prospectus Summary, Risk Factors, Use of Proceeds, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Business and in this prospectus generally. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including all the risks discussed in Risk Factors and
elsewhere in this prospectus.

USE OF PROCEEDS

We expect to receive approximately $58.3 million in net proceeds from the
sale of the shares of common stock in this offering, assuming that the
initial public offering price is $16.00 per share, after deducting the estimated
underwriting discount and commissions and offering expenses. We expect to
receive approximately $67.2 million in net proceeds if the underwriters'
over-allotment option is exercised in full, after deducting the estimated
underwriting discount and commissions and offering expenses.

We currently intend to use the net proceeds of this offering for redemption
of our series G preferred shares which become mandatorily redeemable upon the
closing of this offering, working capital, including the expansion of our new
product lines, and for general corporate purposes. We may also use a portion of
the net proceeds to acquire additional businesses, products and technologies or
to establish joint ventures that we believe will complement our current or
future business. We presently intend to allocate approximately:

- $5 million to redeem our series G preferred shares;

- $1.5 million to pay accrued dividends on our series C, D and E preferred
shares, if the price per share in this offering is less than $18.27;

- $16 million to expand our sales and marketing efforts; and

- $25 million for further development of our products.

However, we have no specific plans, agreements or commitments, oral or written,
to do so. The amounts that we actually expend for the specified purposes will
vary significantly depending on a number of factors, including any change to our
business strategy, future revenue growth, if any, and the amount of cash we
generate from operations. If our business strategy changes, we may use proceeds
from this offering to acquire or develop new products or engage in businesses
not currently contemplated by our present business strategy. In addition, if our
future revenue growth and available cash are less than we currently anticipate,
we may need to support our ongoing business operations with funds from this
offering that we currently intend to use to support growth and expansion. As a
result, we will retain broad discretion in the allocation of the net proceeds of
this offering and may spend those proceeds for any purpose, including purposes
not presently contemplated. Pending the uses described above, we will invest the
net proceeds in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not anticipate paying any cash dividends in the
foreseeable future.

16
<PAGE>
CAPITALIZATION

The following table sets forth our actual, pro forma and pro forma, as
adjusted capitalization as of March 31, 2000. Our pro forma capitalization gives
effect to:

- the conversion of series C, D and E convertible preferred stock into
5,018,951 shares of common stock upon consummation of this offering;

- the accretion of the redemption value of the series G preferred stock
through June 2000; and

- the declaration of a dividend of $1.5 million (calculated at 8% per annum
through June 2000) payable to the series C, D and E preferred shareholders
from the proceeds of this offering.

Our pro forma, as adjusted capitalization gives effect to the application of
the estimated net proceeds from the sale of our common stock based on an assumed
initial public offering price of $16.00 per share and after deducting the
estimated underwriting discount and commissions and offering expenses payable by
us, the redemption of the mandatorily redeemable preferred stock and the
dividend paid on the series C, D and E convertible preferred stock upon
consummation of this offering.

You should read this table in conjunction with the financial statements and
the notes to those statements and the other financial information included in
this prospectus.

<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- -----------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
Capitalized lease obligations, net of current portion... $ 481 $ 481 $ 481
Mandatorily redeemable preferred stock.................. 4,797 4,892 --
Shareholders' equity (deficit):
Preferred stock....................................... 12,010 --
Common stock(1)....................................... 50 16,260 74,580
Additional paid-in capital............................ 5,746 5,746 5,746
Deferred compensation................................. (5,174) (5,174) (5,174)
Accumulated deficit................................... (17,031) (22,781) (22,781)
Treasury stock........................................ (900) (900) (900)
-------- -------- --------
Total shareholders' equity (deficit)................ (5,299) (6,849) 51,471
-------- -------- --------
Total capitalization.............................. $ (21) $ (1,476) $ 51,952
======== ======== ========
</TABLE>

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

(1) The table above excludes an aggregate of 1,727,110 shares issuable upon
exercise of stock options outstanding as of March 31, 2000, plus an
additional 821,522 shares reserved for issuance in connection with future
stock options and other awards under our 1995 Equity Compensation Plan and
our 1998 Time Accelerated Restricted Stock Option Plan.

17
<PAGE>
DILUTION

As of March 31, 2000, our pro forma net tangible book value was
approximately $(7.2) million or $(0.83) per share of common stock. Pro forma net
tangible book value per share represents the amount of our total pro forma
tangible assets reduced by the amount of our total pro forma liabilities,
divided by the number of pro forma shares of common stock outstanding. As of
March 31, 2000, our pro forma net tangible book value, on an as adjusted basis
after giving effect to the redemption of our mandatorily redeemable preferred
stock, the payment of dividends declared on the series C, D and E convertible
preferred stock and the sale of the 4,000,000 shares of common stock, based on
an assumed initial public offering price of $16.00 per share and after deducting
the underwriting discounts and commissions and other estimated offering
expenses, would have been approximately $3.53 per share. This represents an
immediate increase of $4.36 per share to existing shareholders and an immediate
dilution of $12.47 per share to new investors. The following table illustrates
this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $16.00
Pro forma net tangible book value per share at
March 31, 2000......................................... $(0.83)
Increase per share attributable to new investors......... 4.36
------
Pro forma, as adjusted net tangible book value per share
after this offering...................................... 3.53
------
Dilution per share to new investors........................ $12.47
======
</TABLE>

The following table summarizes, on a pro forma, as adjusted basis, as of
March 31, 2000, the differences between the total consideration paid and the
average price per share paid by the existing shareholders and the new investors
with respect to the number of shares of common stock purchased from us based on
an assumed initial public offering price of $16.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................... 8,669,351 68.4% $16,567,950 20.6% $ 1.91
New investors........................... 4,000,000 31.6 64,000,000 79.4 16.00
---------- ------ ----------- ------ ------
Total............................... 12,669,351 100.0% $80,567,950 100.0% $ 6.36
========== ====== =========== ====== ======
</TABLE>

At March 31, 2000, we had outstanding options to purchase a total of
1,727,110 shares of common stock at a weighted average exercise price of $3.22
per share. Assuming the exercise in full of all outstanding options, our pro
forma as adjusted net tangible book value at March 31, 2000 would be $(0.16) per
share, resulting in an immediate increase in pro forma net tangible book value
of $4.13 per share to our existing stockholders, and an immediate dilution of
$12.03 per share to the new investors based on the assumptions set forth above.

18
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Our statement of operations data for 1997, 1998 and 1999 and the balance
sheet data as of December 31, 1998 and 1999 have been derived from the financial
statements, which have been audited by Arthur Andersen, LLP, independent public
accountants, and are included in this prospectus. Our statement of operations
data for 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996
and 1997 have been derived from our audited financial statements that are not
included in this prospectus. The statement of operations data for the three
months ended March 31, 1999 and 2000 and the balance sheet data as of March 31,
2000 are derived from unaudited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for that period, which have been derived from the unaudited financial
statements included elsewhere in this prospectus. You should read the data set
forth below together with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and related
notes contained in this prospectus.

Operating expenses:
Research and development......................... 272 911 1,555 1,669 1,460 396 599
Selling, general and administrative.............. 221 1,329 2,241 3,169 3,897 899 1,565
Stock-based compensation......................... -- -- -- -- 233 -- 339
------ ------- ------- ------- ------- ------- -------
Total operating expenses....................... 493 2,240 3,796 4,838 5,590 1,295 2,503
------ ------- ------- ------- ------- ------- -------
Operating loss............................... (109) (2,010) (4,249) (4,190) (3,748) (1,088) (1,900)

Interest (income) expense, net..................... (20) (77) 47 418 (78) (27) (21)
------ ------- ------- ------- ------- ------- -------
Net loss(1)........................................ (89) (1,933) (4,296) (4,608) (3,670) (1,061) (1,879)
Accretion of redemption premium on preferred
stock............................................ -- -- -- 9 401 94 115
------ ------- ------- ------- ------- ------- -------
Net loss applicable to common shareholders......... $ (89) $(1,933) $(4,296) $(4,617) $(4,071) $(1,155) $(1,994)
====== ======= ======= ======= ======= ======= =======

Net loss per common share:
Basic and diluted................................ $(0.02) $ (0.54) $ (1.27) $ (1.36) $ (1.20) $ (0.34) $ (0.59)
Weighted average shares outstanding:
Basic and diluted................................ 3,628 3,558 3,388 3,388 3,388 3,388 3,388
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $1,192 $ 3,853 $ 2,370 $ 5,346 $ 3,382 $ 2,003
Working capital............................................. 1,310 3,855 2,167 3,845 453 (1,560)
Total assets................................................ 1,762 4,842 4,221 6,794 5,350 4,512
Debt and capital lease obligations, less current portion.... 73 1,213 4,519 570 460 481
Mandatorily redeemable preferred stock...................... -- -- -- 4,280 4,682 4,797
Total shareholders' equity (deficit)........................ 1,554 3,156 (1,140) 195 (3,644) (5,299)
</TABLE>

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

(1) Before accretion of redemption premium on preferred stock.

19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND THE RELATED NOTES TO THE FINANCIAL STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING INCLUDES A NUMBER OF FORWARD-LOOKING
STATEMENTS THAT REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. WE USE WORDS SUCH AS ANTICIPATES, BELIEVES, EXPECTS,
FUTURE, AND INTENDS, AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING
STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS PROSPECTUS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR OUR
PREDICTIONS. FOR A DESCRIPTION OF THESE RISKS, SEE THE SECTION ENTITLED RISK
FACTORS.

OVERVIEW

We released our first Internet products, CaduCIS Manager and CaduCIS Net, in
1996. We subsequently released CaduCIS Alliance in July 1999. Since our first
product release, we have signed over $15 million in multi-year contracts with
customers for our CaduCIS.com products. In March 1999, we formed our
CareStandard.com division, and have entered into a $4.6 million contract with
the California HealthCare Foundation to develop our Care Exchange technology and
business model. In the fall of 1999, we formed our CareScript.com, CareSense.com
and CareLeader.com divisions. We did not generate revenues from these divisions
in 1999. We have commenced sales of CareScript.com products and we expect sales
of CareLeader.com and CareSense.com products to commence in 2001.

We generate revenues from subscriptions to our Internet-based proprietary
technology applications and hosting of customer data, as well as from training,
implementation and consulting services. We sell our products individually or as
an integrated suite of products and services. We price our products on a
per-encounter basis, such as the number of a hospital's patient admissions or
out-patient visits, or the number of members enrolled in a health plan. In the
future, we may also price our products on a per-transaction basis.

The following table presents the percentage of our revenues we derived from
subscriptions to our CaduCIS.com application service provider data analysis and
hosting services and from our consulting and other services over the periods
presented:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Subscription revenue.................. 15% 56% 74% 83% 66%
Consulting and other revenue.......... 85 44 26 17 34
----- ----- ----- ----- -----
100% 100% 100% 100% 100%
===== ===== ===== ===== =====
</TABLE>

Our subscription agreements typically cover an initial three- to five-year
period with provisions for automatic renewals. We recognize training and
implementation fees, as well as subscriptions and related hosting revenues, on a
pro-rata basis over the life of the contract. We recognize consulting fees as
the program or service is delivered.

Our contracts generally provide for payment in advance of services rendered.
Therefore, we record these payments as deferred revenues and recognize these
payments when earned in accordance with our revenue recognition policy. Our
deferred revenue balances were $820,000, $2.9 million and $2.5 million at
December 31, 1998 and 1999 and March 31, 2000, respectively.

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<PAGE>
More than 100 health care organizations subscribe to our products. Our
contracts with the California HealthCare Foundation and Providence Health System
represented approximately 21% and 11%, respectively, of our 1999 revenues.

We have incurred substantial research and development costs since inception
and have also invested in our corporate infrastructure to support our long-term
growth strategy. We expect that our operating expenses will continue to increase
as we expand our product development and sales and marketing efforts.
Accordingly, we expect to continue to incur quarterly net losses for the
foreseeable future.

Since inception, we have incurred cumulative net losses for federal and
state tax purposes and have not recognized any material tax provision or
benefit. As of March 31, 2000, we had net operating loss carryforwards of
approximately $17.0 million for federal income tax purposes. The net operating
loss carryforwards, if not utilized, expire from 2010 through 2019. Federal tax
laws impose significant restrictions on the utilization of net operating loss
carryforwards in the event of an ownership change as defined in Section 382 of
the Internal Revenue Code. See Note 4 of the Notes to Financial Statements in
this prospectus for additional information regarding these carryforwards.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999

REVENUES

Total revenues increased 127% to $1.6 million for the three months ended
March 31, 2000 from $718,000 for the three months ended March 31, 1999. The
increase was primarily related to revenues generated from newly signed customer
contracts.

Unrecognized revenues related to customer contracts as of March 31, 2000
totaled $12.9 million.

COST OF REVENUES

Costs of revenues include customer product and service-related costs
including personnel and facility costs, depreciation and maintenance. Cost of
revenues for the three months ended March 31, 2000 was $1.0 million, an increase
of $489,000 or 101%, compared to $511,000 for the three months ended March 31,
1999. The increase was primarily a result of additional costs necessary to
service new customers.

GROSS PROFIT

Our gross profit margin increased from 29% for the three months ended
March 31, 1999, to 37% for the three months ended March 31, 2000. The increase
in gross profit margin is primarily due to increased revenues spread over a
fixed cost base.

RESEARCH AND DEVELOPMENT

Research and development costs include technology and product development
costs. Research and development costs for the three months ended March 31, 2000
were $599,000, an increase of $203,000 or approximately 51%, compared to
$396,000 for the three months ended March 31, 1999. This increase is primarily
due to expenditures made related to new product development.

21
<PAGE>
As a percentage of revenue, research and development costs were 37% of
revenue for the three months ended March 31, 2000 as compared to 55% for the
three months ended March 31, 1999.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses include costs associated with
our sales, marketing, finance, human resource and administrative functions.
Selling, general and administrative expenses for the three months ended
March 31, 2000 were $1.6 million, an increase of $701,000, or 74% compared to
$899,000 for the three months ended March 31, 1999. The increase was primarily
related to hiring of additional sales and management personnel and marketing
expenditures to increase and support customer growth.

As a percentage of revenues, selling, general, and administrative expenses
were 96% for the three months ended March 31, 2000 as compared to 125% for the
three months ended March 31, 1999.

STOCK-BASED COMPENSATION

We granted certain stock options to our officers and employees with exercise
prices deemed to be below the fair market value of the underlying stock. The
cumulative difference between the fair value of the underlying stock at the date
the options were granted and the exercise price of the granted options was
$5.7 million at March 31, 2000. We expect to amortize this amount over the four
to seven year vesting periods of the granted options. Accordingly, our results
from operations will include stock-based compensation expense at least through
2006. We recognized $339,000 of this expense during the three months ended
March 31, 2000.

INTEREST INCOME AND EXPENSE

Net interest income for the three months ended March 31, 2000 was $21,000, a
decrease of $6,000, or approximately 22%, compared to $27,000 for the three
months ended March 31, 1999.

The decrease is primarily due to lower investable cash balances.

YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998

REVENUES

Total revenues increased 70% to $4.4 million for the year ended
December 31, 1999 from $2.6 million for the year ended December 31, 1998. The
increase was primarily related to revenues generated from newly signed customer
contracts. We anticipate our revenue to grow at a significant rate. The ultimate
growth of our revenue is dependent upon the timing of the signing of contracts
and the introduction of new products.

Unrecognized revenues related to customer contracts as of December 31, 1999
totaled $12.6 million, of which we expect to recognize $5.4 million in 2000 in
accordance with our revenue recognition policy.

COST OF REVENUES

Cost of revenues for the year ended December 31, 1999 was $2.5 million, an
increase of $600,000, or 32%, compared to $1.9 million in 1998. The increase was
primarily a result of additional costs necessary to service new customers.

22
<PAGE>
GROSS PROFIT

Our gross profit margin increased from 25% in 1998 to 42% in 1999. This
increase in gross profit margin is primarily due to increased revenues spread
over a fixed base of costs. We do not expect significant increases in gross
profit margin for the foreseeable future.

RESEARCH AND DEVELOPMENT

Research and development costs for the year ended December 31, 1999 were
$1.5 million, a decrease of $200,000, or approximately 13%, compared to
$1.7 million for 1998.

This decrease is primarily due to the timing of changes in personnel. We
expect research and development costs to increase in the future in support of
our expected new product development.

As a percentage of revenue, research and development costs were 34% of
revenue in 1999 as compared to 65% in 1998. We expect the growth in revenue to
exceed the growth in research and development costs. Therefore, we expect these
costs will decrease as a percentage of revenue in the future.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended
December 31, 1999 were $3.9 million, an increase of $700,000, or 23%, compared
to $3.2 million for 1998. The increase was primarily related to hiring of
additional sales and management personnel to increase and support customer
growth.

We expect that selling, general and administrative expenses will continue to
increase in the future in order to support our revenue growth and the need for
additional infrastructure.

As a percentage of revenues, selling, general and administrative cost was
90% in 1999 as compared to 124% in 1998. We expect the percentage of selling,
general and administrative costs to decrease in the future.

STOCK-BASED COMPENSATION

We granted certain stock options to our officers and employees at prices
deemed to be below the fair value of the underlying stock. The cumulative
difference between the fair value of the underlying stock at the date the
options were granted and the exercise price of the granted options was $5.6
million at December 31, 1999. We expect to amortize this amount over the four to
seven year vesting periods of the granted options. Accordingly, our results from
operations will include stock-based compensation expense at least through 2006.
We recognized $233,000 of this expense during the year ended December 31, 1999.

INTEREST INCOME AND EXPENSE

Net interest income for the year ended December 31, 1999 was $78,000. This
amount arose primarily from investment interest income offset by interest
expense from capital lease obligations. Net interest expense for the year ended
December 31, 1998 was $419,000. This amount arose primarily from interest
expense from notes payable and capital lease obligations, partially offset by
investment interest income.

The change from net interest income in 1999 from net interest expense in
1998 is due to higher investable cash balances resulting from the cash received
from the sale of our series C preferred stock in a private transaction in
December 1998 and a reduction in interest expense in 1999 due to the conversion
of the notes payable to shareholder into our series G preferred stock in
December 1998.

23
<PAGE>
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997

REVENUES

Total revenues increased 145% to $2.6 million for the year ended
December 31, 1998 from $1.0 million for the year ended December 31, 1997. The
increase was primarily related to revenues generated from newly signed customer
contracts.

COST OF REVENUES

Cost of revenues for the year ended December 31, 1998 was $1.9 million, an
increase of $400,000, or approximately 27% compared to $1.5 million in 1997. The
increase was primarily a result of additional costs necessary to service new
customers.

GROSS PROFIT

Our gross profit margin improved in 1998 to 25% from a negative margin in
1997. This improvement is primarily due to an increase in revenue spread over a
fixed base of cost.

RESEARCH AND DEVELOPMENT

Research and development costs for the year ended December 31, 1998 were
$1.7 million, an increase of $100,000 or approximately 7% compared to
$1.6 million for 1997.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended
December 31, 1998 were $3.2 million, an increase of $1.0 million, or 41%
compared to $2.2 million for 1997. The increase was primarily related to the
hiring of additional staff and management to support our customer growth.

INTEREST INCOME AND EXPENSE

Net interest expense for the year ended December 31, 1998 was $419,000 as
compared to $47,000 for the year ended December 31, 1997. The increase in net
expense was primarily related to a reduction in interest income for 1998.

SELECTED QUARTERLY OPERATING RESULTS

The following table sets forth our unaudited quarterly results for the five
quarters ended March 31, 2000. This information has been prepared on the same
basis as the financial statements and, in the opinion of our management,
reflects all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented.
The unaudited quarterly operating results are not necessarily indicative of
future results of operation.

24
<PAGE>
This data should be read in conjunction with our Financial Statements and
related Notes included in this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 718 $ 868 $ 1,196 $ 1,569 $ 1,629
Cost of revenues.............................. 511 555 565 878 1,026
------- ------- ------- ------- -------
Gross profit.................................. 207 313 631 691 603

Research and development...................... 396 358 362 344 599
Selling, general and administrative........... 899 986 994 1,018 1,565
Stock-based compensation...................... -- -- -- 233 339
------- ------- ------- ------- -------
Total operating expenses...................... 1,295 1,344 1,356 1,595 2,503
------- ------- ------- ------- -------
Operating loss................................ (1,088) (1,031) (725) (904) (1,900)
Interest income, net.......................... 27 16 17 18 21
------- ------- ------- ------- -------
Net loss before accretion of redemption
premium on preferred stock.................. (1,061) (1,015) (708) (886) (1,879)
Accretion of redemption premium on preferred
stock....................................... 94 97 102 108 115
------- ------- ------- ------- -------
Net loss applicable to common shareholders.... $(1,155) $(1,112) $ (810) $ (994) $(1,994)
======= ======= ======= ======= =======
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations and funded our capital
expenditures through the private sale of equity securities, supplemented by
private debt and equipment leases. Aggregate net proceeds to date from private
equity financings total $12.3 million. As of March 31, 2000, we had
$2.0 million in cash and a working capital deficit of $1.6 million.

Net cash used in operating activities was $1.1 million for the three months
ended March 31, 2000 and $1.4 million for the three months ended March 31, 1999.
Net cash used in operating activities was $3.8 million in 1997, $2.4 million in
1998 and $1.4 million in 1999. For those periods, net cash used in operating
activities was primarily to fund losses from operations.

Net cash used in investing activities was $192,000 for the three months
ended March 31, 2000 and $155,000 for the three months ended March 31, 1999. Net
cash used in investing activities was $180,000 in 1997, $244,000 in 1998 and
$195,000 in 1999. Investing activities consisted primarily of purchases of
property and equipment.

Net cash used in financing activities was $98,000 for the three months ended
March 31, 2000 and $25,000 for the three months ended March 31, 1999. Financing
activities for these periods consisted primarily of capital lease payments. Net
cash provided by financing activities was $2.5 million in 1997 and $5.6 million
in 1998, and net cash used in financing activities was $370,000 in 1999.
Financing activities consisted primarily of proceeds from a related party loan
in 1997, proceeds from the sale of preferred stock in 1998, and capital lease
financing and payments in 1999.

As we execute our strategy, we expect significant increases in our operating
expenses to fund development of current and new divisions and product lines.
Presently, we anticipate that our existing capital resources and the proceeds
from this offering will meet our operating and investing needs through the end
of 2001. After that time, additional funding may not be available on acceptable
terms or at all. If we require additional capital resources to grow our
business, execute our operating plans or acquire complementary businesses at any
time in the future, we may seek to sell additional equity or debt securities or
secure additional lines of credit, which may result in ownership dilution to our
shareholders. In any event, we believe that our current funding resources,

25
<PAGE>
including cash on hand and operating revenues, will be sufficient to sustain
operations at least through 2000 without the proceeds from this offering.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB 101 expresses the views of
the SEC staff in applying generally accepted accounting principles to certain
transactions. Our financial statements and related disclosures for 1997, 1998
and 1999 are in compliance with SAB 101.

26
<PAGE>
BUSINESS

OVERVIEW

CareScience provides proprietary Internet-based tools designed to improve
the quality and efficiency of health care. Our products allow users to identify
the presence and causes of clinical inefficiencies and medical errors and to
monitor the results of implemented solutions. We have developed a proprietary
suite of technologies for the collection, analysis and sharing of clinical data.
These technologies enable our customers to cost-effectively evaluate and manage
the key quality factors in care delivery. We currently sell our Internet-based
information and data evaluation products to hospitals, health systems, health
plans and pharmaceutical manufacturers. Our objective is to facilitate
improvements in health care quality and efficiency by using the Internet to
become the leader in collection, analysis and exchange of comprehensive,
community-wide clinical data.

CareScience was incorporated in 1992 with the purpose of commercializing
intellectual property that was developed at the University of Pennsylvania
School of Medicine and The Wharton School. In 1993, we exclusively licensed the
intellectual property underlying our core technology in a 30-year agreement with
the University of Pennsylvania which is the holder of approximately 1.2% of our
capital stock. In 1996, we launched our first Internet-based commercial product
based on this proprietary technology under our CaduCIS.com product line. In
1999, we launched our clinical data sharing products as well as a product aimed
at the pharmaceutical industry. In addition, we are currently developing
products for use by physicians and consumers. To date, we have signed 50
contracts covering more than 100 hospitals, health systems, health plans and
pharmaceutical companies. On March 7, 2000, we changed our name from Care
Management Science Corporation to CareScience, Inc.

INDUSTRY BACKGROUND

CLINICAL COSTS ARE LARGE AND GROWING

According to the Health Care Financing Administration, or HCFA, annual
health care spending in the United States exceeds $1.2 trillion, or 14% of the
country's gross domestic product, and is expected to grow to $2.2 trillion by
2008. Current on-line efforts are primarily seeking to change administrative and
financial processes, reduce systems costs, improve cash flow or speed billing
and purchasing. Even if successful, these efforts do not address the significant
majority of health care spending that results from the cost of clinical
diagnosis and treatment. These costs arise from the process of medical
decision-making, treatment choice and therapeutic efficacy, and comprise the
largest portion of spending in the health care industry. Furthermore, we
estimate that hospitals, health plans and pharmaceutical companies spend more
than $35 billion annually to manage treatment decisions and attempt to control
clinical costs. As inefficiencies within the health care system consume enormous
resources, as well as pose medical risks to consumers, constituents across the
health care industry are seeking cost-effective information and tools to improve
the quality and efficiency of care delivery.

CONCERNS ABOUT CLINICAL QUALITY AND MEDICAL ERRORS ARE INCREASING

The delivery of clinical care usually involves complex procedures, multiple
treatments and subjective judgments. Even appropriate clinical decisions are
often difficult to implement and analyze because of uncontrolled operational
systems. Hospitals and health plans have been seeking to gain control of and
measure clinical processes to increase accountability and improve care.

27
<PAGE>
Problems with quality in the health care industry have recently gained
attention because of advances in the ability to measure medical errors and
complications and increasing concern about clinical care among policy-makers and
the public. In addition to being the eighth-leading cause of death in the United
States, medical errors add substantial costs to and drive consumer
dissatisfaction with the delivery of care. Medical errors and complications
result in unnecessary events including emergency room visits, hospitalizations,
specialist referrals and laboratory studies, all of which are used to evaluate
the errors and manage the consequences they create. We believe that many of the
current efforts to reduce administrative waste and improve financial performance
do not address the processes that result in clinical inefficiencies. Health care
delivery systems, physicians, health plans, the government and employers are
seeking information regarding clinical quality and medical errors as well as
tools to enhance clinical efficiency.

HEALTH CARE CONSTITUENTS REMAIN HIGHLY FRAGMENTED

Health care is delivered locally in hundreds of thousands of locations
through a complex and fragmented mix of constituents, including:

- hospitals, health systems, medical practice groups and other provider
organizations;

- physicians in solo or small-group practices;

- payors, such as insurance companies, managed care organizations, Medicare,
Medicaid and employers; and

- suppliers, such as clinical laboratories, pharmaceutical companies and
other groups that provide tests, drugs, x-rays and other medical supplies
and services.

Historically, many of these organizations have tried to improve efficiency,
accountability and clinical-process control by horizontally or vertically
integrating with other constituents. For example, hospitals acquired physician
practices in order to create integrated delivery systems. These efforts have
largely been abandoned because these systems were unable to integrate clinical
services and set common goals. Additionally, these efforts highlighted the
importance of being able to share clinical, operational and administrative
information.

TECHNOLOGICAL FRAGMENTATION LEADS TO INEFFICIENT USE OF CLINICAL DATA

In order to efficiently deliver care, information must flow within and
between health care constituents. For example, to diagnose and treat a patient
properly, physicians need access to clinical information such as medical history
data, laboratory results, x-rays and prescriptions from various hospitals,
laboratories and other providers. Health care constituents have not historically
coordinated their information technology investments due to:

- the large number of constituents;

- the complexity of health care encounters and transactions;

- the cost of deploying technology; and

- pervasive concerns about confidentiality of patient information.

This has resulted in the current technology infrastructure in health care
being characterized by numerous incompatible and proprietary mainframe and
client/server systems that store information in isolated databases using
non-standardized formats. Thus, providers must typically request information by
phone, fax or patient survey and those requests are frequently delayed due to
disparate paper-based systems maintained by most constituents. Furthermore, the
lack of timely access to accurate clinical information, particularly in an
urgent-care situation, may lead to poor clinical outcomes and excess costs
through:

- inaccurate diagnoses;

- redundant tests; and

- enhanced potential for medical errors and clinical complications.

28
<PAGE>
As a result of geographic, organizational and technological fragmentation,
current information exchange is often incomplete or redundant, thus creating the
need for a comprehensive technology solution.

THE GROWTH OF THE INTERNET IS IMPACTING HEALTH CARE

The Internet has emerged as the fastest growing communication medium in
history. International Data Corporation, an independent research firm, estimates
that the total number of Internet users worldwide will grow from 142 million at
the end of 1998 to 502 million by the end of 2003. The Internet is currently
being used to speed and streamline a variety of business transactions. The
Internet's open architecture, platform and location independence, scalability
and growing acceptance make it an increasingly important medium for the
information-intensive and highly transactional health care industry. We believe
that many existing Internet products do not provide tools to monitor the care
delivery process or improve clinical efficiency. Additional improvements in the
ability to search, store, structure, integrate and filter vast amounts of
disparate data and to dynamically analyze, customize and display information in
contexts relevant to particular users will further increase the usefulness of
Internet-based applications to the health care market.

THE CARESCIENCE SOLUTION

We provide Internet-based products that use proprietary analytical tools and
data collection and sharing technologies to improve the quality and efficiency
of clinical services. Our products identify the presence and causes of clinical
inefficiencies and medical errors and monitor the results of implemented
solutions. Additionally, we facilitate the sharing of clinical information
across health care constituents on a community-by-community basis. We believe
our solutions improve our customers' business performance by enabling real-time
clinical data sharing and detailed clinical-process analysis.

IMPROVE THE QUALITY OF CARE. Our proprietary scientific methodologies were
developed at the University of Pennsylvania School of Medicine and The Wharton
School with over $30 million in grants. Our algorithms allow us to normalize
clinical information across thousands of parameters using sophisticated
statistical analysis and, in conjunction with our on-line analytic processing
technology, provide retrospective evaluation as well as prediction of clinical
performance. Unlike benchmarking, which compares performance to designed
protocols or averages of broad populations across a limited number of criteria,
our algorithms allow users to understand the underlying basis of their clinical
performance. For example, when a patient experiences a clinical complication, we
can determine the likelihood that the complication was attributable to the
patient's condition, the physician's decisions or the hospital's operations, and
for any of these, which specific factors contributed to the complication. We
believe our products provide health care constituents with the most
comprehensive, robust and clinically credible tools for clinical-process
management.

OUTSOURCE COMPLEX CLINICAL ANALYSES. The collection, standardization and
analysis of clinical data is complicated, time intensive and requires
specialized capabilities. We believe that very few health care organizations
possess these resources or capabilities. Our products are designed to collect
and analyze comprehensive clinical data in order to improve the delivery of
care. As an application service provider, we offer our customers cost-effective
access to remotely hosted data supported by sophisticated processing technology
and analysis methods.

EXCHANGE CLINICAL INFORMATION. Our technologies provide information to
influence diagnostic and treatment decisions by enabling secure information
sharing among authorized health care constituents. Since much information is not
currently available at the point of care, we are

29
<PAGE>
developing an Internet-based care data utility to share and analyze clinical
information among participating health care constituents within a community. We
are developing access standards to this utility and have certified a wide
variety of clinical applications to give our customers flexibility in accessing
this utility. For example, we have designated more than 60 applications from
vendors as CareStandard.com-certified, including Cerner, Eclipsys, MedicaLogic
and Shared Medical Systems.

PROVIDE COMPREHENSIVE SERVICES. Our products support critical clinical
functions and are used intensively by our customers. We are developing new
products to support other important tasks, such as interacting with physicians
and consumers, which will expand the role of our products in daily
clinical-management functions. Because of the services we provide, our customers
comprise a large and growing base of high-level clinical decision makers with
significant strategic and operational influence. As the use of the Internet
grows, we believe that we will have a unique channel through which to distribute
other Internet-based services to our users.

OUR VALUE PROPOSITION

Our value proposition to our customers is based on enabling them to manage
their clinical operations using our databases and proprietary clinical
algorithms. Our approach identifies clinical inefficiencies and medical errors
and thereby offers the opportunity to improve the quality of care and reduce
costs. Additionally, we host our customers' clinical data and provide real-time
access to that data, which reduces their fixed cost of information technology
while increasing reporting flexibility.

Customers gain value from our products in three principal areas:

IMPROVING CLINICAL PROCESSES. Many tests and therapies that are performed
on patients do not improve outcomes or may pose undue risk. Moreover, many
patients do not receive indicated preventative therapies or are placed at risk
by oversights in drug regimens or in pre-operative preparations. Our products
enable our customers to strengthen their business performance by improving the
quality of care they deliver and avoiding medical errors and unnecessary
treatments.

LOWERING THE COST OF MANAGEMENT OVERSIGHT. In hospitals and health plans,
our products reduce the need for manual data collection and for tracking of
clinical events. Our CareScript.com databases and outsourcing tools reduce the
need for pharmaceutical makers to have specialized in-house staff to manage the
strategic drug development process. Because our products are vendor neutral and
operate over the Internet, we enable our customers to realize substantial value
from their historical investment in legacy systems.

IMPROVING THE WAY HEALTH CARE CONSTITUENTS INTERACT. Our products provide
service integration by enabling health care constituents to share relevant
clinical information. For example, our products enable hospitals and health
plans to provide clinical-data access to physicians at the point of care. Also,
hospitals and health plans can use our products to supplement their consumer
relationships and improve consumer satisfaction and health status.

OUR STRATEGY

Our objective is to become the leading provider of Internet-based products
to facilitate improvements in health care quality and efficiency. The primary
components of our strategy include:

OFFER COMMUNITY-BASED SOLUTIONS. Our primary focus is at the community
level, where the overwhelming majority of people receive clinical services. Our
products and services support the key participants in local health care
delivery: hospitals, health plans, pharmaceutical and biotechnology companies,
physicians and consumers. We offer a comprehensive suite of Internet-based
products and services that allow different participants in local health care
systems to manage

30
<PAGE>
their role in care delivery while collaborating with other participants. As one
or more of our products become accepted within a community, our other products
become more valuable and more likely to be used in that community.

DEVELOP NEW PRODUCTS BASED ON OUR PROPRIETARY KNOWLEDGE AND DATA ASSETS. We
have developed a substantial and rapidly growing proprietary on-line data asset
in a single location and format encompassing millions of care encounters. We
maintain proprietary, rigorously validated clinical algorithms. Our data and
knowledge bases are unique because of their clinical detail and linkage to
ongoing relationships with active customers. We are leveraging our proprietary
database to develop and introduce other Internet-based products. For example, in
the fall of 1999, we introduced our CareScript.com product to pharmaceutical and
biotechnology companies for outsourcing key functions and performing on-line
pharmacoeconomic analysis. In addition, we are developing CareLeader.com for
physicians and CareSense.com for consumers using our proprietary knowledge and
data assets.

CROSS-SELL PRODUCTS. We are developing strong relationships with hospitals,
health systems, health plans and pharmaceutical companies. We intend to enhance
these relationships by developing and selling additional complementary products
to these customers. While each of our products is designed to satisfy the needs
of a particular type of customer, customers frequently purchase more than one
type of product. For example, we believe that hospitals that use CaduCIS.com to
manage clinical processes are more likely to use CareStandard.com to exchange
clinical data, CareLeader.com to relate to physicians and CareSense.com to
relate to consumers. Additionally, we can serve our high-level user base by
providing future opportunities for third-party services to be offered through
our distribution channels.

LEVERAGE OUR TECHNOLOGY PLATFORM. Our products use a common technology
platform, including common architecture, data structures, analytic processing
tools, clinical algorithms and telecommunication protocols. Additionally, our
products frequently integrate with a variety of other vendors' products. By
using the Internet and serving as a centralized application service provider,
our solution represents a high-value proposition for our customers. Furthermore,
since our products are technologically intensive and connect disparate industry
segments, customers cannot replicate our products without incurring substantial
costs.

PURSUE TARGETED STRATEGIC RELATIONSHIPS AND ACQUISITIONS. We intend to
pursue strategic relationships and acquisitions that would bolster our
distribution channels in core areas or expand our service offerings to
customers. We plan to seek targeted partnerships and acquisitions that would be
consistent with our objective to improve quality and efficiency in health care.

PRODUCTS

We provide an integrated suite of Internet-based products designed to
gather, store, analyze and disseminate clinical information. Our customers use
these products to build relationships and to improve the quality and efficiency
of clinical care. To date, we have deployed three core product lines:
CaduCIS.com, CareStandard.com and CareScript.com. Additionally, we are
developing two

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new product lines: CareLeader.com and CareSense.com. An overview of our products
can be seen in the table below:

<TABLE>
<CAPTION>
DATE
PRODUCT TARGET MARKET CORE FUNCTION LAUNCHED PRICING MODEL
<S> <C> <C> <C> <C>
CaduCIS.com

CaduCIS Manager Hospitals and Understanding how to improve clinical Second Quarter Per admission
health systems efficiency and reduce medical errors 1996 or encounter
using clinical data

CaduCIS Alliance Health plans Understanding how to improve clinical Third Quarter Per member
efficiency and reduce medical errors 1999
using claims data

CaduCIS Net Hospitals, health Direct hospital-hospital performance First Quarter Free
systems, health comparisons using public data 1996
plans
CareStandard.com All health care Securely exchanging clinical First Quarter Per encounter
participants information at the point of care via 1999
the Internet
CareScript.com Pharmaceutical and Understanding the best market Fourth Quarter Per report
biotechnology target(s), positioning and pricing 1999
companies for pharmaceutical products
CareLeader.com Hospitals, health Evaluation of current and prior Targeted: 2001 Per member or
systems, health treatment choices encounter
plans for use by
their physicians
CareSense.com Hospitals, health Facilitation of self-assessment of Targeted: 2001 Per member or
systems, health care in consultation with a physician encounter
plans for use by
their consumers
</TABLE>

CADUCIS.COM

CaduCIS.com products are used by hospitals, health systems and health plans
to monitor and evaluate care and to support and manage the physicians that
provide care on their behalf. The CaduCIS.com Web-server center now hosts more
than 5 terabytes of detailed clinical data which is the equivalent of over
2.5 billion pages of text. This data and the related Web-server operation
provide the critical infrastructure support to our other product lines.

All products in the CaduCIS.com product line:

- collect clinical data from existing customer information systems;

- standardize and store data in a common format;

- provide access to data and clinical algorithms through our application
service provider platform;

- analyze data using our proprietary methods to identify ways to improve
care;

- provide information access to authorized users with only a browser and
Internet connection; and

- create on-line communities of users to support collaboration for care
improvements.

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CADUCIS.COM CASE STUDY EXAMPLE

CADUCIS MANAGER ALERTED A HOSPITAL TO A PROBLEM WITH MEDICAL ERRORS IN
PATIENTS WITH AN INTESTINAL BLOCKAGE. USING THE TOOL, USERS DETERMINED THAT THE
AMOUNT OF INTRAVENOUS FLUID PROVIDED WAS TOO MUCH FOR SOME OF THE PATIENTS WITH
WEAKER HEARTS. THAT EXCESS FLUID RESULTED IN A DANGEROUS CONDITION WHERE FLUID
ACCUMULATES IN THE LUNGS AND BREATHING BECOMES DIFFICULT. THIS COMPLICATION WAS
COSTLY DUE TO THE NEED FOR DRUG TREATMENT TO REMOVE THE EXTRA FLUID AS WELL AS
LAB AND X-RAY TESTS TO MONITOR THE TREATMENT. IN LESS THAN 5% OF THE TIME IT
WOULD HAVE TAKEN WITHOUT CADUCIS.COM, TWO USERS WERE ABLE TO QUICKLY IDENTIFY A
TOTAL OF 250 CASES OF THIS COMPLICATION REPRESENTING MORE THAN $1.4 MILLION IN
UNNECESSARY, UNCOMPENSATED FEES.

CADUCIS MANAGER. Our customers use CaduCIS Manager to improve the clinical
care delivery process, reduce medical errors and lower costs in the inpatient
and hospital-based outpatient settings. It is used by case managers, medical
directors, physician leaders, department chairmen, decision-support analysts and
other hospital and health system managers with only a browser and Internet
connection. Output from CaduCIS Manager is used in many different ways
including: case management, physician education, profiling, pathway development,
performance monitoring and compliance with Medicare-required quality data
submission.

CADUCIS ALLIANCE. Our customers use CaduCIS Alliance to reduce medical
errors and better utilize specialized resources such as hospitals, specialists
and emergency care units. CaduCIS Alliance focuses on optimizing physicians'
treatment choices for treatment setting, drug use, test and therapy use and
procedure use. It is used by medical directors, utilization review staff and
practice leaders for numerous medical management functions and also supports
National Committee for Quality Assurance accreditation. Importantly, CaduCIS
Alliance also enables communication and coordination between health plan and
practicing physician.

We typically sell CaduCIS Manager and CaduCIS Alliance pursuant to three- to
five-year contracts, Contract pricing is estimated based on a per-encounter or
per-member basis. To the extent customers exceed estimated amounts, additional
fees will be charged. It usually takes us and our implementation partners
between 10 and 28 weeks to install the products, including data-interface
development, database construction and user training. Customers typically have
unlimited access to data and are supported by an array of telephone and email
help, data validation and management, product training classes and ad-hoc
services. We are currently testing transaction-based pricing in selected
markets.

CADUCIS NET. This is a free Internet-based service using our proprietary
algorithms to compare quality and performance across hospitals. Because we use
the most recent public information for Medicare beneficiaries across the nation,
this product is immediately accessible to authorized users. In September 1999,
we made a strategic decision to offer CaduCIS Net free to the health care
marketplace. Since that time, over 2,600 health care organizations have
registered and are using this product and more than 1,100 have requested
information about our revenue-producing products. Two-thirds of all
non-governmental United States hospitals use CaduCIS Net to compare clinical and
economic performance and to identify patterns of medical errors.

We also employ a group of expert educators and consultants who support
product users through a service offering called the Institute for Management
Development. The Institute for Management Development assists in the development
of disease-focused strategies and in setting and achieving explicit process
improvement performance targets. Institute for Management Development staff also
advises executive and clinical leadership on the strategic use of care
management as a competitive tool in regional or national markets. These services
are offered as on-site or Internet-based programs aimed at physician executives,
practicing clinicians and CaduCIS.com users.

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<PAGE>
CARESTANDARD.COM

CareStandard.com is designed to enable real-time, Internet-based clinical
data exchange and related services that allow for the secure sharing and storage
of clinical data using more than 60 applications from third-party vendors.
Physicians, hospitals, health systems, laboratories, pharmacies and other local
organizations participate in data-sharing arrangements organized and operated by
us to deliver the information that physicians need to provide better care for
their patients. We facilitate data availability at the point of care through an
open-architecture, Internet-based data sharing utility. By using these services,
participants are able to share clinical information, thereby:

- providing clinical data at the point of care;

- reducing the rate of medical errors and misdiagnoses;

- improving the efficiency of care delivery; and

- reducing the overall cost of health care.

CareStandard.com clinical data exchange is accomplished through three
business and technical mechanisms:

- certification of third-party vendors to ensure compliance with the
CareStandard.com data standards;

- formation of a Care Exchange composed of local health care constituents
that determine data sharing rules; and

- deployment of a care data utility to securely and efficiently route,
convert and monitor data elements between parties over the Internet.

CARESTANDARD.COM HYPOTHETICAL EXAMPLE

A PHYSICIAN IS TREATING A NEW PATIENT WHO STATES THAT HE WAS RECENTLY SEEN
IN A HOSPITAL EMERGENCY ROOM BY ANOTHER PHYSICIAN AND HAD A PRESCRIPTION FILLED
THAT HE CAN'T REMEMBER. THE PHYSICIAN IS ABOUT TO ORDER AN EXPENSIVE SERIES OF
LABORATORY TESTS, BUT BEFORE SHE SUBMITS THE ORDER, SHE USES HER EXISTING
CARESTANDARD.COM-CERTIFIED MEDICAL RECORD APPLICATION TO RETRIEVE THE PATIENT'S
LAB RESULTS FROM THE EMERGENCY ROOM AND THE PATIENT'S PRESCRIPTION HISTORY FROM
THE LOCAL PHARMACY. SHE DISCOVERS THAT THE LAB REGIMEN THAT SHE WAS ABOUT TO
ORDER WAS ALREADY COMPLETED BY THE HOSPITAL AND THAT THE PATIENT HAD MORE THAN
ONE ABNORMAL RESULT. ONCE AGAIN USING HER EXISTING APPLICATION, SHE ORDERS A
SINGLE FOLLOW UP LAB TEST AND AN IMPORTANT PRESCRIPTION. FORTUNATELY, THE
PHYSICIAN IS ALERTED IMMEDIATELY TO A DRUG ALLERGY THAT THE PATIENT HAD
FORGOTTEN, SO THE PHYSICIAN CHANGES HER DRUG ORDER TO ANOTHER PRODUCT. IN LESS
THAN FIVE MINUTES, THE PHYSICIAN HAS RETRIEVED IMPORTANT CLINICAL DATA AND
INITIATED A SAFE, EFFECTIVE TREATMENT.

CARE EXCHANGE. We provide the staff and services that establish and manage
a Care Exchange in each community. The Care Exchange develops the rules for data
sharing and governs the ongoing arrangements between participating
organizations. We also provide Internet-based information relevant to Care
Exchange members, including:

- current status of federal, state, and local regulations;

- health industry assessments; and

- reports that track issues surrounding use of the Internet for health
information exchange.

Our demonstration Care Exchange is in Santa Barbara County, California, and
is developed under a contract with the California HealthCare Foundation. We
intend to introduce

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<PAGE>

CareStandard.com in the California market initially and then to markets across
the United States, primarily relying upon Internet-based work-flow management
tools that are being developed as part of our demonstration Care Exchange.

CARE DATA UTILITY. We are currently implementing a care data utility, which
is compliant with proposed Health Insurance Portability and Accountability Act
regulations. This utility will securely route, standardize, host and retrieve
clinical data from any CareStandard.com-certified application. It will comply
with existing industry and governmental standards for data content inputs and
outputs and will include universal person identifiers with secure data access.
Most data will be stored locally within each separate third-party application,
but we could provide a community-level data storage for those third-party
applications that cannot transmit data instantaneously. Importantly, we are
designing this care data utility to be highly scalable and capable of being
expanded at low marginal cost. Markets for this health care information utility
can be accessed on a community-by-community or health system-by-health system
basis.

VENDOR CERTIFICATION. Our CareStandard.com care data utility is designed to
be an application-independent, open-architecture data sharing solution. We
certify vendors that have fully deployed applications that meet our
requirements. As of February 2000, we have certified more than 60 products from
vendors that we determined to meet our requirements. Only products that are
CareStandard.com-certified can integrate with our care data utility, and Care
Exchange members have agreed to only purchase CareStandard.com-certified
products. These products cover multiple functions such as order entry systems,
electronic medical record applications, patient health care information web
sites and system integration tools.

We maintain a comprehensive, highly detailed, Internet-based database
regarding the vendors and products we certify. We also identify and support
organizations that want to buy CareStandard.com-certified products. By bringing
together community-based buyers and product sellers, we believe that we can
simultaneously aggregate organizational purchasing power for communities and
enhance product volume for vendors. Additionally, the certification process
offers vendors a framework for product development that is based on specific and
objective criteria.

CARESCRIPT.COM

CareScript.com builds upon the proprietary databases created by our other
product lines, and uses this data to answer important development,
market-targeting and pricing questions for pharmaceutical and biotechnology
companies. According to a 1994 study by Duke University, seven out of ten
commercialized pharmaceutical products fail to recoup their development costs.
Researchers, marketers and other decision makers within pharmaceutical
manufacturers use CareScript.com to improve the financial return from chemicals
ranging from those in discovery to those that are already commercialized.
Additionally, we provide related services to hospitals, health systems and
health plans to enable those organizations to better select, purchase and deploy
drugs.

CareScript.com products perform the following functions:

- on-line pharmacoeconomic data access;

- interactive analytic models;

- pharmaceutical development life cycle tools; and

- outsourcing management communication technology.

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<PAGE>
CARESCRIPT.COM CASE STUDY EXAMPLE

RESEARCH DATA INDICATES THAT A NEW CHEMICAL COMPOUND DEVELOPED BY A
PHARMACEUTICAL COMPANY IS EFFECTIVE AGAINST A WIDE RANGE OF DISEASES. USING OUR
CARESCRIPT.COM DATABASE AND SERVICES, THE PHARMACEUTICAL MAKER WAS ABLE TO
DETERMINE THE TYPE AND FREQUENCY OF THOSE DISEASES IN UNITED STATES HOSPITALS
NATIONALLY, REGIONALLY AND LOCALLY. CARESCRIPT.COM ALSO DETERMINED THE SEASONAL
AND AGE-RELATED VARIABILITY OF THOSE DISEASES. WE EXPECT THAT FURTHER USE OF OUR
CARESCRIPT.COM DATA AND ANALYTIC TOOLS WILL SHOW HOW EXISTING PHARMACEUTICAL
PRODUCTS ARE USED TO TARGET THESE DISEASES. IT WILL ALSO BE ABLE TO REVEAL THE
EXISTING VARIABILITY IN TREATING THESE CONDITIONS WITH CURRENT PHARMACEUTICAL
PRODUCTS, THE CLINICAL OUTCOMES FOR EACH EXISTING APPROACH AND THE UNMET NEEDS
OF PATIENTS WITH THESE DISEASES. THIS INFORMATION WILL ENABLE THE PHARMACEUTICAL
MAKER TO DETERMINE THE MOST ATTRACTIVE COMMERCIAL OPPORTUNITY AND PROPER
CLINICAL TARGET FOR THE NEXT, MORE EXPENSIVE PHASE OF THE FOOD AND DRUG
ADMINISTRATION APPROVAL PROCESS. SPECIFICALLY, THE PHARMACEUTICAL MAKER CAN
UNDERSTAND WHAT DISEASES TO TARGET, AND WHEN TO START AND WHERE TO CONDUCT ITS
TRIAL TO MINIMIZE ITS COSTS AND MAXIMIZE ITS LIKELIHOOD OF SUCCESS.

ON-LINE ANALYSIS. Customers use CareScript.com to perform on-line analyses
to study the financial impact of a new pharmaceutical product. We use our
Internet-based applications, proprietary algorithms and data to replace or
complement costly and time-consuming consulting services. Pharmaceutical makers
use CareScript.com to decide what diseases to target with their research and
development efforts and whether or not a new drug should be moved out of
research and development and into the expensive clinical trials process. These
studies may identify the costs of treating an illness, the distribution of
patients with particular diseases, how they are treated and how specific drugs
impact the course of illness. Our on-line pricing analyses help determine how a
drug should be priced in view of the benefit it provides to patients and the
competitive positioning of other drugs.

OUTSOURCING. We provide on-line and consulting-based outsourcing to
biotechnology and other smaller firms that cannot support a pharmacoeconomic
staff or pricing staff of their own. Like their larger competitors, these
organizations need specialized clinical-economic support for the
commercialization of their new or positioning of their existing drugs. Through
CareScript.com, we expect to form long-term relationships with these
organizations. We expect to use our Internet-based products to outsource
management of pharmacoeconomics, procurement of pricing and outcome studies and
provide development lifecycle modeling tools for these customers.

CARELEADER.COM AND CARESENSE.COM

CareLeader.com and CareSense.com are currently under development as
interactive products to enhance the physician-patient encounter. Both products
will use our database, as well as our proprietary analytic methods,
Internet-based operations, hosting and distribution channels.

CARELEADER.COM AND CARESENSE.COM HYPOTHETICAL EXAMPLE

A PATIENT WAS RECENTLY DIAGNOSED WITH LEUKEMIA. AFTER REVIEWING THE GENERIC
INFORMATION AVAILABLE ON SEVERAL CONSUMER-FOCUSED WEBSITES, THE PATIENT LOGS
INTO CARESENSE.COM THROUGH HER COMMUNITY HOSPITAL WEBSITE. AFTER ESTABLISHING
HER IDENTITY, SHE INITIATES THE DOWNLOAD OF HER MEDICAL DATA INTO THE
CARESENSE.COM DATABASE AND REVIEWS THAT INFORMATION. SHE THEN PERFORMS A
TREATMENT COMPARISON TO SEE HOW OTHER PATIENTS LIKE HER HAVE BEEN TREATED. SHE
ALSO LEARNS WHICH COMPLICATIONS SHE MAY DEVELOP AND WHAT SHE CAN DO TO PREVENT
THEM. SHE DISCOVERS THAT PEOPLE LIKE HER ARE GENERALLY HOSPITALIZED THREE TIMES
WITHIN THE FIRST SIX MONTHS OF TREATMENT. CARESENSE.COM GENERATES A LIST OF
QUESTIONS FOR HER TO ASK HER PHYSICIAN AND ALLOWS HER TO EMAIL THOSE QUESTIONS
TO HIM. HER PHYSICIAN LOGS INTO CARELEADER.COM AND THESE QUESTIONS ARE PRESENTED
TO HIM AND A

36
<PAGE>
SPECIALIST BEST SUITED TO TREAT THIS PATIENT IS IDENTIFIED. AN ON-LINE
CONSULTATION AND REFERRAL IS MADE AND THE PATIENT BEGINS HER TREATMENT.

CARELEADER.COM

CareLeader.com will be an Internet-based product for use by physicians at
the point of care. It will supplement their own experience and training by using
current and past data available on their patients along with analysis provided
by our proprietary analytical tools. Through CareLeader.com, physicians will be
able to access four real-time features:

DATA ACCESS. Physicians will be able to get on-line access to order and
result data about their patients from any Web browser. This data will include
available orders, diagnoses, results, visit history and treatments by other
physicians.

TREATMENT AID. CareLeader.com will show physicians the types of treatment
that are typically provided to patients like the one they are currently
evaluating. This information will include emergency room visits, primary care
physician visits and referrals to a specialist or admission to a hospital. The
results shown to physicians in CareLeader.com will be generated by the same
methods used throughout our products.

PHYSICIAN OR HOSPITAL SELECTION. Using this feature, physicians will be
able to identify other physicians or hospitals with the best experience and
outcomes for their patient as determined by our proprietary methods. The
physician would also be able to review other information about a physician or
hospital available on-line in CaduCIS.com, in other linked applications or on
the Internet.

PERFORMANCE REVIEW. CareLeader.com will allow physicians to compare
themselves to norms, peers, historical performance or to track the care given to
patients and populations across time. Physicians will also be able to access our
rules library as part of real-time decision making about diagnosis and therapy.
We will host the data supporting these features and make them accessible through
CareLeader.com on a real-time basis over the Internet.

CARESENSE.COM

CareSense.com will allow consumers to access information designed to guide
their self-care decisions and to support their relationship with their
physician. For hospitals and health plans, CareSense.com enhances their consumer
relationships and brand preference among consumers and promotes use of their
services. Where the hospital or health plan uses CaduCIS.com, consumers will be
able to access their clinical data. Regardless of whether a hospital or health
plan uses CaduCIS.com, consumers will be able to complete a confidential medical
profile which we will host for future access. Through CareSense.com, consumers
will be able to access numerous features including:

DATA ACCESS. Consumers will be able to get on-line access to data about
their treatments from any Web browser. This data will include orders, diagnosis,
results, visit history and treatments by any physician.

TREATMENT COMPARISON. After entering or downloading their confidential
medical profile, consumers will be able to use CareSense.com to identify how
patients with similar characteristics were treated. For example, a newly
diagnosed patient could see whether similar patients were treated by a
specialist and what medications they were prescribed. This component of the site
will support self-care decisions and complement the treatment decisions made by
physicians with their patients. The results that are shown to consumers will be
generated by risk assessment libraries

37
<PAGE>
and data stored in CaduCIS.com databases. This core information will be
supplemented by other available information including treatment guidelines and
medical literature reviews.

RISK APPRAISAL. Consumers will be able to identify their risks for
treatments and complications based on their individual characteristics and
diseases. Examples include risks for hospitalization, emergency room use and the
likelihood of undergoing specific procedures or being treated with particular
drugs.

CUSTOMERS

We have entered into long term relationships with over 100 major hospitals,
health systems, health plans and pharmaceutical and biotechnology companies.
Representative customers for our products and services includes:

- Ascension Health;

- Borgess Health Alliance;

- British Biotech;

- Community Health Plan;

- Heartland Health System;

- Providence Health System;

- Rush System for Health;

- Tenet Brookwood Medical Center;

- Sisters of Mercy Health System; and

- University of Pennsylvania Health System.

The Company's operations are conducted in one business segment and sales are
primarily made to health care payors and providers. During the year ended
December 31, 1999 and for the three months ended March 31, 1999, we generated
11% and 16%, respectively, of our revenue from our largest customer, Providence
Health System. During the year ended December 31, 1999 and for the three months
ended March 31, 2000, we generated 21% and 24%, respectively, of our revenue
from our development partner, California HealthCare Foundation. In addition, one
of our customers, Foundation Health Systems, accounted for 53% and 37% of our
revenue in 1997 and 1998, respectively.

The Company had five, three and five customers as of December 31, 1998 and
1999 and March 31, 2000, respectively, which accounted for 77%, 37% and 69% of
total accounts receivable.

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<PAGE>
TECHNOLOGY

We have developed four major technology components that underlie our
products:

- an application service provision platform;

- automated data evaluation and processing tools;

- on-line analytic processing technology; and

- a care data utility.

These components are integrated into a single on-line architecture depicted
below:

CARESCIENCE ARCHITECTURE

<S> <C> <C>
[Customer and Partner [CareScience.com [CareScience.com
Data through the Application Service Access Portals
Internet] Provider through the through the
Internet] Internet]
</TABLE>

APPLICATION SERVICE PROVISION

We operate as an application service provider so that we can rapidly
implement and instantly upgrade our products at low cost. We provide our
customers with an Internet-based environment where computation intensive
functions are supported with high security, performance, availability and
scalability. All of our applications are accessible through a standard Internet
browser. Customer-specific databases are integrated by an analysis layer and a
communications layer using a multi-tier server architecture. We maintain
security through formal policies and procedures as well as technologies used to
protect the integrity of the systems and the confidentiality of the sensitive
data they contain. Performance and availability are maintained through a
redundant design that allows for continued operation in the event of failure of
individual critical components, as well as automated monitoring to detect
failures.

39
<PAGE>

AUTOMATED DATA COLLECTION AND STANDARDIZATION

Our proprietary automated data collection and standardization tool validates
and combines health care data from disparate sources over the Internet. This
tool manages comprehensive, patient-level collection of information including
patient history, risk factors, diagnosis, test results, therapies applied and
their resultant outcomes. It can process a single record or a large group of
records, and is optimized for efficiency and scalability.

Our automated data collection and standardization tools provide our
customers secure, on-line access to advanced standard and user-defined
validation rules and automatic validation reports. We facilitate process or
workflow management through scheduled, automatic data file retrieval,
sophisticated status monitoring, automatic error handling, and pre-planned
capacity for scalability. Building from this foundation of open standards, we
add custom, value-added data structures and dictionaries to capture clinical
services, payor, operating unit, test, therapy and demographic information using
standard definitions.

ON-LINE ANALYTIC PROCESSING

Our on-line analytic processing draws from rules, parameters and other
content that comprises our most protected and proprietary methods. Our on-line
analytical processing technology introduces five key classes of variables into
our patient-level data:

- RISK ASSESSMENT. Our tools calculate patient-specific risks for outcomes
including mortality, complications, episode duration, length of stay,
cost, emergency room visits, specialist referrals and hospitalizations.
Patient-specific risks are computed for each diagnosis, outcome and
utilization measure, using more than 5,000 severity assessment equations.

- THERAPEUTIC NORMS. Our tools identify specific therapeutic norms in cases
where physicians have variant practices in comparison to their peers, risk
adjusted for patient differences. Practice-style variations can be
compared to outcomes in order to focus inquiry on practice decisions that
significantly impact outcomes.

- EPISODE GROUPING. Our tools group multi-site encounters and claims into
common treatment categories based on procedures, diagnoses and medications
with variable-length episode durations. Risk assessment algorithms are
applied to these episodes to enable performance comparisons across sites
of care.

- COMPLICATION IDENTIFICATION. Our tools distinguish between newly
identified complications and pre-existing conditions for both surgical and
medical conditions. Risk assessment algorithms are used to separate
patient determinants of complications from those related to the facility
or physician.

- UNIFIED MEDICAL LANGUAGE. Our tools use standard clinical vocabulary based
on the National Library of Medicine Unified Medical Language System. This
vocabulary allows comparisons of tests and therapies across facilities and
application of treatment-specific rules, and also supports data
integration and analysis.

CARE DATA UTILITY

We are currently developing a care data utility to enable the secure
exchange of clinical data between cooperating health-care organizations. This
utility uses a variety of health-care standards for the exchange of data over
the Internet. It is designed to be accessed by any authorized application which
we have designated as CareStandard.com-certified.

The security regulations proposed in the Health Insurance Portability and
Accountability Act will require the protection of the confidentiality, integrity
and availability of health care information. The

40
<PAGE>
utility and certified applications will work together to provide all three
protections as information is exchanged by organizations. In addition, a key
characteristic of the care data utility will be the collection and management of
metadata, representing the location of primary health care data. Through
standardization of information exchange formats and communication protocols,
CareStandard.com-certified applications will be able to exchange information
directly.

The care data utility will have four primary components:

- the Internet provides basic connectivity among organizations;

- our Care Exchange Metadata Server tracks the location of data stored in
customers' legacy systems;

- our Care Exchange Directory Servers provide address resolution and patient
and provider indexing; and

- third-party CareStandard.com-certified applications interface with the
servers over the Internet using our standards.

STRATEGIC RELATIONSHIPS

We have developed strategic relationships with organizations that supply
important inputs into our products. We have a long-standing technology transfer
relationship with the University of Pennsylvania, from which we have licensed
intellectual property and methods. The University and management began this
relationship in 1987 and it has grown over time as new methods and properties
have been added to our portfolio. From time to time, faculty of the University
of Pennsylvania provide informal advice and consultation regarding refinement of
our existing methodologies and/or advice regarding potential areas of new
development. This informal advice is not material to our results of operations.
Dr. David J. Brailer, our Chairman, Chief Executive Officer and a member of our
Board of Directors, is an adjunct faculty member of the University of
Pennsylvania. The University of Pennsylvania Health System is also a
non-material customer of CareScience. Also, the University owns 124,900 shares
of our common stock, which represents 1.2% of our outstanding stock before this
offering and less than one percent after this offering. The University does not
have the ability to direct or influence our operations, except as licensor under
the license agreement and through its ability to vote its 124,900 shares of
common stock. We are not aware of any agreements among the University and any
other parties, such as other shareholders, to influence our management or
operations. We have no agreements with the University, informal or formal, other
than a non-material customer agreement and the license agreement.

We entered into our license agreement with the University on July 1, 1993
and amended it effective on April 1, 1995 and May 1, 1997. That agreement
expires on March 31, 2025, unless sooner terminated by the University upon our
default or sooner terminated by us upon 90 days' notice to the University. Under
the license agreement, the University grants a royalty-bearing, worldwide,
exclusive license to us for the use of the software code which forms the basis
for our technology and the proprietary analytic routines which were used to
create the software, as well as the right to sublicense the software, to create
derivative works from the software and to enter into end-user agreements with
our customers. We pay the University royalties for the license in an amount
equal to a percentage of fees we receive for allowing others to use or to
sublicense the technology. We are obligated to pay the University a minimum
level of $75,000 per year in royalties, regardless of the fees we collect. If we
fail to pay the minimum level of royalty fees every year, the University has the
option to convert our exclusive license to a non-exclusive license. The
University retains the right to publish the material we license, although the
University must notify us in advance of their intention to publish in order that
a filing for intellectual property protection of such

41
<PAGE>

material may be made. In the event of such publication, to the extent that
intellectual property protection is not available for such material, the
University agrees to negotiate with us in good faith as to whether the
disclosure can be appropriately modified or withheld, although we do not have a
right to prevent any such disclosure. The University has not disclosed any
information about the licensed material and, to our knowledge, the University
has no plans to do so. Pursuant to the license agreement, we agree to indemnify
and hold the University harmless against claims which arise out of the use of
the licensed material by us or parties with which we contract.

We have entered into a consulting agreement with California HealthCare
Foundation for a term beginning October 1, 1999 until the earlier of
September 30, 2002, or the completion of an extensive work plan, unless sooner
terminated. The work plan includes the production of a local business model for
the Internet-based cooperative sharing of clinical health information that may
then be replicated in other localities. The purpose of the agreement is to
establish a management office to facilitate the development and maintenance of a
care data utility for the sharing of clinical health care data in Santa Barbara
County. Under the terms of the agreement, the Foundation is required to make
payments to us upon various milestones, including the receipt and approval of
narrative and financial reports, work plans, deliverables and budget
projections, which may not exceed a total of $4,620,574. The Foundation has also
granted to us a fully-paid, non-exclusive, perpetual, worldwide license to all
intellectual property developed pursuant to the agreement. The Foundation
retains the right to sell, license or exploit such intellectual property,
subject to our license. Either party may terminate the agreement due to the
other's breach that is not cured within 45 days of written notice from the
non-breaching party.

We have relationships with Superior Consulting and with Computer Task Group
for implementation of our products. These organizations integrate our
Internet-based data collection tools into our customers' clinical and
operational information systems. We have no contractual obligations or
committments with either of these organizations.

MARKETING AND SALES

We have positioned ourselves as a leader in the provision of Internet-based
products to improve the quality and efficiency of health care. We market our
products and services by:

- conducting executive education programs aimed at health industry
executives;

- providing consulting activities aimed at solving important management
problems faced by health system executives;

- enhancing links with The Wharton School and its nationally prominent
health care management programs;

- publishing in academic journals and speaking regularly at conferences
attended by health industry leaders;

- developing a customer service and consulting staff with strong clinical,
management and analytic expertise; and

- leading research about clinical-decision support and other important
methodological frontiers.

By following this strategy, we have become the preeminent vendor of
Internet-based tools designed to improve the quality and efficiency of health
care to chief medical officers and other key decision-makers in health systems.
Independent market research, in conjunction with our own studies, conducted in
March 1999 demonstrated that clinical leaders and managers at over 85% of
non-governmental United States hospitals had name recognition of and over 65%
had a favorable opinion of CareScience. These individuals are becoming
increasingly prominent in senior

42
<PAGE>
management positions and are gaining accountability as medical management
becomes essential to health system operations.

We have supplemented our brand identity by the free distribution of CaduCIS
Net. This tool is used by more than 2,600 health care organizations and has
generated more than 1,100 requests for demonstrations of our revenue-generating
products. Also, we recently began publicizing our CareStandard.com demonstration
project in Santa Barbara County, California, and our CareStandard.com
vendor-certification program. These efforts will continue our positioning as an
innovator of Internet-based clinical products.

We have used CaduCIS.com to build a distribution channel to health care
systems and health plans, and CareScript.com for pharmaceutical makers and
biotechnology firms. We sell our products into these sectors through a national
sales force of highly experienced sales executives who manage all aspects of
sales and also generate cross selling referrals to other products. Within our
distribution channels, we cross-sell our other products in the following ways:

- CaduCIS.com customers can benefit by implementing a CareStandard.com care
exchange;

- CareStandard.com can be complemented by our consulting services or
Institute for Management Development services and our data hosting and
access services;

- CareLeader.com and CareSense.com generate interest by and referrals from
organizations that benefit from CaduCIS.com products;

- CareLeader.com and CareSense.com can be incorporated into CareStandard.com
implementations to enhance consumer and physician participation; and

- CareLeader.com and CareSense.com can be sold to CaduCIS.com customers to
enable integrated data access by consumers and physicians.

PRODUCT DEVELOPMENT

We have been a leader in the management of health care quality and
efficiency using the Internet by focusing on changes in the analysis and
application of information to patient care. Our technology arose from
fundamental research in risk assessment, outcomes measurement, care-process
analysis, medical-language processing and data integration and validation at the
University of Pennsylvania, beginning in the late 1980s. Researchers have
published more than ten scientific manuscripts about the methodologies
underlying our products and other publications are underway at this time
regarding new advances which we intend to commercialize in the future.

From this research base, we have built a track record for commercializing
significant advances in clinical management and information-sharing products. We
have accomplished this by nurturing technology transfer-relationships with
scientists, from which we can acquire and commercialize new technologies. Our
development is coordinated by our research center, which is staffed with our
employees and by academic scientists and which can balance the academic needs of
scientists with proprietary requirements. Our research center works closely with
our product engineers to prototype new innovations.

In addition to design of products in the laboratory, we refine our products
in demonstration projects. For example, we tested our CaduCIS.com products in
seven health systems and health plans, and our Institute for Management
Development products in two major health systems before commercialization. We
are currently demonstrating our CareStandard.com product line in California.

43
<PAGE>
COMPETITION

Each of our product lines face different competitors, although we believe
that our total solution as a whole has no single competitor. We have few pure
Internet-based competitors, but Internet-based competition is increasing and
many off-line organizations are adding Internet capabilities. We believe that
competition in our industry is based on the performance, utility, price and
level of comprehensiveness of products.

CADUCIS.COM. There are no dominant care-management firms serving the
hospital or health plan markets, and Internet-based entities have not
established a credible base in this market. Rapid growth and the demand for a
new generation of care-management tools has opened this market sector to new
entrants. Therefore, most CaduCIS.com competition arises from clinical
information system companies that offer data warehousing or benchmarking. These
firms offer large-scale transactional databases and applications, but their
current data warehouses do not have clinical analysis methodologies or the
ability to change the way that health care constituents interact with each other
and with physicians or consumers. These firms tend to be administratively
oriented and focus on external comparisons rather than the internal management
of care. None of these firms offer primary Internet access to their products.

CARESTANDARD.COM. CareStandard.com faces a diverse array of competitors,
including consulting firms, technology vendors, and local efforts. Most vendors
offer a proprietary approach with pre-packaged end-user applications rather than
allowing customers their choice of applications. Additionally, these products
are aimed primarily at the flow of claims and financial data, rather than
clinical data. Large consulting firms have presented plans for new activities in
data sharing. However, their core business model is to focus on application
implementation, not cross-customer data sharing. In addition, these consulting
firms tend to have long-standing relationships with large hospital information
system vendors which prevent them from being vendor-neutral, and they have not
yet been able to adapt their value proposition to the Internet.

CARESCRIPT.COM. CareScript.com competes with contract research
organizations and pharmaceutical information companies. Contract research
organizations are increasingly offering pharmacoeconomic studies and outcomes
research to pharmaceutical companies and directly to the health care market.
Pharmaceutical information companies are the largest suppliers of information to
the pharmaceutical industry. However, these firms have not focused on market
economics or outcomes, and the information provided is generally limited to
traditional market research data and analysis. Generally, these firms do not
offer complete outsourcing of strategic analysis for drug development. Many of
these groups also lack integrated patient-level clinical, laboratory and
pharmacy information over time.

GOVERNMENT REGULATION

The collection, storage and transmission of personal information about an
individual, especially health care information, is extensively regulated by
federal and state governmental authorities in the United States. A variety of
federal and state laws protect a person's medical records and information as
confidential. In addition, several federal and state privacy laws have strict
requirements governing the treatment of particularly sensitive health data, such
as information regarding an individual's HIV status, mental health, or substance
abuse problems. Widespread access to the Internet, and the high speed at which
data is transferred over the Internet, make this medium especially vulnerable to
breaches of confidentiality.

To address these potential breaches, the federal Department of Health and
Human Services has issued the proposed Health Insurance Portability and
Accountability Act of 1996 regulations dealing with confidentiality of medical
records. The regulations are expected to become final in

44
<PAGE>
2000. The proposed regulations are intended to safeguard health information
about specific individuals that can be identified in connection with their
health information. This information is referred to as "protected health
information." The proposed regulations prohibit healthcare providers, health
insurance plans and health care clearinghouses, referred to as "covered
entities," from using or disclosing protected health information without the
individual's consent, except as permitted by the proposed regulations.
Additionally, the proposed regulations require a covered entity to protect an
individual's medical records from unauthorized disclosure for the life of the
individual plus two years after the individual's death.

The proposed regulations also outline procedures and policies that covered
entities must establish regarding the collection, storage and dissemination of
protected health information. Finally, the proposed regulations also govern
business partners of a covered entity who receive protected health information
from a covered entity. A company that is a covered entity will have two years
from the date that the proposed regulations become final to comply with the
standards and requirements of the regulations.

In some of our business relationships we will be subject to the proposed
regulations as a covered entity, and in other business relationships we will be
considered a business partner of a covered entity. Over the next two years
following the final adoption of the regulations, we will need to ensure that our
internal policies and procedures meet the requirements of the regulations. We
will also need to ensure that our business relationships with persons who share
information with us, and with whom we share information, meet the requirements
of the regulations. Under the proposed regulations, in many situations our
exchange of protected health information will not require a patient's consent
under the regulations. However, even in these situations we must be very careful
to safeguard the information against receipt by persons other than the intended
recipient. We will need to implement technical safeguards to ensure that
information in our systems can only be accessed by authorized persons. We do not
expect to significantly modify our products or business operations or materially
increase our expenses in response to currently proposed regulations.

Once the proposed regulations become final, we will be subject to periodic
reviews by the federal government to verify our compliance with the regulations.
If we are found not to be in compliance, we may have to pay penalties.
Additionally, if we are found to have misused any protected health information,
we may face substantial monetary penalties and our management or employees could
face imprisonment.

Because the proposed regulations are currently being reviewed, their
provisions could be changed at any time prior to final adoption of the
regulations. Moreover, once they have been adopted in final form, these
regulations could be amended or additional regulations could be issued. This
could substantially change our responsibilities with respect to patient consent
as well as with respect to safeguards of confidential patient information,
permissible disclosures of that information without prior patient consent, the
manner of those disclosures and the storage of that information.

Because the federal regulations, when final, will not preempt any state laws
regarding confidentiality of health information, we will still be subject to
provisions of state laws. Some state laws establish strict requirements for the
maintenance and dissemination of an individual's health records, especially when
those records contain particularly sensitive data such as HIV status, mental
health information or substance abuse information.

INTELLECTUAL PROPERTY

We have licensed intellectual property from the University of Pennsylvania
and from the California HealthCare Foundation. The intellectual property
underlying our on-line analytic

45
<PAGE>
processing software is licensed exclusively to us by the University of
Pennsylvania in a 30-year agreement, which include payments by us of royalties
or sublicense fees. The intellectual property used in our care data utility
software is licensed to us by the California HealthCare Foundation on a
non-exclusive, perpetual, world-wide and fully-paid basis. We consider the
technology we own and license to be fundamental to the success of our
operations.

We have spent approximately $1.6 million on research and development
activities sponsored by us during each of the last three years.

We own proprietary software which we have developed and used in our
operations which we consider to be trade secrets.

EMPLOYEES

As of March 31, 2000, we employed 80 people, including 26 in research and
development, 20 in sales and marketing, 23 in professional services and 11 in
administration.

FACILITIES

Our headquarters and application service provider operations are located in
Philadelphia, Pennsylvania, where we lease approximately 15,000 square feet of
office space through February 2001. We lease approximately 3,000 square feet of
office space in San Francisco, California. In addition, we have permanent
employees who work from home offices in Ann Arbor, Michigan; Atlanta, Georgia;
Austin, Texas; Boston, Massachusetts; Bridgeport, Connecticut; Chicago,
Illinois; Milwaukee, Wisconsin; Portland, Oregon; and Santa Barbara, California.

LEGAL PROCEEDINGS

We are not involved in any legal proceedings that either individually or
taken as a whole would have a material adverse effect on our business, financial
condition or results of operations.

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<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information regarding our executive officers
and directors:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ----------------------------------------------
<S> <C> <C>
David J. Brailer(1)(2).................... 40 Chairman, Chief Executive Officer and Director

Ronald A. Paulus(1)....................... 37 President, Secretary, Treasurer and Director

Steven Bell............................... 42 Chief Financial Officer

J. Bryan Bushick.......................... 37 Vice President and Managing Director,
Strategic Products

Alfredo A. Czerwinski..................... 46 Chief Medical Officer

Gregory P. Hess........................... 43 Senior Vice President and Managing Director,
CareScript.com

Robb L. Tretter........................... 28 General Counsel

Thomas H. Zajac........................... 39 Chief Operating Officer

Edward N. Antoian(3)...................... 44 Director

C. Martin Harris(2)(3).................... 43 Director

Jeffrey R. Jay(1)(2)(3)(4)................ 41 Director

Steven E. Rodgers......................... 28 Director

William Winkenwerder(4)................... 45 Director
</TABLE>

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

(1) Member of Capital Committee.

(2) Member of Nominating Committee.

(3) Member of Audit Committee.

(4) Member of Compensation Committee.

DAVID J. BRAILER, M.D., PH.D., has served as our Chairman and Chief
Executive Officer and a director since January 1993. He is also Adjunct
Assistant Professor of Health Care Systems at The Wharton School, Clinical
Associate Professor of Internal Medicine at the University of Pennsylvania
Health System, a Senior Fellow at the Leonard Davis Institute of Health
Economics at the University of Pennsylvania and a Fellow of the College of
Physicians of Philadelphia and the American College of Physicians. His
scientific work focuses on physician decision-making, outcomes measurement,
practice-style evaluation and operations strategies. He is the author of
numerous articles about health-care management for publications including the
Journal of the American Medical Association, the Harvard Business Review,
Medical Care, and Health Affairs, and several books and chapters about health
management. Dr. Brailer earned his Ph.D. in Management Science at The Wharton
School while he was a Robert Wood Johnson Foundation Clinical Scholar at The
University of Pennsylvania.

RONALD A. PAULUS, M.D., M.B.A., has served as our President since
November 1998. Dr. Paulus joined us as Chief Operating and Chief Financial
Officer and a director in March 1993. From June 1989 to March 1993, he was Vice
President, Operations of Salick Health Care, Inc., a national provider of
oncology, dialysis and related services, and later, Managing Director of its
INFUSX

47
<PAGE>
subsidiary. Dr. Paulus earned his B.S. and M.D. from the University of
Pennsylvania and his M.B.A. from The Wharton School.

STEVEN BELL, C.P.A., has served as our Chief Financial Officer since
February 1999. He is responsible for our finance, accounting, treasury, human
resource and administrative functions. From December 1994 to December 1998,
Mr. Bell was Senior Vice President of Finance, Chief Financial Officer,
Secretary and Treasurer of The MRC Group, Inc., a national medical-transcription
company with 3,000 employees in 50 offices serving more than 500 medical
institutions. Prior to joining MRC in 1993, Mr. Bell spent 13 years in public
accounting, first at Price Waterhouse and then as a partner at Zelenkofske,
Axelrod & Co. Mr. Bell received his B.S. from Temple University.

J. BRYAN BUSHICK, M.D., M.B.A., has served as our Vice President and
Managing Director, Strategic Products since December 1999. From July 1999 to
December 1999, he was Chief Executive Officer of HealthTides.com, an on-line
professional opinion research firm. Dr. Bushick served as Vice President,
Clinical Partnerships, and later, Vice President, Business Operations for
ThinkMed, a managed-care decision support company from September 1997 through
May 1999. Before joining ThinkMed, Dr. Bushick was Vice President, Delivery
System Integration at United HealthCare from 1993 through 1994 and System Vice
President, Performance Measurement and Improvement at Allina Health System from
1994 to 1997. Dr. Bushick earned his B.S. from Dickinson College and his M.D.
from the University of Pennsylvania and his M.B.A. from The Wharton School.

ALFREDO A. CZERWINSKI, M.D., has served as our Chief Medical Officer since
March 1999. He began his career in medical research related to improving
clinical outcomes and has for the last 15 years been leading or consulting for
integrated delivery systems in care management. From 1997 to 1999, he was an
independent health care consultant. He served as Chief Medical Officer of Sutter
Health, a large regional integrated delivery system in California, from 1996 to
1997. Prior to joining Sutter, he was Director of Medical Operations for
Kelsey-Seybold Clinic in Houston from 1988 to 1992 and Corporate Medical
Director for the Kelsey-Seybold Management Division of Caremark International
from 1992 to 1996. Dr. Czerwinski earned his B.S. from the Massachusetts
Institute of Technology and his M.D. from the University of California, San
Francisco.

GREGORY P. HESS, M.D., M.B.A., has served as Senior Vice President and
Managing Director, CareScript.com since October 1999. From 1995 to 1999, he was
Vice President and Director, Market Economics, for SmithKline Beecham, a global
pharmaceutical company, where he directed worldwide Health Economics,
Epidemiology, Pricing and Economic Analyses, including strategic planning and
tactical operations. From 1992 to 1993 he was Director of Pharmacoeconomics and
Scientific Communications for Sandoz Pharmaceuticals, directing all aspects of
health and pharmacoeconomic studies. Dr. Hess earned his B.S. from Skidmore
College, his M.D. from Albany Medical College and his M.B.A. from The Wharton
School.

ROBB L. TRETTER, J.D., has served as our General Counsel since May 2000.
From February 1999 to April 2000, he was a corporate associate at Reboul,
MacMurray, Hewitt, Maynard & Kristol, a law firm. From November 1996 to January
1999, Mr. Tretter was a corporate associate at Wachtell, Lipton, Rosen & Katz, a
law firm. Mr. Tretter earned his B.A. from Cornell University and his J.D. from
New York University School of Law.

THOMAS H. ZAJAC, M.B.A., has served as our Chief Operating Officer since
November 1999. From March 1999 through November 1999, he led the Business
Solutions Group of Eclipsys Corporation, a health-information company. He joined
Eclipsys as part of its acquisition of Transition Systems, Inc. in 1998.
Mr. Zajac was associated with Transition Systems for more than 11 years, last
serving as Chief Operating Officer and Vice President and General Manager in
charge of Sales, Product Development, Consulting, Customer Services and Support.
Mr. Zajac earned his B.S. and M.B.A. from Drexel University.

48
<PAGE>
EDWARD N. ANTOIAN has served as a director since April 1998. He has served
as a Partner of Chartwell Investment Partners since its founding in April 1997.
From 1984 to 1997, he served as Senior Portfolio Manager at Delaware Management
Company, managing $2 billion of small- and mid-cap growth institutional assets
as well as the Trend and Delcap Funds. Mr. Antoian earned his B.S. from The
State University of New York at Albany and his M.B.A. from The Wharton School.

C. MARTIN HARRIS, M.D., M.B.A., has served as a director since September
1997. He has served as Chief Information Officer and Chairman of the Information
Technology Division at The Cleveland Clinic Foundation, a large integrated
delivery system, since June 1996. From 1991 to 1996 he was Chief Information
Officer of the University of Pennsylvania Health System. Dr. Harris earned his
B.S. and M.D. from the University of Pennsylvania and his M.B.A. from The
Wharton School.

JEFFREY R. JAY, M.D., M.B.A., has been a director since December 1998. He
has served as a General Partner of J.H. Whitney & Co., a private investment
firm, since 1993, where he focuses on health care and information technology
investments. He is a director of Advance Paradigm, Inc. and Chairman of NMT
Medical, Inc. as well as a director of a number of privately held health care
and information technology companies. Dr. Jay earned his B.S. and M.D. from
Boston University and his M.B.A. from Harvard Business School.

STEVEN E. RODGERS, M.B.A., has been a director since July 1999. He served as
an Associate and a Senior Associate for J.H. Whitney & Co. from July 1995 to
July 1997. He rejoined J.H. Whitney & Co. in August 1999 as a Senior Associate
after obtaining his M.B.A. and in March 2000 was promoted to Vice President.
From 1993 to 1995, he was a Financial Analyst in the Health Care Group of Alex.
Brown & Sons Incorporated. He earned his B.A. from Dartmouth College in 1993 and
his M.B.A. from Stanford University in 1999.

WILLIAM WINKENWERDER, M.D., M.B.A., has served as a director since July
1997. He has served as Executive Vice President, Blue Cross Blue Shield of
Massachusetts, a large health insurance and managed care company since
October 1998. From May 1996 to September 1998, he was Vice President of Emory
Health Care and Associate Director of The Emory Clinic in Atlanta. From
April 1992 to April 1996, he was Vice President of Prudential Health Care's
South Central Operations. Dr. Winkenwerder earned his B.S. from Davidson
College, his M.D. from the University of North Carolina and his M.B.A. from The
Wharton School.

Our executive officers are elected and serve at the discretion of the board
of directors. There are no family relationships among our directors and
officers.

Dr. Jay and Mr. Rodgers were elected to the board of directors as
representatives of J.H. Whitney III, L.P. and Drs. Brailer, Paulus, Harris and
Winkenwerder and Mr. Antoian were elected to the board of directors by
Dr. Brailer pursuant to the Amended and Restated Shareholders' Agreement dated
December 23, 1998 among the Company and the holders of the Company's preferred
stock. The Shareholders' Agreement terminates automatically upon the closing of
this offering.

CLASSIFIED BOARD

Upon the closing of this offering, our Amended and Restated Articles of
Incorporation will provide that the board of directors is to consist of three
classes, as nearly equal in size as the number of members permits. Each class of
directors generally will have a term of three years, except that the term of the
initial Class I directors, Mr. Rodgers and Dr. Paulus, will expire at the annual
meeting of shareholders in 2001 and the term of the Class II directors, Drs.
Harris and Jay, will expire at the annual meeting of shareholders in 2002. The
term of the Class III directors, Dr. Brailer, Dr. Winkenwerder and Mr. Antoian,
will expire at the annual meeting of shareholders in 2003.

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<PAGE>
At each annual shareholders meeting, the successors of the class of directors
whose term expires at each meeting shall be elected to hold office for a term
expiring in three years.

BOARD COMMITTEES

We established an audit, compensation, capital and board nominating
committee. The audit committee consists of Mr. Antoian and Drs. Jay and Harris.
The audit committee:

- reviews the results and scope of the audit and other services provided by
our independent auditors; and

- reviews and evaluates our audit and control functions.

The compensation committee consists of Drs. Winkenwerder and Jay. The
compensation committee:

- reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plans; and

- makes recommendations to the board regarding those matters.

The capital committee consists of Drs. Brailer, Paulus and Jay. The capital
committee:

- reviews and evaluates our capital needs; and

- makes recommendations to the board regarding those matters.

The board nominating committee consists of Drs. Brailer, Jay and Harris. The
board nominating committee:

- reviews and evaluates potential new members to the board; and

- nominates new board members for approval by the other directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee is responsible for determining salaries,
incentives and other forms of compensation for our directors, officers and other
employees and administering various incentive compensation and benefit plans.
The compensation committee consists of Drs. Winkenwerder and Jay. No
interlocking relationship exists between any member of our compensation
committee and any member of any other company's board of directors or
compensation committee.

J.H. Whitney III purchased 2,245,752 shares of our series C preferred stock
for $5,858,824. Whitney Strategic Partners III purchased 54,115 shares of our
series C preferred stock for $141,176. Dr. Jay is a general partner of J.H.
Whitney III and Whitney Strategic Partners III. Dr. Winkenwerder purchased 3,833
shares of our series C preferred stock for $10,000. Zeke Investment Partners
purchased 57,497 shares of our Series C preferred stock for $150,000. Mr.
Antoian is a partner of Zeke Investment Partners. Upon the closing of this
offering, each outstanding share of series C preferred stock will convert into
one share of common stock and, if the per share price of this offering is less
than $18.27, one share of series F redeemable preferred stock. If issued, the
series F redeemable preferred stock will be immediately redeemed for an
aggregate of 262,500 shares of common stock.

DIRECTOR COMPENSATION

Outside directors are entitled to receive $500 for attending a telephone
meeting and $1,500 for attending a meeting in person for their services as
members of the board of directors. Members are

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<PAGE>
also reimbursed for expenses in connection with attendance at board of directors
and committee meetings. Directors are eligible to participate in our stock
plans.

EXECUTIVE COMPENSATION

The following table sets forth in summary form information concerning the
compensation paid by us during the fiscal year ended December 31, 1999 to our
Chief Executive Officer and each of our other three most highly paid executive
officers whose salary and bonus for the fiscal year exceeded $100,000 and who
served as an executive officer of CareScience during the fiscal year. We refer
to each of these officers as the named executive officers in this prospectus.
Other than the salary and bonus described in the table below, we did not pay any
executive officer any fringe benefits, perquisites or other compensation in
excess of either $50,000 or 10% of the total of his salary and bonus during the
fiscal year ended December 31, 1999.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
-------------------------------------- -------- --------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
David J. Brailer...................... 1999 $250,774 $25,000 -- $2,514
Chairman and Chief Executive Officer
Ronald A. Paulus...................... 1999 212,876 -- -- 2,161
President
Steven Bell........................... 1999 129,334 -- 198,359 872
Chief Financial Officer
Alfredo A. Czerwinski................. 1999 137,825 40,000 60,452 154
Chief Medical Officer
</TABLE>

Mr. Bell was given a grant of 48,359 options to acquire shares of common
stock under our 1998 Time Accelerated Restricted Stock Option Plan. The award
vests after seven years or upon obtainment of specified milestones. An award of
150,000 options to acquire shares of common stock to Mr. Bell and all of the
awards to Dr. Czerwinski listed under the Securities Underlying Options were
made under our 1995 Equity Compensation Plan and are exercisable at a rate of
25% each year beginning in 1999. The amounts listed under All Other Compensation
for the executive officers listed above are matching contributions made by us
for the executive officer's account under our 401(k) plan.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth, as to the named executive officers,
information concerning stock options granted during the fiscal year ended
December 31, 1999.

Amounts represent the hypothetical gains that could be achieved from the
respective options if exercised at the end of the option term. These gains are
based on assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the respective options were granted to their expiration date based
upon the grant price.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT PRICE APPRECIATION FOR
UNDERLYING OF TOTAL OPTION TERM
OPTIONS OPTIONS EXERCISE EXPIRATION -----------------------
GRANTED GRANTED PRICE PER SHARE DATE 5% 10%
---------- -------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven Bell................ 96,719 11.0% $2.59 2/09 $157,538 $399,228
53,281 6.1 2.59 10/09 86,780 219,924
48,359 5.5 2.59 2/09 78,769 199,616
Alfredo A. Czerwinski...... 40,750 4.6 1.25 3/09 32,027 81,174
19,702 2.2 2.59 3/09 32,084 81,317
</TABLE>

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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth information concerning option exercises and
unexercised options for the fiscal year ended December 31, 1999 with respect to
each of the named executive officers.

The value realized represents the difference between the deemed value of the
common stock on the date of exercise used by us for accounting purposes and the
exercise price of the option.

The value of unexercised in-the-money options was calculated based on an
assumed value equal to an assumed initial public offering price of $16.00 per
share.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END
--------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David J. Brailer.............. -- 120,899 -- 1,621,256
Ronald A. Paulus.............. -- 96,719 -- 1,297,002
Steven Bell................... 24,179 174,179 324,240 2,335,740
Alfredo A. Czerwinski......... 15,113 45,339 216,316 648,950
</TABLE>

COMPENSATION PLANS

EQUITY COMPENSATION PLAN

Our Amended and Restated 1995 Equity Compensation Plan provides for grants
of incentive stock options, nonqualified stock options, stock appreciation
rights and restricted stock to our designated employees, selected consultants
and non-employee directors.

GENERAL. The plan authorizes up to 2,065,038 shares of common stock for
issuance under the terms of the plan. No more than 500,000 shares in the
aggregate may be granted to any individual in any calendar year, subject to
adjustment. If options granted under the plan expire, terminate, or are
canceled, forfeited, exchanged or surrendered for any reason without having been
exercised, or shares of restricted stock are forfeited, the shares of common
stock underlying that grant will again be available for purposes of the plan.

ADMINISTRATION OF THE PLAN. A compensation committee administers and
interprets the plan. The compensation committee consists of two or more
non-employee directors approved by the board. The compensation committee has the
sole authority to:

- determine grants under the plan, including eligible individuals and the
type, size, vesting, exercise price and other terms of the grants to be
made to each of those individuals; and

- make factual determinations and amend the plan.

The compensation committee may also delegate to the Chief Executive Officer
the authority to make grants and to designate individuals to receive grants
under the plan.

OPTIONS. Options granted under the plan are generally not transferable by
the optionee. Options granted under the plan must generally be exercised within
10 years. The exercise price of all options must be at least equal to the fair
market value of the underlying shares of common stock on the date of grant.
Incentive stock options granted to any participant who owns more than 10% of our
outstanding common stock on the date of grant must have an exercise price equal
to or exceeding 110% of the fair market value of a share of common stock on the
date of grant and must not be exercisable for longer than five years. The
vesting schedule of options granted after December 28, 1998 is determined by the
compensation committee.

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RESTRICTED STOCK. Restricted stock granted under the plan is generally not
transferable by the grantee until restrictions on the grant lapse. Restrictions
on the transfer of shares will lapse as to one-half of the shares subject to a
restricted stock grant in four equal annual installments commencing on the first
anniversary of the date of grant and the remaining one-half at the end of the
fourth year, unless otherwise determined by the compensation committee.
Restricted stock will generally be granted for no consideration.

CHANGE OF CONTROL. All outstanding options will immediately vest and
restrictions on restricted stock will immediately lapse upon a change of
control. A change of control is defined to have occurred if:

- as a result of any transaction, any one shareholder, other than David J.
Brailer, becomes a beneficial owner, directly or indirectly, of common
stock representing more than 50% of the voting power of the
then-outstanding shares of common stock; the term beneficial owner is
defined in the Securities Exchange Act of 1934; or

- we sell or dispose of all or substantially all of our assets.

RESTRICTED STOCK OPTION PLAN

Our 1998 Time Accelerated Restricted Stock Option Plan provides for grants
of restricted non-qualified stock options to our officers, senior management and
employee directors.

GENERAL. The plan authorizes up to 483,594 shares of common stock for
issuance under the terms of the plan. If options granted under the plan expire
or terminate for any reason without having been exercised, the shares of common
stock underlying that grant will again be available for purposes of the plan.

ADMINISTRATION OF THE PLAN. The board of directors administers and
interprets the plan, except that no member of the board may act upon any matter
exclusively affecting any option granted or to be granted to himself or herself
under the plan. The board of directors has the sole authority to:

- determine grants under the plan, including eligible individuals, size,
vesting, exercise price and other terms of the grants made to each of
those individuals; and

- amend the plan.

The board of directors may delegate its powers, duties and responsibilities
to a committee consisting of two or more non-employee directors approved by the
board and an outside director.

GRANTS. Options granted under the plan consist of non-qualified stock
options that are not intended to qualify as incentive stock options under the
Code and are generally not transferable by the optionee. Options granted under
the plan will generally be exercisable within seven years and must be exercised
within 10 years. The exercise price of all options must be at least equal to the
fair market value of the underlying shares of common stock on the date of grant.

CHANGES DUE TO REORGANIZATIONS. In the event that the outstanding common
stock is changed into or exchanged for a different number or kind of our shares
or other of our securities or securities of another corporation as the result of
any reorganization, merger, consolidation, recapitalization, reclassification,
stock split, combination of shares or dividends payable in capital stock,
appropriate adjustments will be made in the number and kind of shares for which
options may be granted under the plan. In addition, in the case of any sale to
another entity of all or substantially all of our property or assets or change
in control,

- the board of directors may cancel all outstanding options in exchange for
consideration in cash or kind; or

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<PAGE>
- the purchaser of our property or assets may choose to deliver to the
grantees the same kind of consideration that is delivered to our
shareholders as a result of the sale.

A change of control is defined to have occurred if any person, or any two or
more persons acting as a group, and all affiliates of that person or persons,
who prior to that time owned less than ten percent of the then outstanding
common stock, acquire additional shares of the common stock in one or more
transactions, or series of transactions, with the result being that the person
or group or affiliates beneficially owns 51% or more of the outstanding common
stock.

Finally, if we are dissolved or liquidated, all options granted under the
plan will terminate, but each grantee will have the right, immediately prior to
the dissolution or liquidation, to exercise his or her options.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION

LIMITATIONS ON LIABILITY

Our articles of incorporation and applicable Pennsylvania law provide that
our directors will not be personally liable to us or our shareholders for
monetary damages resulting from a breach of fiduciary duty except for:

- any breach of the duty of loyalty to us or our shareholders; and

- any breach or failure to perform that constitutes self-dealing, willful
misconduct or recklessness.

This limitation of liability does not apply to liability pursuant to any
criminal statute or does it relieve our directors from payment of taxes pursuant
to federal, state or local law.

INDEMNIFICATION

Our articles of incorporation provide that we will indemnify our directors
and executive officers and may indemnify our other corporate agents, to the
fullest extent permitted by Pennsylvania law. Section 1741 of the Pennsylvania
corporate laws provides the power to indemnify any officer or director acting in
his capacity as our representative who was, is or is threatened to be made a
party to any action or proceeding for expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with that
action or proceeding. The indemnity provisions apply whether the action was
instituted by a third party or arose by or in our right. Generally, the only
limitation on our ability to indemnify our officers and directors is if the act
violates a criminal statute or if the act or failure to act is finally
determined by a court to have constituted willful misconduct or recklessness.

EMPLOYMENT AGREEMENTS

Under an Employment Agreement dated December 24, 1998, David J. Brailer
agreed to be our Chief Executive Officer. Under this agreement, Dr. Brailer
receives a base salary of $250,000 per year, subject to annual increases of not
less than five percent of the base salary and an annual minimum bonus of not
less than $25,000. The term of this agreement is three years, subject to
renewal, unless Dr. Brailer is terminated earlier by mutual agreement with us.
In connection with this agreement, Dr. Brailer is also eligible to participate
in our stock option plans, and has received non-qualified stock option grants
under our senior management incentive plan. Dr. Brailer has agreed not to
disclose confidential information, including, but not limited to, any of our
trade secrets, policies and proprietary technology, which are not known to the
public or consented to disclosure by us. In addition, Dr. Brailer was required
to sign a non-competition agreement and an invention assignment agreement with
us. We may only terminate Dr. Brailer under the terms of the

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agreement for circumstances relating to his willful failure to perform his
duties, illegal, dishonest or fraudulent acts, for breach of the agreement or
mental or physical disability. If Dr. Brailer leaves his employment for good
cause, as defined in the agreement, he will be entitled to receive his continued
base salary payments for a period of six months following his termination of
employment or through the end of the term of the agreement, whichever is longer.

Under an Employment Agreement dated November 11, 1998, Ronald A. Paulus
agreed to be our President. Under this agreement, Dr. Paulus receives a base
salary of $215,000 per year, subject to annual increases of not less than five
percent. The term of this agreement is twenty-five months, subject to renewal.
In connection with this agreement, Dr. Paulus is also eligible to receive
bonuses in amounts to be determined by the board of directors. Dr. Paulus may
also participate in our option plans and has received non-qualified stock option
grants under our senior management incentive stock option plan. Dr. Paulus has
agreed not to disclose confidential information, including, but not limited to,
any of our trade secrets, policies and proprietary technology, which are not
known to the public or consented to disclosure by us. In addition, Dr. Paulus
was required to sign a non-competition agreement and an invention assignment
agreement with us. We may only terminate Dr. Paulus under the terms of the
agreement for circumstances relating to his willful failure to perform his
duties, illegal, dishonest or fraudulent acts, for breach of the agreement or
mental or physical disability. If Dr. Paulus leaves his employment for good
cause, as defined in the agreement, he will be entitled to receive his continued
base salary payments for a period of six months following his termination of
employment or through the end of the term of the agreement, whichever is longer.

Under an Employment Agreement dated March 10, 1999, Alfredo Czerwinski
agreed to be our Chief Medical Officer. Under this agreement, Dr. Czerwinski
receives a base salary of $185,000 per year. In connection with this agreement,
Dr. Czerwinski is also eligible to receive bonuses in amounts to be determined
by the board of directors. The term of this agreement is four years, subject to
renewal, unless Dr. Czerwinski is terminated earlier by mutual agreement with
us. In connection with this agreement, Dr. Czerwinski is also eligible to
participate in our stock option plan, and has received non-qualified stock
option grants under the plan. Dr. Czerwinski has agreed not to disclose
confidential information, including, but not limited to, any of our trade
secrets, policies and proprietary technology, which are not known to the public
or consented to disclosure by us. In addition, Dr. Czerwinski was required to
sign a non-competition agreement and an invention assignment agreement with us.
We may only terminate Dr. Czerwinski under the terms of the agreement for
circumstances relating to his willful failure to perform his duties, illegal,
dishonest or fraudulent acts, for breach of the agreement or mental or physical
disability, unless we pay Dr. Czerwinski severance equal to twelve months of his
base salary.

Under an Employment Agreement dated February 8, 1999, Steven Bell agreed to
be our Chief Financial Officer. Under this agreement, Mr. Bell receives a base
salary of $150,000 per year. The term of this agreement is three years, subject
to renewal. In connection with this agreement, Mr. Bell is also eligible to
receive bonuses in amounts to be determined by the board of directors. Mr. Bell
may also participate in our stock option plans and has received grants under the
plans. Mr. Bell has agreed not to disclose confidential information, including,
but not limited to, any of our trade secrets, policies and proprietary
technology, which are not known to the public or consented to disclosure by us.
In addition, Mr. Bell was required to sign a non-competition agreement and an
invention assignment agreement with us. We may only terminate Mr. Bell under the
terms of the agreement for circumstances relating to his willful failure to
perform his duties, illegal, dishonest or fraudulent acts, for breach of the
agreement or mental or physical disability, unless we pay Mr. Bell severance
equal to six months of his base salary. We must pay this severance also if we do
not renew Mr. Bell's employment agreement. In addition, in the event of a change
in our control, if Mr. Bell is terminated without cause within nine months
before or after that change in control, we must pay Mr. Bell severance equal to
12 months of his base salary.

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<PAGE>
CERTAIN TRANSACTIONS

In December 1998, J.H. Whitney III purchased 2,245,752 shares of our
series C preferred stock and Whitney Strategic Partners III purchased 54,115
shares of our series C preferred stock at a price of $2.61 per share. Jeffrey
Jay, one of our directors, is a member of the general partner of both entities.
Steven E. Rodgers, one of our directors, is a Vice President of J.H. Whitney &
Co., an affiliate of both entities. Zeke Investment Partners purchased 57,497
shares of our series C preferred stock at a price of $2.61 per share. Edward
Antoian, one of our directors, is a partner of Zeke Investment Partners. These
shares will convert into common stock and, if the price per share in this
offering is less than $18.27, series F preferred stock immediately prior to the
closing of this offering. If issued, the series F preferred stock will then be
immediately redeemed. Assuming an offering price of $16.00 per share, holders of
our series C preferred stock have agreed to accept an aggregate of 262,500
shares of our common stock in payment of the redemption price of the series F
preferred stock that they will receive in lieu of an aggregate cash payment of
$4.2 million. In addition, if the price per share in this offering is less than
$18.27, we are required to pay the holders of our series C preferred stock, in
the aggregate, approximately $729,000 for accrued but unpaid dividends.

In December 1998, Foundation Health Systems received 994,000 shares of our
series D preferred stock at a price of $2.01 per share and 1,658,004 shares of
our series E preferred stock at a price of $2.50 per share in exchange for
shares of our series A and B preferred stock. In connection with this offering,
Foundation Health had the right to elect to convert each share into one share of
common stock or redeem each share for cash. Foundation Health has elected to
convert its series D and series E preferred stock into common stock. In
addition, if the price per share in this offering is less than $18.27, we are
required to pay Foundation Health, in the aggregate, approximately $726,000 for
accrued but unpaid dividends on our series D and E preferred stock. In December
1998, Foundation Health also received 1,560,000 shares of our series G preferred
stock at a price of $2.74 per share upon conversion of two promissory notes. The
series G preferred stock will be redeemed upon the closing of this offering for
approximately $5 million. In April 2000, we entered into an agreement with
Foundation Health under which we established the methodology to calculate the
redemption amount which was approximately $4.8 million and agreed to pay to
Foundation Health upon the closing of this offering $125,000 representing the
net balance of outstanding obligations related to the December 1998 share
exchange and promissory note conversion.

We also entered into a rights agreement with J.H. Whitney III, Whitney
Strategic Partners III, Foundation Health, Dr. Brailer, Dr. Paulus, Zeke
Investment Partners and William Winkenwerder, granting them registration rights,
other than in connection with this offering, with respect to shares of our
common stock which they own, including common stock issuable upon conversion of
or in exchange for our preferred stock.

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<PAGE>
PRINCIPAL SHAREHOLDERS

The following table sets forth information with respect to the beneficial
ownership of our common stock as of March 31, 2000, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by each person who we
know owns more than 5% of our common stock, each of our directors, each of our
named executive officers, and all of our directors and executive officers as a
group. Except as otherwise noted below, the address of each person listed below
is our address. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Beneficial ownership also includes
shares of stock subject to options and warrants currently exercisable or
convertible, or exercisable or convertible within 60 days of the date of this
table. The number of shares of common stock beneficially owned and the
percentage of beneficial ownership are based on 8,669,351 shares of common stock
outstanding as of March 31, 2000, assuming the conversion or redemption of all
outstanding shares of series C, D, E and F preferred stock into 5,281,451 shares
of common stock which will occur immediately prior to this offering. The
percentages after the offering are based on 12,669,351 shares of common stock
outstanding after completion of this offering, assuming the underwriters do not
exercise their over-allotment option. Unless otherwise indicated, to our
knowledge, all persons listed have sole voting and investment power with respect
to their shares of common stock, except to the extent authority is shared by
spouses under applicable law.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING SHARES
OF COMMON ---------------------
STOCK BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
---------------- ------------------ --------- ---------
<S> <C> <C> <C>
J.H. Whitney III/Whitney Strategic Partners III(1)... 2,554,925 29.5% 20.2%
177 Broad Street
Stamford, Connecticut 06901
Foundation Health Systems, Inc....................... 2,652,004 30.6 20.9
21600 Oxnard Street, Suite 2000
Woodland Hills, California 91367
David J. Brailer..................................... 2,423,000 27.9 19.1
Ronald A. Paulus..................................... 840,000 9.7 6.6
Steven Bell(2)....................................... 24,180 * *
J. Bryan Bushick(3).................................. 4,170 * *
Alfredo A. Czerwinski(4)............................. 15,113 * *
Gregory P. Hess...................................... -- * *
Thomas H. Zajac(5)................................... 48,360 * *
Edward N. Antoian(6)................................. 71,874 * *
C. Martin Harris(7).................................. 8,000 * *
Jeffrey R. Jay(8).................................... 2,554,925 29.5 20.2
Steven E. Rodgers(8)................................. 2,554,925 29.5 20.2
William Winkenwerder(9).............................. 16,259 * *
All directors and executive officers
as a group (12 persons)............................ 6,005,881 69.3 47.4
</TABLE>

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

* Represents less than 1% of the outstanding shares of common stock.

(1) J.H. Whitney Equity Partners III, L.L.C. is the sole general partner of J.H.
Whitney III and Whitney Strategic Partners III. The following individuals
are the managing members of J.H. Whitney Equity Partners III, L.L.C.:
Michael C. Brooks, Joseph D. Carrabino, Jr.,

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<PAGE>
Peter M. Castleman, James H. Fordyce, Jeffrey R. Jay, William Laverack, Jr.,
Daniel J. O'Brien and Michael R. Stone.

(2) All 24,180 shares of common stock are issuable upon exercise of stock
options within 60 days.

(3) All 4,170 shares of common stock are issuable upon exercise of stock options
within 60 days.

(4) All 15,113 shares of common stock are issuable upon exercise of stock
options within 60 days.

(5) All 48,360 shares of common stock are issuable upon exercise of stock
options within 60 days.

(6) 63,874 shares of common stock are owned by Zeke Investment Partners.
Mr. Antoian is a partner of Zeke Investment Partners. Includes 8,000 shares
of common stock issuable upon exercise of stock options within 60 days.

(7) All 8,000 shares of common stock are issuable upon exercise of stock options
within 60 days.

(8) Consists of 2,494,808 shares of common stock owned by J.H. Whitney
III, L.P. and 60,117 shares of common stock owned by Whitney Strategic
Partners III, L.P., which are affiliates. Dr. Jay is a managing member of
J.H. Whitney Equity Partners III, LLC, which is the general partner of both
entities. Mr. Rodgers is a Vice President of J.H. Whitney & Co., an
affiliate of both entities. Each of Dr. Jay and Mr. Rodgers disclaims
beneficial ownership of the shares held by these entities except to the
extent of his pecuniary interest in such entities.

(9) Includes 12,000 shares of common stock issuable upon exercise of stock
options within 60 days.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

AUTHORIZED AND OUTSTANDING CAPITAL STOCK

Our authorized capital stock as of March 31, 2000 consisted of 16,000,000
shares of common stock and 10,679,898 shares of preferred stock. As of
March 31, 2000, there were outstanding 3,387,900 shares of common stock and
5,018,951 shares of preferred stock. Those shares were held of record by a total
of nine shareholders.

Upon the closing of this offering:

- all shares of our outstanding series of preferred stock will convert into
common stock or be redeemed, and a total of 12,669,351 shares of common
stock and no shares of preferred stock will be outstanding; and

- our certificate of incorporation will be amended and restated to provide
for total authorized capital consisting of 100,000,000 shares of common
stock and 20,000,000 shares of preferred stock.

COMMON STOCK

The holders of our common stock are entitled to receive dividends as may be
declared by our board of directors and paid out of legally available funds.
Holders of shares of common stock are entitled to one vote per share in all
matters upon which shareholders have the right to vote. Upon the closing of this
offering, cumulative voting of shares will not be permitted. In the event of a
voluntary or involuntary liquidation, dissolution or winding up of CareScience,
the holders of our common stock are entitled to receive and share ratably in all
assets remaining available for distribution to shareholders after payment of any
preferential amounts to which the holders of preferred stock may be entitled.
Our common stock has no preemptive rights and is not redeemable, convertible,
assessable or entitled to the benefits of any sinking fund. All outstanding
shares of our common stock are, and the common stock to be issued in this
offering will be, validly issued, fully paid and nonassessable.

PREFERRED STOCK

As of the closing date of this offering, each outstanding share of series C
preferred stock will convert into one share of common stock, and if the price
per share in this offering is less than $18.27, one share of redeemable
series F preferred stock. If issued, each such share of redeemable series F
preferred stock will be immediately redeemed for shares of our common stock. The
sole holder of the outstanding shares of series D and E preferred stock must
convert the preferred shares into our common stock or redeem those shares for
cash as of the closing date of this offering. The holder has elected to convert.
Each outstanding share of our mandatorily redeemable series G preferred stock
will be redeemed as of the closing date of this offering.

Pursuant to an amended and restated certificate of incorporation to be filed
upon the closing of this offering, a total of 20,000,000 shares of preferred
stock will be authorized for issuance, none of which has been designated in any
series. Our board of directors is authorized, without further shareholder
action, to authorize and issue any of the 20,000,000 undesignated shares of
preferred stock in one or more series and to fix the voting rights, liquidation
preferences, dividend rights, repurchase rights, conversion rights, preemption
rights, redemption rights and terms, including sinking fund provisions and other
rights and preferences of those shares of our preferred stock. The issuance of
any class or series of preferred stock could adversely affect the rights of the
holders of common stock by restricting dividends on, diluting the power of,
impairing the liquidation rights of common stock, or delaying, deferring or
preventing a change in control of CareScience. We have no present plans to issue
any preferred stock.

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WARRANTS

In connection with the our December 1998 financing, the series A warrant was
substituted with a warrant to purchase 1,334,000 shares of series D convertible
preferred stock at $2.01, subject to adjustment, and the series B warrant was
substituted with a warrant to purchase 400,000 of additional shares of the
series E convertible preferred stock at $2.50, subject to adjustment. The
warrants could be exercised at any time after December 24, 2008 if we failed to
redeem the series G preferred stock. The warrants expire when the series G
preferred stock is redeemed as of the closing of this offering.

REGISTRATION RIGHTS

The holders of approximately 5,281,451 shares of outstanding common stock
held by investors who own shares of series C, D, E and F preferred stock, which
will be converted or redeemed in connection with this offering, will be entitled
to rights regarding registration of the shares. Under the terms of the
Registration Rights Agreement dated December 23, 1998, if we propose to register
our stock, the holders of registration rights will be eligible to include, at
our expense, their shares in the registration. In addition, the holders may
require us to pay for up to three registrations of the holders' common stock at
any time after six months from the date of the consummation of this offering.

PENNSYLVANIA ANTI-TAKEOVER LAW AND PROVISIONS IN OUR CHARTER AND BYLAWS

Provisions of Pennsylvania law, our articles of incorporation and bylaws
could make our acquisition by hostile tender offer, proxy contest or otherwise
and the removal of incumbent officers and directors more difficult. These
provisions are intended to discourage coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to control us to first negotiate
with us. We believe that the benefits provided to us by allowing us to negotiate
with an unfriendly or unsolicited acquiror outweigh the disadvantages of
discouraging those proposals since we will have the opportunity to negotiate
improved terms. These provisions deter transactions not approved by the board,
and could have the effect of discouraging tender offers which may provide a
premium over the market price of our shares of common stock. Consequently, these
provisions may also inhibit fluctuations in the market price of our shares
resulting from actual or rumored takeover attempts.

PENNSYLVANIA LAW

Generally, subchapters 25E, F, G, H, I and J of the Pennsylvania corporate
laws place procedural requirements and establish restrictions upon the
acquisition of voting shares of a corporation which would entitle the acquiring
person to cast or direct the casting of a percentage of votes in an election of
directors. Subchapter 25E of the Pennsylvania corporate laws provides generally
that, if a company were involved in a control transaction, shareholders of the
company would have the right to demand from a controlling person or group
payment of the fair value of their shares. For purposes of subchapter 25E, a
controlling person or group is a person or group of persons acting in concert
that, through voting shares, has voting power over at least 20% of the votes
which shareholders of the company would be entitled to cast in the election of
directors. A control transaction arises, in general, when a person or group
acquires the status of a controlling person or group.

In general, Subchapter 25F of the Pennsylvania corporate laws delays for
five years and imposes conditions upon business combinations between an
interested shareholder and us. The term business combinations is defined broadly
to include various merger, consolidation, division, exchange or sale
transactions, including transactions utilizing our assets for purchase price

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amortization or refinancing purposes. An interested shareholder, in general,
would be a beneficial owner of at least 20% of our voting shares.

In general, subchapter 25G of the Pennsylvania corporate laws suspends the
voting rights of the control shares of a shareholder that acquires for the first
time 20% or more, 33 1/3% or more, or 50% or more of a company's shares entitled
to be voted in an election of directors. The voting rights of the control shares
generally remain suspended until the disinterested shareholders of the company
vote to restore the voting power of the acquiring shareholder.

Subchapter 25H of the Pennsylvania corporate laws provides in some
circumstances for the recovery by a company of profits made upon the sale of its
common stock by a controlling person or group if the sale occurs within
18 months after the controlling person or group became a controlling person or
group and the common stock was acquired during that 18-month period or within
24 months before that period. In general, for purposes of Subchapter 25H, a
controlling person or group is a person or group that:

- has acquired;

- offered to acquire; or

- publicly disclosed or caused to be disclosed an intention to acquire
voting power over shares that would entitle that person or group to cast
at least 20% of the votes that shareholders of the company would be
entitled to cast in an election of directors.

If the disinterested shareholders of a company vote to restore the voting
power of a shareholder who acquires control shares subject to Subchapter 25G,
that company would then be subject to subchapters 25I and J of the Pennsylvania
corporate laws. Subchapter 25I generally provides for a minimum severance
payment to some employees terminated within two years of that shareholder vote.
Subchapter 25J, in general, prohibits the abrogation of labor contracts prior to
their stated date of expiration.

The above descriptions of subchapters of the Pennsylvania corporate laws
summarize the material anti-takeover provisions contained in the Pennsylvania
corporate laws but are not a complete discussion of those provisions.

OUR CHARTER DOCUMENTS

As of the date of the closing of this offering, our articles of
incorporation, bylaws and Pennsylvania corporate law will contain provisions
that may hinder or delay a third party's attempt to acquire us. They may also
make it difficult for the shareholders to remove incumbent management.

CLASSIFIED BOARD OF DIRECTORS; VACANCIES. Our articles of incorporation
divide the board of directors into three classes. The directors' terms will be
staggered by class. Our classified board of directors is intended to provide
continuity and stability in board membership and policies. However, the
classified board of directors makes it more difficult for shareholders to change
the board composition quickly. In addition, a majority of the directors then in
office can increase the size of the board of directors and fill board of
directors vacancies and newly created directorships resulting from any increase
in the size of the board of directors. This is true even if those directors do
not constitute a quorum or if only one director is left in office. These
provisions could prevent shareholders, including parties who want to take over
or acquire us, from removing incumbent directors without cause and filling the
resulting vacancies with their own nominees.

ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER PROPOSALS AND SHAREHOLDER
NOMINATIONS OF DIRECTORS. Our bylaws will provide for an advance notice
procedure regarding nominations of directors by shareholders and other
shareholder proposals. The advance notice procedure will not apply to

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nominations of directors by the board of directors. For matters a shareholder
wishes to bring before an annual meeting of shareholders, the shareholder must
deliver to us a notice not less than 120 days prior to the date of our proxy
statement released to shareholders in connection with the previous year's annual
meeting. The 2000 annual meeting of shareholders was held on March 30, 2000. For
nominations of directors by shareholders, a shareholder generally must provide
notice not less than 90 days prior to the anniversary date of the preceding
year's annual meeting of shareholders. The shareholder must put information in
the notice including, but not limited to, the following:

- the shareholder and its holdings;

- the background of any nominees for director;

- any business desired to be brought before the meeting;

- the reasons for conducting the business at the meeting; and

- any material interest of the shareholder in the business proposed.

At a special meeting of shareholders to elect directors, shareholders can
make a nomination only if they deliver to us a notice that complies with the
above requirements no later than the tenth day following the day on which public
announcement of the special meeting is made. The bylaws could preclude a
nomination for the election of directors or the conduct of particular business
at a particular meeting if the proper procedures are not followed. This may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
us.

SPECIAL SHAREHOLDERS' MEETINGS. Our articles of incorporation and bylaws
will permit special meetings of the shareholders to be called only by our board
of directors, our chairman of the board of directors, our chief executive
officer or the president.

AUTHORIZED BUT UNISSUED SHARES. The authorization of undesignated preferred
stock will also make it possible for the board of directors, without shareholder
approval, to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of us. We are
able to issue shares of common stock without shareholder approval, up to the
number of shares authorized for issuance in our articles of incorporation,
except as limited by Nasdaq rules. We can use these additional shares for a
variety of corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit plans. Our
ability to issue these additional shares could make it more difficult or
discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.

VOTING RIGHTS. Our articles of incorporation and bylaws will not provide
for cumulative voting in the election of directors. These and other provisions
are intended to enhance continuity and stability in the composition of the board
of directors and to reduce the vulnerability to unsolicited or hostile takeovers
or proxy contests, and could delay changes in our control or management. The
amendment of any provision of our articles of incorporation and bylaws will
require approval by holders of 75% of the outstanding common stock. This
requirement of the approval of 75% of the outstanding common stock will not
apply if two-thirds of the members of the board of directors approve the
proposed amendment. In that case, the ordinary requirements of Pennsylvania
corporate law for shareholder approval will apply.

TRANSFER AGENT

The transfer agent and registrar for the common stock is StockTrans.

NATIONAL MARKET LISTING

We have applied to list our common stock on The Nasdaq Stock Market under
the symbol CARE.

62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have outstanding 12,669,351 shares
of common stock based upon shares outstanding at March 31, 2000, assuming no
exercise of the underwriters' over-allotment option. Excluding the 4,000,000
shares of common stock offered hereby and assuming no exercise of the
underwriters' over-allotment option, upon the consummation of this offering,
there will be 8,669,351 shares of common stock outstanding none of which will be
freely tradable without restriction in the public market. All restricted shares
are subject to lock-up agreements with the underwriters pursuant to which the
holders of the restricted shares have agreed not to sell, pledge or otherwise
dispose of those shares for a period of 180 days after the date of this
prospectus. Beginning 180 days after the effective date of our registration
statement, all of the restricted shares will become eligible for sale in the
public market when the underwriter's lock-up agreements expire unless the
underwriters elect, in their sole discretion, to release these shares from the
lock-up agreements earlier. These shares include 5,281,451 shares which may be
sold pursuant to registration rights granted by us, upon the expiration or
waiver of the lock-up agreement 180 day period. We are not aware of any present
intention of a shareholder to exercise any registration rights. The registration
rights of the preferred shareholders may not be used as a reason for the
shareholder to terminate the lock-up agreements. In addition, after the 180 day
period, the restricted shares described above will become available for sale
pursuant to Rule 144. The general provisions of Rule 144 are described below.

RULE 144

In general, under Rule 144, an affiliate of CareScience, or person or
persons whose shares are aggregated who has beneficially owned restricted shares
for at least one year, will be entitled to sell in any three-month period a
number of shares that does not exceed the greater of (a) 1% of the then
outstanding shares of the common stock comprising approximately 127,000 shares
immediately after this offering, assuming no exercise of the underwriters'
over-allotment option or (b) the average weekly trading volume during the four
calendar weeks preceding the date on which notice of the sale is filed with the
SEC. Sales pursuant to Rule 144 are subject to requirements relating to manner
of sale, notice and availability of current public information about us. A
person or persons whose shares are aggregated who is not deemed to have been our
affiliate at any time during the 90 days immediately preceding the sale and who
has beneficially owned his or her shares for at least two years is entitled to
sell those shares pursuant to Rule 144(k) without regard to the limitations
described above. Unless registered, most of the restricted shares that will
become available for sale in the public market beginning 180 days after the
effective date will be subject to volume and other resale restrictions pursuant
to Rule 144 because the holders are our affiliates.

We intend to file, within 180 days after the date of this prospectus,
Form S-8 registration statements under the Securities Act to register shares
issued pursuant to our equity compensation plans and shares issued in connection
with option exercises. Shares of common stock issued pursuant to our equity
compensation plans or upon exercise of options after the effective date of the
Forms S-8 will be available for sale in the public market, subject to Rule 144
volume limitations applicable to affiliates and lock-up agreements.

LOCK-UP AGREEMENTS

All officers, directors, employees and holders of our common stock and
options to purchase common stock have agreed pursuant to lock-up agreements that
they will not offer, sell, contract to sell, pledge, grant any option to sell,
or otherwise dispose of, directly or indirectly, any shares of common stock or
securities convertible or exchangeable for common stock, or warrants or other
rights to purchase common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Deutsche Bank Securities Inc.

63
<PAGE>

Deutsche Bank Securities Inc. may release the shares subject to the lock-up
agreements in whole or in part at any time with or without notice. However,
Deutsche Bank Securities Inc. has no current plans to do so, and none of our
officers or directors or, to the best of our knowledge, current shareholders
intend to request a release. Any decision by Deutsche Bank Securities Inc. to
release shares subject to a lock-up agreement will be determined on a
case-by-case basis. Apart from the facts of any particular case, in exercising
their discretion to release shares from a lock-up agreement Deutsche Bank
Securities Inc. may consider such factors as: the likelihood of a material
market effect from the sale of the shares; the market price of the shares
relative to the original offering price; its own position in the shares, if any;
the desirability of fostering an orderly market for the shares; and the hardship
or circumstances of the person requesting the waiver.

64
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc., FleetBoston Robertson Stephens Inc. and Thomas Weisel Partners
LLC have severally agreed to purchase from us the following respective number of
shares of common stock at a public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Deutsche Bank Securities Inc................................
FleetBoston Robertson Stephens Inc..........................
Thomas Weisel Partners LLC..................................

---------
Total................................................... 4,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to conditions precedent and that the underwriters will purchase all shares of
the common stock offered hereby, other than those covered by the over-allotment
option described below, if any of these shares are purchased.

The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than $ per share to other dealers. After
the initial public offering, representatives of the underwriters may change the
offering price and other selling terms.

We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 600,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered hereby. To the extent that
the underwriters exercise this option, each of the underwriters will become
obligated, subject to several conditions, to purchase approximately the same
percentage of additional shares of common stock as the number of shares of
common stock to be purchased by it in the above table bears to the total number
of shares of common stock offered hereby. We will be obligated, pursuant to the
option, to sell these shares of common stock to the underwriters to the extent
the option is exercised. If any additional shares of common stock are purchased,
the underwriters will offer the additional shares on the same terms as those on
which the 4,000,000 shares are being offered.

The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is currently expected to be approximately % of the
initial public offering price. We have agreed to pay the

65
<PAGE>
underwriters the following fees, assuming either no exercise or full exercise by
the underwriters of the underwriters' over-allotment option:

<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEE PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
------------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by CareScience................ $ $ $
</TABLE>

In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $ .

We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act of 1933, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.

Each of our officers and directors, all of our shareholders and selected
holders of options to purchase our stock, have agreed not to offer, sell,
contract to sell or otherwise dispose of, or enter into any transaction that is
designed to, or could be expected to, result in the disposition of any shares of
our common stock or other securities convertible into or exchangeable or
exercisable for shares of our common stock or derivatives of our common stock
owned by these persons prior to this offering or common stock issuable upon
exercise of options held by these persons for a period of 180 days after the
effective date of the registration statement of which this prospectus is a part
without the prior written consent of Deutsche Bank Securities Inc. This consent
may be given at any time without public notice. We have entered into a similar
agreement with the representatives of the underwriters, except that we may grant
options and sell shares pursuant to our 1995 Equity Compensation Plan and our
1998 Time Accelerated Restricted Stock Option Plan without their consent. There
are no agreements between the representatives and any of our shareholders or
affiliates releasing them from these lock-up agreements prior to the expiration
of the 180-day period.

The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 160 filed
public offerings of equity securities, of which 111 have been completed, and has
acted as a syndicate member in an additional 89 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.

66
<PAGE>

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares for our vendors, employees, family
members of employees, customers and other third parties. This group may include
British Biotech, plc which has expressed an interest in acquiring up to $1.5
million worth of our common stock. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
reserved shares are purchased. Any reserved shares that are not purchased by
these persons will be offered by the underwriters to the general public on the
same basis as the other shares in this offering.

PRICING OF THIS OFFERING

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation among us and the representatives of the
underwriters. Among the primary factors to be considered in determining the
public offering price will be:

- prevailing market conditions;

- our results of operations in recent periods;

- the present stage of our development;

- the market capitalization and stage of development of other companies that
we and the representatives of the underwriters believe to be comparable to
our business; and

- estimates of our business potential.

LAWYERS

Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania will provide us an
opinion relating to the validity of the common stock issued in this offering.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Reboul, MacMurray, Hewitt, Maynard & Kristol, New York, New
York.

EXPERTS

The financial statements, as of December 31, 1998 and 1999 and for the years
ended December 31, 1997, 1998 and 1999 included in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.

67
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to our common stock to be issued in this
offering. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information described in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to CareScience and our common
stock, you may refer to the registration statement and the related exhibits and
schedules. You may read and copy any document we file at the Securities and
Exchange Commission's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information about the public reference rooms. Our
Securities and Exchange Commission filings are also available to the public from
the Securities and Exchange Commission's web site at http://www.sec.gov. Upon
completion of this offering, we must comply with the information and periodic
reporting requirements of the Securities Exchange Act and will file periodic
reports, proxy statements and other information with the Securities and Exchange
Commission. These periodic reports, proxy statements and other information will
be available for inspection and copying at the Securities and Exchange
Commission's public reference room and the web site of the Securities and
Exchange Commission. We maintain a Web site at http://www.carescience.com. The
information contained on our Web site does not constitute part of this
prospectus.

68
<PAGE>
CARESCIENCE, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... F-2

Balance Sheets.............................................. F-3

Statements of Operations.................................... F-4

Statements of Mandatorily Redeemable
Preferred Stock and Shareholders' Equity (Deficit)........ F-5

Statements of Cash Flows.................................... F-6

Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CareScience, Inc.:

We have audited the accompanying balance sheets of CareScience, Inc.
(formerly Care Management Science Corporation) (a Pennsylvania corporation) as
of December 31, 1998 and 1999, and the related statements of operations,
mandatorily redeemable preferred stock and shareholders' equity (deficit) and
cash flows for the three years in the period ended December 31, 1999. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CareScience, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information included in Schedule II
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP

Philadelphia, Pa.,
February 18, 2000

F-2
<PAGE>
CARESCIENCE, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31, 2000
DECEMBER 31, --------------------------
--------------------------- PRO FORMA
1998 1999 ACTUAL (NOTE 1)
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 5,346,099 $ 3,381,600 $ 2,003,257 $ 2,003,257
Accounts receivable, net of allowance for
doubtful accounts of $31,844, $29,754 and
$52,311, respectively.......................... 198,956 719,570 708,439 708,439
Prepaid expenses and other....................... 48,829 203,957 262,566 262,566
------------ ------------ ------------ -----------
Total current assets........................... 5,593,884 4,305,127 2,974,262 2,974,262
------------ ------------ ------------ -----------
Property and equipment:
Computer equipment............................... 1,838,634 2,213,629 2,387,724 2,387,724
Office equipment................................. 241,694 263,260 297,501 297,501
Furniture and fixtures........................... 250,880 273,086 351,298 351,298
------------ ------------ ------------ -----------
2,331,208 2,749,975 3,036,523 3,036,523
Less--Accumulated depreciation and
amortization................................... (1,130,615) (1,705,518) (1,851,710) (1,851,710)
------------ ------------ ------------ -----------
Net property and equipment..................... 1,200,593 1,044,457 1,184,813 1,184,813
------------ ------------ ------------ -----------
Other.............................................. -- -- 353,256 353,256
------------ ------------ ------------ -----------
Total assets................................. $ 6,794,477 $ 5,349,584 $ 4,512,331 $ 4,512,331
============ ============ ============ ===========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations..... $ 353,125 $ 317,065 $ 292,488 $ 292,488
Accounts payable................................. 251,893 214,263 513,045 513,045
Accrued expenses................................. 323,779 397,076 1,205,926 1,205,926
Deferred revenues................................ 820,492 2,923,737 2,522,389 2,522,389
Dividends payable under convertible preferred
stock.......................................... -- -- -- 1,455,207
------------ ------------ ------------ -----------
Total current liabilities...................... 1,749,289 3,852,141 4,533,848 5,989,055
------------ ------------ ------------ -----------
Capital lease obligations.......................... 569,980 459,955 480,763 480,763
------------ ------------ ------------ -----------
Commitments and contingencies (Note 6)

Mandatorily redeemable preferred stock (Note 7).... 4,280,390 4,681,634 4,797,005 4,892,108
------------ ------------ ------------ -----------
Shareholders' equity (deficit):
Preferred stock, no par value, liquidation value
of $13,336,234 and $13,602,958 at December 31,
1999 and March 31, 2000, respectively.......... 12,009,700 12,009,700 12,009,700 --
Common stock, no par value, 16,000,000 shares
authorized, 4,827,900 shares issued and
3,387,900 outstanding, actual; 10,109,351
shares issued and 8,669,351 outstanding,
pro forma...................................... 50,000 50,000 50,000 16,259,700
Additional paid-in capital....................... -- 5,624,839 5,745,522 5,745,522
Deferred compensation............................ -- (5,392,322) (5,173,981) (5,173,981)
Accumulated deficit.............................. (10,964,882) (15,036,363) (17,030,526) (22,780,836)
Treasury stock, at cost, 1,440,000 shares........ (900,000) (900,000) (900,000) (900,000)
------------ ------------ ------------ -----------
Total shareholders' equity (deficit)........... 194,818 (3,644,146) (5,299,285) (6,849,595)
------------ ------------ ------------ -----------
Total liabilities and shareholders' equity
(deficit).................................. $ 6,794,477 $ 5,349,584 $ 4,512,331 $ 4,512,331
============ ============ ============ ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>
CARESCIENCE, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------------- ---------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................... $ 1,040,703 $ 2,551,963 $ 4,350,688 $ 717,733 $ 1,628,927
Cost of revenues........... 1,493,730 1,903,803 2,508,231 510,915 1,026,041
----------- ----------- ----------- ----------- -----------
Gross profit (loss)...... (453,027) 648,160 1,842,457 206,818 602,886
----------- ----------- ----------- ----------- -----------

Operating expenses:
Research and
development............ 1,554,522 1,668,764 1,459,867 395,681 599,123
Selling, general and
administrative......... 2,241,511 3,169,097 3,897,849 898,949 1,564,739
Stock-based
compensation........... -- -- 232,517 -- 339,024
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 3,796,033 4,837,861 5,590,233 1,294,630 2,502,886
----------- ----------- ----------- ----------- -----------
Operating loss......... (4,249,060) (4,189,701) (3,747,776) (1,087,812) (1,900,000)

Interest income............ (153,858) (55,766) (172,863) (53,189) (42,048)
Interest expense........... 200,931 474,541 95,324 25,985 20,840
----------- ----------- ----------- ----------- -----------
Net loss................... (4,296,133) (4,608,476) (3,670,237) (1,060,608) (1,878,792)
Accretion of redemption
premium on preferred
stock.................... -- 8,307 401,244 94,318 115,371
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common shareholders...... $(4,296,133) $(4,616,783) $(4,071,481) $(1,154,926) $(1,994,163)
=========== =========== =========== =========== ===========
Net loss per common share:
Basic and diluted........ $ (1.27) $ (1.36) $ (1.20) $ (0.34) $ (0.59)
Weighted average shares
outstanding:
Basic and diluted........ 3,387,900 3,387,900 3,387,900 3,387,900 3,387,900
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>
CARESCIENCE, INC.
STATEMENTS OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
MANDATORILY ---------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK COMMON STOCK
PREFERRED ----------------------- -------------------- DEFERRED
STOCK SHARES AMOUNT SHARES AMOUNT APIC COMPENSATION
----------- --------- ----------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996......... $ -- 663,001 $ 6,630 3,387,900 $50,000 $6,051,061 $ --
Net loss......................... -- -- -- -- -- -- --
---------- --------- ----------- --------- ------- ---------- -----------
Balance, December 31, 1997......... -- 663,001 6,630 3,387,900 50,000 6,051,061 --
Sale of Series C Convertible
Preferred stock, net of
expenses of $222,991........... -- 2,366,947 5,952,009 -- -- -- --
Conversion of Series A and B
Convertible Preferred stock
into Series D and E Convertible
Preferred stock................ -- 1,989,003 6,051,061 -- -- (6,051,061) --
Conversion of amounts under
shareholder Loan Agreements
into Series G Mandatorily
Redeemable Preferred stock..... 4,272,083 -- -- -- -- -- --
Accretion of dividends on Series
G Mandatorily Redeemable
Preferred stock................ 8,307 -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
---------- --------- ----------- --------- ------- ---------- -----------
Balance, December 31, 1998......... 4,280,390 5,018,951 12,009,700 3,387,900 50,000 -- --
Accretion of dividends on Series
G Mandatorily Redeemable
Preferred stock................ 401,244 -- -- -- -- -- --
Deferred compensation in
connection with issuance of
Common stock options........... -- -- -- -- -- 5,624,839 (5,624,839)
Amortization of deferred
compensation................... -- -- -- -- -- -- 232,517
Net loss......................... -- -- -- -- -- -- --
---------- --------- ----------- --------- ------- ---------- -----------
Balance, December 31, 1999......... 4,681,634 5,018,951 12,009,700 3,387,900 50,000 5,624,839 (5,392,322)
Accretion of dividends on
Series G Mandatorily
Redeemable Preferred Stock
(unaudited).................... 115,371 -- -- -- -- -- --
Deferred compensation in
connection with issuance of
Common stock options
(unaudited).................... -- -- -- -- -- 120,683 (120,683)
Amortization of deferred
compensation (unaudited)....... -- -- -- -- -- -- 339,024
Net loss (unaudited)............. -- -- -- -- -- -- --
---------- --------- ----------- --------- ------- ---------- -----------
Balance, March 31, 2000
(unaudited)...................... $4,797,005 5,018,951 $12,009,700 3,387,900 $50,000 $5,745,522 $(5,173,981)
========== ========= =========== ========= ======= ========== ===========

<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------
TREASURY STOCK
ACCUMULATED ----------------------
DEFICIT SHARES AMOUNT TOTAL
------------ ---------- --------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996......... $ (2,051,966) 1,440,000 $(900,000) $ 3,155,725
Net loss......................... (4,296,133) -- -- (4,296,133)
------------ ---------- --------- -----------
Balance, December 31, 1997......... (6,348,099) 1,440,000 (900,000) (1,140,408)
Sale of Series C Convertible
Preferred stock, net of
expenses of $222,991........... -- -- -- 5,952,009
Conversion of Series A and B
Convertible Preferred stock
into Series D and E Convertible
Preferred stock................ -- -- -- --
Conversion of amounts under
shareholder Loan Agreements
into Series G Mandatorily
Redeemable Preferred stock..... -- -- -- --
Accretion of dividends on Series
G Mandatorily Redeemable
Preferred stock................ (8,307) -- -- (8,307)
Net loss......................... (4,608,476) -- -- (4,608,476)
------------ ---------- --------- -----------
Balance, December 31, 1998......... (10,964,882) 1,440,000 (900,000) 194,818
Accretion of dividends on Series
G Mandatorily Redeemable
Preferred stock................ (401,244) -- -- (401,244)
Deferred compensation in
connection with issuance of
Common stock options........... -- -- -- --
Amortization of deferred
compensation................... -- -- -- 232,517
Net loss......................... (3,670,237) -- -- (3,670,237)
------------ ---------- --------- -----------
Balance, December 31, 1999......... (15,036,363) 1,440,000 (900,000) (3,644,146)
Accretion of dividends on
Series G Mandatorily
Redeemable Preferred Stock
(unaudited).................... (115,371) -- -- (115,371)
Deferred compensation in
connection with issuance of
Common stock options
(unaudited).................... -- -- -- --
Amortization of deferred
compensation (unaudited)....... -- -- -- 339,024
Net loss (unaudited)............. (1,878,792) -- -- (1,878,792)
------------ ---------- --------- -----------
Balance, March 31, 2000
(unaudited)...................... $(17,030,526) 1,440,000 $(900,000) $(5,299,285)
============ ========== ========= ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>
CARESCIENCE, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(4,296,133) $(4,608,476) $(3,670,237) $(1,060,608) $(1,878,792)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization......... 309,812 592,705 574,903 165,020 146,192
Interest on notes to a shareholder.... 164,463 379,076 -- -- --
Provision for bad debts............... 35,162 136,929 17,505 4,375 9,000
Stock-based compensation.............. -- -- 232,517 -- 339,024
Changes in assets and liabilities--
(Increase) decrease in--
Accounts receivable............... (151,576) 197,977 (538,119) (422,219) 2,131
Prepaid expenses and other........ (41,978) 57,702 (155,128) (89,076) (411,865)
Increase in--
Accounts payable and accrued
expenses........................ 48,397 300,760 35,667 34,535 1,107,632
Deferred revenues................. 111,871 557,660 2,103,245 (13,307) (401,348)
----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities.................... (3,819,982) (2,385,667) (1,399,647) (1,381,280) (1,088,026)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment,
net................................... (180,442) (243,949) (194,973) (154,904) (192,037)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from sale of Series C
Convertible Preferred stock........... -- 5,952,009 -- -- --
Proceeds from notes to a shareholder.... 2,684,675 -- -- -- --
Proceeds from related party loan........ -- 500,000 -- -- --
Payment of related party loan........... -- (500,000) -- -- --
Payments on capital lease obligations... (167,635) (346,064) (369,879) (24,773) (98,280)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities.......... 2,517,040 5,605,945 (369,879) (24,773) (98,280)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents........................ (1,483,384) 2,976,329 (1,964,499) (1,560,957) (1,378,343)

Cash and cash equivalents,
beginning of year....................... 3,853,154 2,369,770 5,346,099 5,346,099 3,381,600
----------- ----------- ----------- ----------- -----------

Cash and cash equivalents,
end of year............................. $ 2,369,770 $ 5,346,099 $ 3,381,600 $ 3,785,142 $ 2,003,257
=========== =========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

1. BACKGROUND:

CareScience, Inc. (formerly Care Management Science Corporation) provides
Internet-based tools designed to improve the quality and efficiency of health
care. The Company's products use its proprietary clinical algorithms and data
collection and storage technologies to perform complex clinical analyses. The
Company's customers use its products to identify clinical inefficiencies and
medical errors and monitor the results of implemented solutions. Additionally,
the Company facilitates the real-time exchange of clinical information over the
Internet among local health care constituents.

The Company incurred losses in the current and prior year, and anticipates
incurring additional losses through 2000 as it expands its customer base and
product offerings. Additional financing may be needed by the Company to fund
operations and to continue the development of its products. Notwithstanding the
foregoing, the Company's management believes that cash on hand at March 31, 2000
and cash generated from revenues in 2000 will be sufficient to sustain
operations at least through 2000.

PRO FORMA BALANCE SHEET ADJUSTMENTS

In connection with the proposed sale of 4,000,000 shares of Common stock to
the public in an initial public offering (the "Offering"), the Company has
prepared an unaudited pro forma balance sheet as of March 31, 2000. The pro
forma balance sheet reflects the following transactions which will occur upon
the closing of the Offering:

- the conversion of Series C, D and E Convertible Preferred stock into
5,018,951 shares of Common stock;

- the issuance, upon the conversion of the Series C Convertible Preferred
stock, of Series F Redeemable Preferred stock, with a redemption value of
$4.2 million, and the simultaneous redemption of the Series F Redeemable
Preferred stock for 262,500 shares of Common stock, assuming an offering
price of $16.00 per share;

- the accretion of the redemption value of the Series G Preferred stock
through June 2000; and

- the declaration of a dividend of $1.5 million (calculated at 8% per annum
through June 2000) payable to the Series C, D and E Convertible Preferred
shareholders from the proceeds of the Offering.

The payment of the dividend and the redemption of the Series G Redeemable
Preferred stock has not been reflected on the pro forma balance sheet, since the
Company does not have adequate cash resources prior to the closing of the
Offering to make such payments.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

INTERIM FINANCIAL STATEMENTS

The financial statements as of March 31, 2000 and for the three months ended
March 31, 1999 and 2000 are unaudited and, in the opinion of management, include
adjustments necessary for a

F-7
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
fair presentation of results for those interim periods. The results of
operations for the three months ended March 31, 1999 and 2000 are not
necessarily indicative of the results to be expected for the entire year.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Major additions and improvements
are capitalized, while maintenance and repairs that do not improve or extend the
life of assets are charged to expense as incurred.

Depreciation and amortization are provided using the straight-line method
over the following estimated useful lives:

<TABLE>
<S> <C>
Office equipment............................................ 5 years
Computer equipment.......................................... 3 years
Furniture and fixtures...................................... 7 years
</TABLE>

Depreciation and amortization expense was $309,812, $592,705, $574,903,
$165,020 and $146,192 for the years ended December 31, 1997, 1998 and 1999 and
the three months ended March 31, 1999 and 2000, respectively.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense as incurred.

SOFTWARE DEVELOPMENT COSTS

In conjunction with the development of its software products, the Company
incurs software development costs. Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
The Company has determined that technological feasibility for its software
products is generally achieved upon completion of a working model. As of
March 31, 2000, no costs are capitalized pursuant to SFAS No. 86, since software
development costs are not significant after the completion of a working model.
These development costs are included in research and development expenses in the
accompanying statements of operations.

In conjunction with the development of its websites, the Company incurs
software development costs. On January 1, 1999, the Company adopted the
provisions of Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". Prior to 1999, the
Company has expensed all development costs related to its Websites. In 1999,

F-8
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the Company incurred costs related to an online local healthcare community.
These costs are being funded by a third party, and therefore, have not been
capitalized. All other costs incurred in 1999 were related to maintenance of the
Websites and have been charged to expense as incurred.

REVENUE RECOGNITION

The Company's CaduCIS.com products agreements, which typically cover an
initial period of three-to-five years and are fixed priced, provide to
customers, among other things, a software license, project management services,
data management services, data storage and computer server maintenance and
software support and maintenance. Revenues under these contracts are recognized
ratably over the period the services are performed. Any additional consulting
fees, outside of the initial contract, related to the CaduCiS.com products are
recognized as the program or service is delivered.

In October 1999, the Company entered into a three year agreement with the
California HealthCare Foundation, which provides funding for the development of
an online local healthcare community. Revenue from this contract is being
recognized as the services are performed over three years.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets to be held and used by the Company be reviewed
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 121 also
requires that long-lived assets held for sale be reported at the lower of the
carrying amount or fair value, less cost to sell.

The Company continually evaluates whether events and circumstances have
occurred that indicate that the remaining estimated useful life of long-lived
assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that such assets should be evaluated for
possible impairment, the Company uses an estimate of the related undiscounted
cash flow in measuring whether the asset is recoverable. Management believes
that no revision to the remaining useful lives or write-down of such assets is
required.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred taxes are required to be
classified based on financial statement classification of the related assets and
liabilities which give rise to the temporary differences. Deferred taxes result
from temporary differences between the financial statement carrying amounts and
the tax basis of assets and liabilities.

F-9
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Differences can arise between the
fair value and carrying amount of financial instruments that are recognized at
historical cost. The Company's financial instruments consist primarily of cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses.

The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due to the short
maturity of these instruments.

MAJOR CUSTOMERS

The Company's operations are conducted in one business segment and sales are
primarily made to health care payors and providers. The Company had one, one,
two, one and one customers for the year ended December 31, 1997, 1998 and 1999
and for the three months ended March 31, 1999 and 2000, respectively, which
accounted for 53%, 37%, 32%, 16% and 24% of total revenues.

The Company had five, three and five customers as of December 31, 1998 and
1999 and March 31, 2000, respectively, which accounted for 77%, 37% and 69% of
total accounts receivable.

BUSINESS AND CREDIT RISK CONCENTRATION

Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and accounts
receivable. The Company limits its credit risk associated with cash and cash
equivalents by placing its investments in highly liquid funds.

USE OF ESTIMATES

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

SUPPLEMENTAL CASH FLOW INFORMATION

The Company paid interest of $38,379, $98,704, $95,324, $25,985 and $20,840
for the years ended December 31, 1997, 1998 and 1999 and for the three months
ended March 31, 1999 and 2000, respectively.

The Company financed $833,301, $338,801, $223,794, $0 and $94,511 of
property and equipment purchases with capital leases for the years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 1999
and 2000, respectively.

F-10
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In December 1998, the Company sold 2,366,947 shares of Series C Convertible
Preferred stock (see Note 8). In connection with the sale, the Company converted
notes payable including accrued interest to a Preferred Shareholder into
Mandatorily Redeemable Series G Preferred stock which resulted in a non-cash
transaction of $4,272,083 (see Note 7). In addition, the Company recorded a
non-cash charge of $8,307, $401,244, $94,318 and $115,371 for the accretion of
dividends relating to the Mandatorily Redeemable Series G Preferred stock during
the year ended December 31, 1998 and 1999 and for the three months ended
March 31, 1999 and 2000, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission "SEC" issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 expresses the views of the SEC staff in applying generally
accepted accounting principles to revenue transactions. The Company's financial
statements and related disclosures for the years ended December 31, 1997, 1998
and 1999 and the three months ended March 31, 1999 and 2000 conform to the views
of the SEC staff as documented in SAB 101.

3. NET LOSS PER SHARE:

Net loss per share is calculated utilizing the principles of SFAS No. 128,
"Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive securities
and is computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
is computed assuming the conversion or exercise of all dilutive securities such
as preferred stock, options and warrants.

Under SFAS No. 128, the Company's granting of certain stock options,
warrants and convertible preferred stock resulted in potential dilution of basic
EPS. The number of incremental shares from the assumed exercise of stock options
and warrants is calculated applying the treasury stock method. Stock options,
warrants and Preferred stock convertible into common shares were excluded from
the calculations as they were anti-dilutive due to the net loss.

4. INCOME TAXES:

The Company incurred operating losses and generated a significant
accumulated deficit through March 31, 2000, therefore, no tax provisions have
been recorded. As of March 31, 2000 the Company had federal net operating loss
carryforwards of approximately $17.0 million which expire from 2010 through
2019. At December 31, 1998 and 1999 a valuation allowance was recorded for 100%
of the company's deferred tax asset as realization of the tax benefit was not
considered more likely than not.

F-11
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

4. INCOME TAXES: (CONTINUED)
The deferred tax effect of temporary differences giving rise to the
Company's deferred tax assets consist of the following components:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
Expenses not currently deductible for income tax purposes... $ 57,815 $ 45,320
Accounts receivable reserve................................. 10,884 10,116
Cash to accrual............................................. (55,851) (41,889)
Difference due to method of depreciation.................... 27,126 45,826
Net operating loss carryforward............................. 3,834,982 5,142,235
----------- ------------
Gross deferred tax asset, before valuation.................. 3,874,956 5,201,608
Less--Valuation allowance................................... (3,874,956) (5,201,608)
----------- ------------
Net deferred tax asset...................................... $ -- $ --
=========== ============
</TABLE>

Since realization of the tax benefit associated with the deferred tax assets
is not more likely than not, a valuation allowance was recorded against this
entire amount as required by SFAS No. 109.

The Tax Reform Act of 1986 contains certain provisions that limit the
utilization of net operating losses and tax credit carryforwards if there has
been a cumulative ownership change greater than 50% within a three-year period.
Such limitation could result in the expiration of the net operating losses
before such losses are fully utilized.

5. CAPITAL LEASE OBLIGATIONS:

The Company has entered into capital leases for various pieces of equipment
expiring through 2004 and having interest rates ranging from 7% to 14.5%. At
March 31, 2000 and December 31, 1999 and 1998, equipment and furniture includes
assets under capitalized leases totaling $1,702,533, $1,608,022 and $1,384,228,
net of accumulated amortization of $995,571, $915,951 and $546,321,
respectively. The present value of the minimum lease payments as of March 31,
2000 is as follows:

<TABLE>
<S> <C>
Total minimum lease payments................................ $919,749
Less--Amount representing interest........................ 146,498
--------
Present value of net minimum lease payments............... 773,251
Less--Current portion..................................... 292,488
--------
$480,763
========
</TABLE>

F-12
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

5. CAPITAL LEASE OBLIGATIONS: (CONTINUED)
Future minimum lease payments as of March 31, 2000 are as follows:

<TABLE>
<S> <C>
Nine months ending December 31, 2000........................ $289,082
2001........................................................ 267,475
2002........................................................ 218,597
2003........................................................ 84,272
2004........................................................ 55,722
--------
$915,148
========
</TABLE>

6. COMMITMENTS AND CONTINGENCIES:

SOFTWARE LICENSING AGREEMENT

The Company has an exclusive license for software and technical information
with the Trustees of the University of Pennsylvania ("License Agreement").

In April 1995, the Company amended the original License Agreement to include
the payment of royalties, as defined, for a period of 30 years and issued
124,900 shares of Common stock to the Trustees of the University of
Pennsylvania. Under the License Agreement, the Company must pay minimum,
nonrefundable royalty amounts as follows:

<TABLE>
<S> <C>
2000........................................................ $ 75,000
2001........................................................ 75,000
2002........................................................ 75,000
2003........................................................ 75,000
2004........................................................ 75,000
2005 and thereafter......................................... 1,500,000
----------
Minimum future royalties.................................... $1,875,000
==========
</TABLE>

The Company can lose its exclusivity under the License Agreement if the
minimum payments are not made. The Company had royalty expenses under this
License Agreement of $30,000, $45,000, $60,000, $15,000 and $18,750 for the
years ended December 31, 1997, 1998 and 1999 and for the three months ended
March 31, 1999 and 2000, respectively, which represent the minimum royalty for
each year, respectively, under the License Agreement.

OPERATING LEASES

The Company leases its office facility under an operating lease. Rent
expense, including common area maintenance charges, was $153,773, $203,414,
$208,496, $51,771 and $65,268 for the years ended December 31, 1997, 1998 and
1999 and for the three months ended March 31,

F-13
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
1999 and 2000, respectively. Minimum future rental payments under the lease as
of March 31, 2000 is as follows:

<TABLE>
<S> <C>
Nine months ending December 31, 2000........................ $257,425
2001........................................................ 141,053
2002........................................................ 104,136
2003........................................................ 17,468
--------
$520,082
========
</TABLE>

EMPLOYMENT AGREEMENTS

The Company has employment agreements with certain employees that provide
for minimum annual compensation of $1,433,026 in 2000, $668,982 in 2001 and
$65,000 in 2002.

7. MANDATORILY REDEEMABLE PREFERRED STOCK:

In connection with the sale of the Series C Convertible Preferred stock (see
Note 8), the Company converted notes payable due to a shareholder with initial
principal amounts of $2,684,675 and $1,000,000, respectively, plus all accrued
interest into 1,560,000 shares of Series G Mandatorily Redeemable Preferred
stock (Series G Preferred). This Series G Preferred requires mandatory
redemption upon the earlier of a qualified initial public offering of the
Company, as defined, or December 24, 2008. The Series G Preferred has been
reclassified outside of equity in the accompanying financial statements. The
Series G Preferred has no voting or conversion rights and requires a dividend,
payable upon redemption or liquidation, at a rate equal to the prime rate plus
one percent based upon the Series G Preferred liquidation value. The Series G
Preferred has a redemption value of $4,797,005, which includes accrued dividends
of $524,922 at March 31, 2000.

8. SHAREHOLDERS' EQUITY (DEFICIT):

PREFERRED STOCK

On December 24, 1998, the Company sold 2,366,947 shares of Series C
Convertible Preferred stock for $6,175,000 to new investors.

Simultaneously with the sale of the Series C Preferred stock, each
outstanding share of the Series A Redeemable Convertible Preferred stock was
converted into four shares of Series D Convertible Preferred stock and each
outstanding share of the Series B Redeemable Convertible Preferred stock was
converted into four shares of Series E Convertible Preferred stock. A related
Series A Warrant was substituted with a Warrant to purchase 1,334,000 additional
shares of Series D Preferred (the "Series D Warrant"), and a related Series B
Warrant was substituted with a Warrant to purchase 400,000 of additional shares
of the Series E Preferred (the "Series E Warrant").

The Series C, D and E Preferred have voting rights equal to the number of
Common shares into which they are convertible, require a dividend of 8% per year
based upon their respective liquidation value when and if declared by the
Company, and are convertible into Common stock, at

F-14
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

8. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)

an initial conversion rate of one share of Common stock for each share of
Preferred. Conversion rates are subject to adjustment based upon certain events,
as defined. Upon conversion of the Series C, D and E Preferred stock, if certain
minimum return requirements, as defined, have not been met, the holders of the
Series C, D and E Preferred are entitled to receive a dividend equal to that
which would have been received upon liquidation. Simultaneously with the
conversion of Series C Preferred into Common stock, each Series C shareholder
shall receive one share of Series F Redeemable Preferred stock (Series F
Preferred) if certain minimum return requirements, as defined, have not been
met. The Series F Preferred have no voting rights and upon their issuance date
require a dividend of 8% per year based on their liquidation value or upon
redemption. The Series F Preferred will have an assigned liquidation value of
$4.2 million (if all Series C Preferred shares are converted).

Prior to the sale of the Series C Preferred, the Company entered into two
agreements with a Preferred shareholder which provided bridge financing of
$500,000, in aggregate. The loan bore interest of 8.75% and was repaid out of
the proceeds of the sale of the Series C Preferred.

The components of Preferred stock are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Series C Convertible Preferred stock, no par value,
2,366,947 shares authorized, issued and
outstanding (liquidation value of $6,685,467 and
$6,819,176 at December 31, 1999 and March 31,
2000, respectively)............................... $ 5,952,009 $ 5,952,009 $ 5,952,009
Series D Convertible Preferred stock, no par value,
2,328,000 shares authorized, 994,000 shares issued
and outstanding (liquidation value of $2,163,103
and $2,206,365 at December 31, 1999 and March 31,
2000, respectively)............................... 1,923,026 1,923,026 1,923,026
Series E Convertible Preferred stock, no par value,
2,058,004 shares authorized, 1,658,004 shares
issued and outstanding (liquidation value of
$4,487,664 and $4,577,417 at December 31, 1999 and
March 31, 2000, respectively)..................... 4,134,665 4,134,665 4,134,665
Series F Redeemable Preferred stock, no par value,
2,366,947 shares authorized, none issued or
outstanding (liquidation value of $0 at
December 31, 1999 and March 31, 2000)............. -- -- --
----------- ----------- -----------
$12,009,700 $12,009,700 $12,009,700
=========== =========== ===========
</TABLE>

F-15
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

8. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
EQUITY COMPENSATION PLANS

The Company's 1995 Equity Compensation Plan (the "Plan") permits the
granting of incentive stock options, nonqualified stock options, stock
appreciation rights and restricted stock. The Company has authorized the
issuance of up to 2,065,038 shares of Common stock to satisfy grants under the
Plan. At March 31, 2000, there were 897,501 shares reserved under the Plan
available for grant. A committee of the Board of Directors (the "Committee")
administers the Plan and determines the terms of the grants.

Stock options issued under the Plan generally vest over a four-year period,
25% on each anniversary date. The exercise period is determined by the
Committee, but may not exceed ten years from the date of grant. Each option
entitles the holder to purchase one share of common stock at the indicated
exercise price.

In December 1998, the Company adopted the 1998 Time Accelerated Restricted
Stock Option Plan (the "Accelerated Plan"). The Accelerated Plan provides for
the granting of non-qualified stock options to officers, senior management and
employee directors of the Company. The aggregate number of shares of Common
stock the Company may issue under the Accelerated Plan is 483,594 shares. At
March 31, 2000 there were 48,359 shares reserved under the Accelerated Plan
available for grant.

The Company accounts for all plans under APB Opinion No. 25, under which
compensation expense is recognized based on the amount by which the fair value
of the underlying common stock exceeds the exercise price of the stock options
on the measurement date. For financial reporting purposes, the Company has
determined that the deemed fair market value on the measurement date for certain
stock options was in excess of the exercise price. This amount has been recorded
as deferred compensation and is being amortized over the vesting period of the
applicable options which range between four and seven years. The Company
recorded deferred compensation of $5,624,839 and $120,683 during the year ended
December 31, 1999 and the three months ended March 31, 2000, respectively. The
Company recognized $232,517 and $339,024 of compensation expense related to
options for the year ended December 31, 1999 and the three months ended
March 31, 2000, respectively.

Had compensation expense for all options issued been determined consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
loss, basic EPS and diluted EPS would have been equal to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss applicable to common As reported
shareholders.................... $(4,296,133) $(4,616,783) $(4,071,481)
Pro forma (4,309,281) (4,657,486) (4,219,036)
Basic and Diluted EPS............. As reported (1.27) (1.36) (1.20)
Pro forma (1.27) (1.37) (1.25)
</TABLE>

F-16
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

8. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)

The weighted average fair value of options granted under the 1995
Compensation Equity Plan was $0.72, $0.77 and $3.96 in 1997, 1998 and 1999,
respectively. The weighted average fair value of options granted under the 1998
Time Accelerated Restricted Stock Option Plan was $1.66 and $7.19 in 1998 and
1999, respectively. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
1995 Compensation Equity Plan:
Expected dividend rate.................................... -- -- --
Expected volatility....................................... 70% 70% 70%
Weighted average risk-free interest rate.................. 6.17% 5.45% 5.67%
Expected lives (years).................................... 4 4 4
1998 Restricted Stock Option Plan:
Expected dividend rate.................................... -- -- --
Expected volatility....................................... -- 60% 60%
Weighted average risk-free interest rate.................. -- 4.84% 5.84%
Expected lives (years).................................... -- 7 7
</TABLE>

F-17
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

8. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
The following table summarizes the option activity for both plans:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER EXERCISE AVERAGE
FOR OF PRICE AGGREGATE EXERCISE
GRANT SHARES PER SHARE PRICE PRICE
---------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.............. 488,000 126,000 $0.25- 1.25 $ 93,500 $ .74
Authorized............................ -- -- -- -- --
Granted............................... (163,400) 163,400 1.25 204,250 1.25
Forfeited/Canceled.................... 38,200 (38,200) 0.25- 1.25 (26,550) .70
---------- --------- ----------- ---------- -----
Balance, December 31, 1997.............. 362,800 251,200 0.25- 1.25 271,200 1.08
Authorized............................ 1,134,632 -- -- -- --
Granted............................... (472,635) 472,635 1.25- 2.60 895,227 1.89
Forfeited/Canceled.................... 12,800 (12,800) 0.25- 1.25 (10,800) .84
---------- --------- ----------- ---------- -----
Balance, December 31, 1998.............. 1,037,597 711,035 0.25- 2.60 1,155,627 1.63
Authorized............................ -- -- -- -- --
Granted............................... (1,108,150) 1,108,150 1.25- 2.59 2,814,164 2.54
Forfeited/Canceled.................... 216,413 (216,413) 0.25- 2.59 (291,017) 1.34
---------- --------- ----------- ---------- -----
Balance, December 31, 1999.............. 145,860 1,602,772 0.25- 2.60 3,678,774 2.30
Authorized (unaudited)................ 800,000 -- -- -- --
Granted (unaudited)................... (128,651) 128,651 2.59-16.00 1,886,433 14.66
Forfeited/Canceled (unaudited)........ 4,313 (4,313) 1.25- 2.59 (7,653) 1.77
---------- --------- ----------- ---------- -----
Balance, March 31, 2000 (unaudited)..... 821,522 1,727,110 $0.25-16.00 $5,557,554 $3.22
========== ========= =========== ========== =====
</TABLE>

The above table includes options granted during the three months ended
March 31, 2000 at an assumed initial public offering price of $16.00 per share.

As of December 31, 1999, the weighted average contractual life of all
options outstanding was 9.07 years, there were options to purchase 134,971
shares of Common stock vested at a weighted average exercise price of $1.04.

WARRANTS

The Series D Warrant has an exercise price of $2.01 per share and the
Series E Warrant has an exercise price of $2.50 per share. The warrants may be
exercised at any time after December 24, 2008 should the Company fail to redeem
the Series G Preferred. The warrants expire following the redemption of the
Series G Preferred.

9. EMPLOYEE BENEFIT PLAN:

The Company maintains a defined contribution 401(k) Savings Plan ("the
Plan"). Employees who have met certain eligibility requirements, as defined, may
contribute up to 15% of their pre-tax gross wages or salaries. Subject to
certain restrictions, the Plan provides for Company matching

F-18
<PAGE>
CARESCIENCE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)

9. EMPLOYEE BENEFIT PLAN: (CONTINUED)
contributions of 20% of the first 1% of employee contributions to the Plan,
which vest 33 1/3 per year over a three-year period. For the year ended
December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and
2000, the Company contributed $20,000, $21,000, $24,040, $5,471 and $17,822,
respectively, to the Plan.

10. RELATED-PARTY TRANSACTIONS:

MASTER DEVELOPMENT LICENSING AGREEMENT

The Company had a development and licensing agreement (the "Licensing
Agreement") with the Series D and E Preferred shareholder. The agreement
provided the Preferred shareholder a preferential right to enter into
arrangements with the Company, under which the Company will develop new products
for, and license them to the Preferred shareholder or its affiliates, as
defined, for a period of ten years. Under the terms of the Licensing Agreement,
the Company was reimbursed for development costs and received a monthly
licensing and maintenance fee, as defined in the agreement. The Company recorded
revenues of $544,000 and $441,311 under the Licensing Agreement in 1997 and
1998, respectively. In December 1998, the Licensing Agreement between the
Company and the Preferred shareholder was canceled.

F-19
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts:

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES WRITE-OFFS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999........................................... $31,844 $ 17,505 $ (19,595) $29,754
1998........................................... 40,110 136,929 (145,195) 31,844
1997........................................... 4,948 35,162 -- 40,110
</TABLE>

F-20
<PAGE>

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON STOCK MEANS THAT
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS
PROSPECTUS, EXCEPT THAT WE WILL UPDATE THIS PROSPECTUS WHEN REQUIRED BY LAW.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 6
Forward-Looking Statements......... 15
Use of Proceeds.................... 16
Dividend Policy.................... 16
Capitalization..................... 17
Dilution........................... 18
Selected Financial Data............ 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 20
Business........................... 27
Management......................... 47
Certain Transactions............... 56
Principal Shareholders............. 57
Description of Capital Stock....... 59
Shares Eligible for Future Sale.... 63
Underwriting....................... 65
Lawyers............................ 67
Experts............................ 67
Where You Can Find Additional
Information...................... 68
Index to Financial Statements...... F-1
</TABLE>

[LOGO]

4,000,000 SHARES
COMMON STOCK

DEUTSCHE BANC ALEX. BROWN

ROBERTSON STEPHENS

THOMAS WEISEL PARTNERS LLC

PROSPECTUS
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses (other than underwriting discounts and commissions and the
underwriter's non-accountable expense allowance) payable in connection with this
offering of the rights and the sale of the Common Stock offered hereby are as
follows:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 22,800
NASD filing fee............................................. 9,125
Nasdaq filing fee........................................... 95,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 250,000
Blue Sky fees and expenses (including legal fees)........... 30,000
Transfer agent and rights agent and registrar fees and
expenses.................................................. 20,000
Miscellaneous............................................... 223,075
----------
Total................................................... $1,200,000
==========
</TABLE>

All expenses are estimated except for the Securities and Exchange Commission
fee and the NASD fee.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Registrant's Amended and Restated Articles of Incorporation provide that
pursuant to and to the extent permitted by Pennsylvania law, the Registrant's
directors shall not be personally liable for monetary damages for breach of any
duty owed to the Registrant and its shareholders. This provision does not
eliminate the duty of care, and, in appropriate circumstances, equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under Pennsylvania law. In addition, each director will
continue to be subject to liability for breach of the director's duty of loyalty
to the Registrant, for acts or omissions not in good faith or involving knowing
violations of law, or for actions resulting in improper personal benefit to the
director. The provision also does not affect a director's responsibilities under
any other law, such as federal securities laws or state or federal environmental
laws. The Registrant's Amended and Restated Bylaws provide that the Registrant
shall indemnify its officers and directors to the fullest extent permitted by
Pennsylvania law, including some instances in which indemnification is otherwise
discretionary under Pennsylvania law. Pennsylvania law permits the Registrant to
provide similar indemnification to employees and agents who are not directors or
officers. The determination of whether an individual meets the applicable
standard of conduct may be made by the disinterested directors, independent
legal counsel or the shareholders. Pennsylvania law also permits indemnification
in connection with a proceeding brought by or in the right of the Registrant to
procure a judgment in its favor. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers, or
persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable.

In general, any officer or director of the Registrant shall be indemnified
by the Registrant against expenses including attorneys' fees, judgments, fines
and settlements actually and reasonably incurred by that person in connection
with a legal proceeding as a result of such relationship, whether or not the
indemnified liability arises from an action by or in the right of the
Registrant, if the officer or director acted in good faith, and in the manner
believed to be in or not

II-1
<PAGE>
opposed to the Registrant's best interest, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the conduct was
unlawful. Such indemnity is limited to the extent that (i) such person is not
otherwise indemnified and (ii) such indemnifications are not prohibited by
Pennsylvania law or any other applicable law.

Any indemnification under the previous paragraph (unless ordered by a court)
shall be made by the Registrant only as authorized in the specific case upon the
determination that indemnification of the director or officer is proper in the
circumstances because that person has met the applicable standard of conduct set
forth above. Such determination shall be made (i) by the Board of Directors by a
majority vote of a quorum of disinterested directors who are not parties to such
action or (ii) if such quorum is not obtainable or, even if obtainable, a quorum
of disinterested directors so directs, by independent legal counsel in a written
opinion. To the extent that a director or officer of the Registrant shall be
successful in prosecuting an indemnity claim, the reasonable expenses of any
such person and the fees and expenses of any special legal counsel engaged to
determine the possibility of indemnification shall be borne by the Registrant.

Expenses incurred by a director or officer of the Registrant in defending a
civil or criminal action, suit or proceeding shall be paid by the Registrant in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that person is not entitled to be
indemnified by the Registrant as authorized by our Bylaws.

The indemnification and advancement of expenses provided by, or granted
pursuant to Article 10 of our Bylaws is not deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled, both as to action in that person's official capacity and as to action
in another capacity while holding such office.

The Board of Directors has the power to authorize the Registrant to purchase
and maintain insurance on behalf of the Registrant and others to the extent that
power to do so has not been prohibited by Pennsylvania law, create any fund to
secure any of its indemnification obligations and give other indemnification to
the extent permitted by law. The obligations of the Registrant to indemnify a
director or officer under Article 10 of our Bylaws is a contract between the
Registrant and such director or officer and no modification or repeal of our
Bylaws shall detrimentally affect such officer or director with regard to that
person's acts or omissions prior to such amendment or repeal.

The Registrant has also purchased insurance for its directors and officers
for certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Registrant.

The Underwriting Agreement provides that the underwriter is obligated, under
certain circumstances, to indemnify directors, officers, and controlling persons
of the Registrant against certain liabilities, including liabilities under the
Act. Reference is made to Section 8 of the form of Underwriting Agreement which
is filed by amendment as Exhibit 1.1 hereto.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In the preceding three years, the Registrant has issued the following
securities that were not registered under the Act:

Since its inception, the Registrant has issued to employees and directors
options to purchase 1,727,110 shares issued pursuant to the Registrant's Equity
Compensation Plans. All of such sales were made under the exemption from
registration provided under Section 4(2) and Rule 701 of the Securities Act.

II-2
<PAGE>
All of the following shares were sold to qualified investors under the
Section 4(2) exemption from registration:

On December 23, 1998, the registrant sold to five accredited investors
2,366,947 shares of series C preferred stock at $2.61 per share for a total of
$6,175,000.

On December 23, 1998, the registrant issued 994,000 shares of series D
preferred stock at $2.01 per share for a total of $1,997,940 to Foundation
Health Systems in exchange for shares of series A preferred stock.

On December 23, 1998, the registrant issued 1,658,004 shares of series E
preferred stock at $2.50 per share for a total of $4,145,010 to Foundation
Health Systems in exchange for shares of series B preferred stock.

On December 23, 1998, the registrant issued warrants to Foundation Health
Systems to purchase 1,344,000 shares of series D preferred stock at $2.01 per
share and 400,000 warrants to purchase series E preferred stock at $2.50 per
share.

On December 23, 1998, the registrant issued 1,560,000 shares of series G
preferred stock at $2.74 per share for a total of $4,258,800 upon conversion of
two promissory notes.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS:

See Exhibit Index.

(B) FINANCIAL STATEMENT SCHEDULES

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

ITEM 17 UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes (1) to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser; (2) that for purposes
of determining any liability under the Act, the information omitted from the
form of prospectus filed as part of a registration statement in reliance upon
Rule 430(a) and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be
part of this registration statement as of the time it was declared effective;
and (3) that for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-3
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania, on
June 5, 2000.

<TABLE>
<S> <C> <C>
CARESCIENCE, INC.

By: /s/ DAVID J. BRAILER
-----------------------------------------
David J. Brailer
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
TITLE DATE
----- ----
<C> <S> <C>
/s/ DAVID J. BRAILER Chairman and Chief Executive
------------------------------------------- Officer (Principal Executive June 5, 2000
David J. Brailer Officer)

/s/ STEVEN BELL Chief Financial Officer
------------------------------------------- (Principal Financial and June 5, 2000
Steven Bell Accounting Officer)

/s/ RONALD A. PAULUS President and Director
------------------------------------------- June 5, 2000
Ronald A. Paulus

/s/ EDWARD N. ANTOIAN Director
------------------------------------------- June 5, 2000
Edward N. Antoian

/s/ C. MARTIN HARRIS Director
------------------------------------------- June 5, 2000
C. Martin Harris

/s/ JEFFREY R. JAY Director
------------------------------------------- June 5, 2000
Jeffrey R. Jay

/s/ WILLIAM WINKENWERDER Director
------------------------------------------- June 5, 2000
William Winkenwerder

/s/ STEVEN E. RODGERS Director
------------------------------------------- June 5, 2000
Steven E. Rodgers
</TABLE>

II-4
<PAGE>
EXHIBIT INDEX

(A) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.

3.1+ Articles of Incorporation of the Registrant (effective until
immediately prior to the closing of the offering).

3.2+ Bylaws of the Registrant (effective until immediately prior
to the closing of the offering).

3.3+ Amended and Restated Articles of Incorporation of the
Registrant (proposed to be effective immediately prior to
the closing of the offering).

3.4+ Amended and Restated Bylaws of the Registrant (proposed to
be effective upon closing of the offering).

5.1 Opinion of Morgan, Lewis & Bockius LLP.

10.1+ 1995 Equity Compensation Plan of the Registrant.

10.2+ 1998 Time Accelerated Restricted Stock Option Plan.

10.3* Restated License Agreement, dated April 1, 1995, by and
between the Trustees of the University of Pennsylvania and
the Registrant, as amended.

10.4+ Employment Agreement with David J. Brailer.

10.5+ Employment Agreement with Ronald A. Paulus.

10.6+ Employment Agreement with Steven Bell.

10.7+ Employment Agreement with Alfredo A. Czerwinski.

10.8 Employment Agreement with Gregory P. Hess.

10.9 Employment Agreement with J. Bryan Bushick.

10.10 Employment Agreement with Robb L. Tretter.

10.11 Employment Agreement with Thomas H. Zajac.

10.12 Registration Rights Agreement, dated December 23, 1998,
among the Registrant, J.H. Whitney III, L.P., Whitney
Strategic Partners III, L.P., Foundation Health Systems,
Inc., David J. Brailer, Ronald A. Paulus, Brent Milner, Zeke
Investment Partners and William Winkenwerder.

10.13 California HealthCare Foundation Consulting Agreement, dated
October 1, 1999, by the California HealthCare Foundation and
the Registrant.

23.1 Consent of Arthur Andersen LLP relating to the Registrant.

23.2 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit
5.1).

24.1+ Power of Attorney (included on signature page).

27.1+ Financial Data Schedule.
</TABLE>

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

+ Filed previously.

* We have requested confidential treatment of certain portions of this exhibit
pursuant to Rule 406 of the Securities Act of 1933, as amended. The entire
agreement has been filed separately with the Securities and Exchange
Commission.