APACHE MEDICAL SYSTEMS INC, 424B1, 1996-06-28

APACHE MEDICAL SYSTEMS INC
424B1, 1996-06-28
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1

PROSPECTUS

2,000,000 SHARES

APACHE LOGO

APACHE Medical Systems, Inc.
COMMON STOCK
------------------------------

All of the shares of common stock, $.01 par value per share (the "Common
Stock"), offered are being sold by APACHE Medical Systems, Inc. ("APACHE" or the
"Company").

Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation and trading on the Nasdaq National Market under the
symbol "AMSI," subject to notice of issuance.
------------------------------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $12.00 $.84 $11.16
Total(3)................................ $24,000,000 $1,680,000 $22,320,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting offering expenses payable by the Company, estimated to be
$750,000.

(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase an aggregate of up to 300,000
additional shares at the Price to Public less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional shares
are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $27,600,000, $1,932,000 and
$25,668,000, respectively. See "Underwriting."
------------------------------

The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York on or about July 3, 1996.
------------------------------

COWEN & COMPANY
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
June 28, 1996
<PAGE> 2

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

APACHE(R) is a registered trademark of APACHE Medical Systems, Inc. All
other trademarks and trade names referred to in this Prospectus are the property
of their respective owners.

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<PAGE> 3

DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER

The graphic is entitled "The APACHE Advantage." The text reads as
follows:

Our clinically validated methodologies have been utilized in
connection with more than 600 peer-reviewed articles (in New
England Journal of Medicine, JAMA, Annals of Internal Medicine,
Science and others).

Patient-specific data identifies and tracks patient health status
throughout the hospital stay. (accompanied by representative
graphic of patient status graph showing risk of death and active
treatment risk)

Concurrent, predictive clinical information supports physician
decisions regarding the most appropriate therapy at the
point-of-care. (accompanied by a bar chart depicting an APACHE
Complication Risk Analysis of Bypass Surgery (CABG) and
Angioplasty (PTCA))

APACHE products and services provide clinical and financial
information to clinicians and administrators, with ongoing
development throughout the continuum of care. (accompanied by
graphic illustrating the continuum of care)

High-risk, high-cost patient focus targets the greatest potential
cost savings. (accompanied by graphic illustrating cost savings
for various cost/risk levels)

GATEFOLD

The graphic is entitled "The APACHE Medical Cost Management Program"
and is a four step flow diagram. The text is as follows:

Step 1. Compare performance to Best Demonstrated Practices

APACHE systems measure a variety of healthcare outcomes, including
mortality, length of stay, complications and ventilator days, for
a broad range of disease groups. (accompanied by representative
graphics of utilization management review of ICU length of stay by
service and actual versus predicted risk-adjusted length of stay)

Step 2. Target high-risk, high-cost patients

APACHE systems identify cost savings opportunities for high-risk,
high-cost disease groups, such as the examples listed here.
<PAGE> 4

Acute Care -- Heart attack, Open heart surgery (CABG), Congestive
heart failure, Hysterectomy, Laminectomy, Pneumonia, Stroke,
Vascular surgery, Lower bowel resection
Treatment sites: Hospital

Critical Care -- Unstable angina, Gastrointestinal cancer, Acute
myocardial infarction (AMI), Drug overdose, Carotid
endarterectomy, Sepsis, Bacterial pneumonia, Rhythm disturbance,
Lung cancer, Peripheral vascular disease, Craniotomy for neoplasm
Treatment sites: Medical ICU, Surgical ICU, Neurological
ICU, Trauma ICU

Cardiovascular Care -- Open heart surgery (CABG), Valve surgery,
Angioplasty (PTCA), Cardiac catheterization
Treatment sites: CCU, CTICU, Cath Lab, CV Operating Room

Sub-Acute Care -- Ventilator dependent: Emphysema (COPD),
Congestive heart failure, Pneumonia
Treatment sites: Hospital or long-term care facility

Step 3. Develop severity-adjusted guidelines

A unique feature of these guidelines is the ability to adjust the
guidelines for the patient's level of severity. (accompanied by
graphics depicting a discharge criteria check sheet and a bar
chart of APACHE length of stay guidelines for varying severity
levels)

Step 4. Apply to individual patients

APACHE systems monitor health status (risk of mortality, length of
stay, treatment level) for individual patients and for an entire
unit at a glance. (accompanied by graphic depicting sample
computer screens produced by APACHE clinical decision support
systems)

INSIDE BACK COVER

The graphic is entitled "APACHE Integration." It depicts the
interfacing of admission, lab, billing, cost and clinical data information with
an Outcomes Repository and its utilization in APACHE EIS and point of care
tools. The page also depicts a representative graphic screen from an APACHE
EIS tool.

The accompanying text is as follows:

The APACHE EIS monitors the costs and quality of care. "Point and
click" Windows technology sorts the analysis by payer, physician,
service line, treatment level, risk range, or other category
specified by the user.
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Except as otherwise specified, the information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option
and has been adjusted for a 1-for-2.86 reverse split of the Common Stock to be
effected prior to the consummation of this offering, and for: (i) the conversion
of all outstanding shares of preferred stock into 3,294,519 shares of Common
Stock; (ii) conversion of $1,000,000 of convertible debt into 122,257 shares of
Common Stock; and (iii) payment of $939,940 of accumulated preferred stock
dividends by the issuance of 78,331 shares of Common Stock, all to be effected
upon the assumed consummation date of this offering, July 3, 1996 (collectively,
the "Recapitalization Transactions"). See "Description of Capital Stock,"
"Underwriting" and Notes 4, 8 and 12 of Notes to Consolidated Financial
Statements.

THE COMPANY

APACHE provides clinically-based decision support information systems to
the healthcare industry. The Company believes that it is the only healthcare
information company that can provide hospitals and physicians with
patient-specific, concurrent and predictive outcomes information at the point of
care that can be used to assist them in making clinical and resource utilization
decisions. APACHE's products and services address the information needs of both
clinicians and healthcare administrators by enabling joint access to clinical
and cost information, which facilitates both the containment of costs and the
delivery of high-quality care. APACHE's products and services are focused on
high-risk, high-cost patients, such as cardiovascular care and critical care
patients, who typically account for a disproportionately large share of hospital
costs.

APACHE addresses the healthcare industry's need for sophisticated
outcomes-based clinical decision support information systems. The Company's
systems provide clinicians with information to assist them in making individual
patient care decisions, based on concurrent information about the patient's
health status and a severity-adjusted analysis of the outcomes of similar
patients in the Company's databases. The Company's products also enable
healthcare providers to analyze patient outcomes, physician performance and
hospital unit resource utilization in comparison to similar hospital, regional
and national norms. These analyses can be used to develop care guidelines and
allocate resources to reduce the cost of healthcare.

APACHE offers healthcare providers and suppliers a comprehensive line of
outcomes-based products and services, encompassing software, hardware, and
related consulting services. APACHE's products and services are differentiated
from other healthcare decision support products by: (i) using detailed clinical
data in addition to administrative or cost data; (ii) utilizing
patient-specific, severity-adjusted data; (iii) providing concurrent, predictive
outcomes information as well as comparative historical information; (iv)
providing patient information to the physician across the continuum of care; and
(v) focusing on high-risk, high-cost patients. The Company's products and
services are based on its clinical outcomes methodologies and its proprietary
databases, which contain clinical data on over 550,000 patients.

APACHE's principal product, the Medical Cost Management Program ("MCMP"),
is an integrated decision support system that provides point-of-care,
severity-adjusted clinical and financial information to physicians and
healthcare administrators. The Company also offers Benchmark Studies to compare
a customer's clinical and financial outcomes to industry norms on a
severity-adjusted basis. Other products and services include the Outcomes
Repository, the Enterprise Information System, Consulting Studies and Supplier
Studies. APACHE's products and services currently include coverage of patients
in the following categories: cardiovascular care, critical care, acute care and
long-term acute ("sub-acute") care.

The Company's objective is to become the leading provider of clinical
outcomes data and decision support systems to healthcare providers, suppliers
and payers. APACHE intends to achieve this objective by implementing its
strategy of: (i) leveraging its existing provider customer base; (ii) expanding
its market share in the provider and supplier markets and entering the payer
market; (iii) adding methodologies, databases, products and services; and (iv)
continuing to develop relationships with key industry participants. These
strategies have recently led to an agreement with an affiliate of Premier Inc.
pursuant to which the Company is designated as Premier Inc.'s exclusive supplier
of clinically-based outcomes data systems for high-risk, high-cost patients to
the approximately 1,800 Premier hospitals.

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<PAGE> 6

THE OFFERING

Common Stock offered hereby... 2,000,000 shares(1)

Common Stock to be outstanding
after the offering.......... 6,571,353 shares(1)(2)

Use of proceeds............... For working capital and general corporate
purposes, including paying certain accumulated
preferred stock dividends, funding expansion of
the Company's sales and marketing activities,
developing or acquiring additional
methodologies and databases, or acquiring
complementary businesses, products or
technologies. See "Use of Proceeds."

Nasdaq National Market
symbol........................ AMSI

SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue...................... $1,635 $ 1,974 $ 3,841 $ 5,317 $ 7,024 $ 1,259 $1,659
Expenses:
Cost of operations........ 767 1,457 2,152 3,700 2,866 733 753
Research and
development............. 393 667 1,017 1,813 1,919 578 364
Selling, general and
administrative.......... 1,079 1,810 2,976 6,030 5,631 1,577 1,445
------ ------- ------- ------- ------- ------- ------
Total expenses.......... 2,239 3,934 6,145 11,543 10,416 2,888 2,562
------ ------- ------- ------- ------- ------- ------
Loss from operations......... (604) (1,960) (2,304) (6,226) (3,392) (1,629) (903)
Other income (expense)....... 22 (71) (80) 34 (416) (20) (48)
------ ------- ------- ------- ------- ------- ------
Net loss..................... $ (582) $(2,031) $(2,384) $(6,192) $(3,808) $(1,649) $ (951)
====== ======= ======= ======= ======= ======= ======
Pro forma net loss per
share(3).................. $ (0.79) $(0.19)
======= ======
Pro forma weighted average
number of shares
outstanding(3)............ 4,611,389 4,628,029
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 2,627 $ 23,375
Working capital.................................................... 763 21,512
Total assets....................................................... 7,086 27,834
Long-term obligations, less current maturities..................... 1,114 271
Redeemable convertible preferred stock............................. 21,029 --
Stockholders' equity (deficit)..................................... (19,597) 23,023
</TABLE>

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

(1) Assumes a closing date of July 3, 1996 and that the Underwriters'
over-allotment option for up to 300,000 shares of Common Stock is not
exercised. See "Underwriting."

(2) Does not include 1,416,286 shares reserved for issuance upon the exercise of
currently outstanding options and warrants, exercisable at a weighted
average exercise price of $4.18 per share. See "Management -- Employee
Benefit Plans" and "Description of Capital Stock."

(3) See Note 2 of Notes to Consolidated Financial Statements.

(4) Gives effect to: (i) the sale of 2,000,000 shares of Common Stock offered
hereby at the initial offering price of $12.00 per share and the application
of the net proceeds therefrom, after deducting the underwriting discounts
and commissions and estimated offering expenses as discussed under "Use of
Proceeds;" and (ii) the Recapitalization Transactions as if they occurred on
March 31, 1996. See Notes 4, 8 and 12 of Notes to Consolidated Financial
Statements and "Use of Proceeds."

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<PAGE> 7

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information in
this Prospectus, should be carefully considered in evaluating the Company and
its business before purchasing shares of Common Stock offered hereby.

HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT; EXPECTED LOSSES;
UNCERTAINTY OF FUTURE PROFITABILITY

The Company has never recorded an operating profit and had an accumulated
deficit of approximately $18.9 million as of March 31, 1996. The Company expects
to continue to record losses for at least the next five quarters. The ability of
the Company to achieve profitability in the future largely depends on its
ability to generate revenues from its products and services. In view of the
Company's operating history, there can be no assurance that the Company will be
able to generate revenue that is sufficient to achieve profitability, to
maintain profitability on a quarterly or annual basis or to sustain or increase
its revenue growth in future periods. The Company's limited capitalization may
adversely affect the ability of the Company to raise additional capital in the
future and could impair the Company's ability to invest in research and
development, sales and marketing programs and other operations, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations and on the price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary from quarter to quarter in the
future. Quarterly revenues and operating results may fluctuate as a result of a
variety of factors, including: the Company's relatively long sales cycle;
variable customer demand for its products and services; changes in the Company's
product mix and the timing and relative prices of product sales; the loss of
customers due to consolidation in the healthcare industry; changes in customer
budgets; investments by the Company in marketing or other corporate resources;
acquisitions of other companies or assets; the timing of new product
introductions and enhancements by the Company and its competitors; changes in
distribution channels; sales and marketing promotional activities and trade
shows; and general economic conditions. Further, due to the relatively fixed
nature of most of the Company's costs, which primarily include personnel as well
as facilities costs, any unanticipated shortfall in revenue in any fiscal
quarter would have an adverse effect on the Company's results of operations in
that quarter. Accordingly, the Company's operating results for any particular
quarterly period may not be indicative of results for future periods. Although
the Company has not historically experienced any material seasonality in its
operating results, the Company could experience such seasonality in the future,
which could cause fluctuations in the Company's quarterly results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."

UNCERTAINTY OF MARKET ACCEPTANCE

The Company's future success and financial performance will depend in large
part on its ability to successfully market its products and services. To date,
the Company's healthcare provider customers include over 500 of the
approximately 5,200 community hospitals in the United States. Healthcare
providers comprise most of the Company's customers to date. The Company only
recently began to target sales to healthcare suppliers and has not yet completed
any sales to healthcare payers. There can be no assurance that the Company will
be able to achieve more extensive penetration of its target markets. The failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations and on the price of the Common
Stock.

The Company's future success and financial performance will also depend on
its ability to meet the increasingly sophisticated needs of its customers
through the timely development and successful introduction of new and enhanced
versions of its products and services. The Company believes that significant
continuing product development efforts will be required to sustain the Company's
growth and that such efforts have inherent risks. The Company is currently
expanding its products and services to include additional high-risk,

5
<PAGE> 8

high-cost disease categories and to broaden coverage across the continuum of
care. There can be no assurance that the Company will be successful in entering
new markets or in developing and marketing new or enhanced products and
services, or that it will not experience significant delays in the introduction
of new products and services. In addition, there can be no assurance that new or
enhanced products or services developed by the Company will meet the
requirements of healthcare providers, suppliers or payers and achieve market
acceptance. The failure to enter new markets successfully, to develop new
products or to achieve market acceptance for new products could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock. See "Business -- The APACHE
Solution," "-- The APACHE Strategy," "-- APACHE Products and Services."

STATE AND FEDERAL GOVERNMENT REGULATION

The confidentiality of patient records and the circumstances under which
such records may be released is subject to substantial regulation by state and
federal governments. These state and federal laws and regulations govern both
the disclosure and use of confidential patient medical record information. To
protect patient confidentiality, data entries to APACHE's databases omit any
patient identifiers, including name, address, hospital and physician. The
Company believes that its procedures comply with the laws and regulations
regarding the collection of patient data in substantially all jurisdictions, but
regulations governing patient confidentiality rights are evolving rapidly and
are often unclear and difficult to apply in the rapidly restructuring healthcare
market. Additional legislation governing the dissemination of medical record
information is continually being proposed at both the state and federal level.
This legislation may require holders or users of such information to implement
security measures that may result in substantial cost to the Company. There can
be no assurance that changes to state or federal laws will not materially
restrict the ability of the Company to obtain or disseminate patient
information. The inability to obtain or disseminate patient information could
have a material adverse effect on the Company's business, financial condition
and results of operations and on the price of the Common Stock.

Certain products, including software applications, intended for use in the
diagnosis of disease or other conditions, or in the cure, treatment, mitigation
or prevention of disease, are subject to regulation by the United States Food
and Drug Administration (the "FDA") as medical devices. The laws administered by
the FDA impose substantial regulatory controls over the manufacturing, labeling,
testing, distribution, sale, marketing and promotion of medical devices and
other related activities. These regulatory controls can include compliance with
the following requirements: manufacturer establishment registration and device
listing; current good manufacturing practices; completion of premarket
notification or premarket approval; medical device adverse event reporting; and
general controls prohibiting misbranding and adulteration. Violations of the
laws concerning medical devices can result in severe criminal and civil
penalties and other sanctions. In its 1989 Policy for the Regulation of Computer
Products (the "1989 Policy Statement"), the FDA stated that it intended to issue
regulations exempting certain clinical decision support software products from a
number of regulatory controls, and that until those regulations were issued it
would not require manufacturers of such products to comply with requirements
other than the general controls. The Company believes that its products are not
medical devices and, thus, are not subject to the controls imposed on
manufacturers of such products. The Company further believes that to the extent
that its products were determined to be medical devices, the products would fall
within the exemptions for decision support systems provided by the 1989 Policy
Statement. The Company has not taken action to comply with the controls that
would otherwise apply if the Company's products were non-exempt medical devices.
The FDA has stated that it intends to revise its 1989 Policy Statement and that
it may eliminate some or all of the exemptions that it currently allows.
Accordingly, there can be no assurance that the FDA will not now or in the
future make determinations that the Company's current or future products are
medical devices subject to FDA regulations and are ineligible for the exemptions
from those regulations. If the FDA made such determinations, the Company would
not be able to market its products without obtaining FDA clearance of premarket
notifications, or FDA approval of premarket approval applications, submitted by
the Company. The regulatory process can be lengthy, expensive, and uncertain;
securing FDA clearances or approvals may require the submission of extensive
non-clinical and clinical safety and effectiveness data together with other
supporting information to the FDA; and there could be no assurance as to when if
ever the FDA clearances or approvals would be obtained. There can

6
<PAGE> 9

be no assurance that the Company's current or future products will qualify for
future exemptions, if any, nor can there be any assurance that any future
requirements will not have a material adverse effect on the Company's business,
financial condition, results of operations or on the price of the Common Stock.
See "Business -- Government Regulation."

In addition to legislation regarding patient records and potential FDA
regulation, state and federal lawmakers have proposed, and are likely to
continue to propose, a number of other legislative initiatives regulating
various aspects of the healthcare industry. The Company is unable to predict
what impact, if any, such legislation could have on the Company's business,
financial condition and results of operations or on the price of the Common
Stock.

INTEGRITY AND RELIABILITY OF METHODOLOGIES AND DATABASES

The Company's success is highly dependent on the integrity and reliability
of its methodologies and databases. The Company's methodologies have been
validated by a large number of academic researchers. The Company believes that
it takes adequate precautions to safeguard the completeness and consistency of
the data in its databases. Moreover, while the Company believes that the
information contained in its databases is representative of the clinical and
financial aspects of various types of hospitals and patients, there can be no
assurance that such information is appropriate for comparative analysis in all
cases or that the databases accurately reflect general or specific trends in the
healthcare industry. If the validity of the Company's methodologies were
challenged in the future or if the information contained in the databases were
found, or were perceived, to be inaccurate or unreliable, there could be a
material adverse effect on the Company's business, financial condition and
results of operations and on the price of the Common Stock. See "Business -- The
APACHE Solution."

RISK OF LIABILITY CLAIMS

Customer reliance on the Company's products and services could result in
exposure of the Company to liability claims if the Company's products fail to
perform as intended or if patient care decisions based in part on guidance from
the Company's products or services are challenged. Even unsuccessful claims
could result in the expenditure of funds in litigation, diversion of management
time and resources or damage to the Company's reputation and the marketability
of the Company's products and services. While the Company takes contractual
steps to obtain indemnification for certain liabilities and maintains general
commercial liability insurance, there can be no assurance that a successful
claim could not be made against the Company, that the amount of indemnification
payments or insurance would be adequate to cover the costs of defending against
or paying such a claim or that damages payable by the Company would not have a
material adverse effect on the Company's business, financial condition and
results of operations and on the price of the Common Stock.

TECHNOLOGICAL CHANGE

The healthcare information industry is relatively new and is experiencing
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. In addition, as the computer and
software industries continue to experience rapid technological change, the
Company must be able to quickly and successfully adapt its products so that they
continue to integrate well with the other computer platforms and software
employed by its customers. There can be no assurance that the Company will not
experience difficulties, including lack of necessary capital or expertise, that
could delay or prevent the successful development and introduction of product
enhancements or new products in response to technological changes. If the
Company is unable to respond to technological changes in a timely and cost-
effective manner, there could be a material adverse effect on the Company's
business, financial condition and results of operations and on the price of the
Common Stock. See "Business -- APACHE Products and Services."

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<PAGE> 10

HIGHLY COMPETITIVE INDUSTRY

The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical decision support products and services are the
quality and depth of the underlying clinical outcomes databases, the proprietary
nature of methodologies, databases and technical resources, the usefulness of
the data and reports generated by the software, customer service and support,
compatibility with the customer's existing information systems, potential for
product enhancement, vendor reputation, price and the effectiveness of sales and
marketing efforts.

The Company's competitors include other companies that collect and
distribute healthcare data, such as Impath Laboratories Inc., Mecon, Inc., HCIA
Inc., Summit Medical Systems, Inc., and Transition Systems Inc. Other companies
that provide healthcare information systems include Cerner Corporation, HBO &
Company, Shared Medical Systems Corporation and Phamis Inc. However, the
Company's products and services are differentiated from the products and
services offered by those competitors by virtue of the fact that the Company's
products and services, unlike competing products and services, focus primarily
on high-risk, high-cost patients and provide both concurrent and predictive
outcomes information. Moreover, the Company believes that there are no dominant
competitors to the Company in the field of healthcare information systems that
focus on high-risk, high-cost patients or that provide concurrent and predictive
outcomes information. Many of the Company's competitors and potential
competitors have greater financial, product development, technical and marketing
resources than the Company, and currently have, or may develop or acquire,
substantial installed customer bases in the healthcare industry. The Company
also faces significant competition from internal information services at
individual hospitals, large hospital alliances, for-profit hospital chains and
managed care companies, many of which have developed their own outcomes
databases. As the market for decision support systems develops, additional
competitors may enter the market and competition may intensify. While the
Company believes that it has successfully differentiated itself from
competitors, there can be no assurance that future competition would not have a
material adverse effect on the Company's business, financial condition and
results of operations or on the price of the Common Stock. See "Business --
Competition."

UNCERTAINTY AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY

The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. During the past several years, state and
federal government regulation of reimbursement rates and capital expenditures in
the United States healthcare industry has increased. Lawmakers continue to
propose programs to reform the United States healthcare system, which may
contain proposals to increase governmental involvement in healthcare, lower
Medicare and Medicaid reimbursement rates or otherwise change the operating
environment for the Company's customers. Healthcare industry participants may
react to these proposals by curtailing or deferring investments, including
investments in the Company's products. In addition, the healthcare industry has
experienced, and could continue to experience, consolidation as a result of
mergers and acquisitions of healthcare providers, suppliers and payers, which
typically puts additional pressure on the consolidated companies to reduce
expenses. The Company cannot predict what impact, if any, such factors would
have on its business, financial condition and results of operations or on the
price of the Common Stock.

In addition, many healthcare providers are consolidating to create larger
healthcare delivery enterprises with greater regional market power. Such
consolidation could erode the Company's existing customer base and reduce the
size of the Company's target market. In addition, the resulting enterprises
could have greater bargaining power, which could lead to price erosion affecting
the Company's products and services. The reduction in the size of the Company's
target market or the failure of the Company to maintain adequate price levels
could have a material adverse effect on the Company's business, financial
condition and results of operations or on the price of the Common Stock.

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<PAGE> 11

DEPENDENCE ON KEY PERSONNEL AND OTHERS

The success of the Company and of its business strategy is dependent in
large part on its key management and operating personnel, including its Chairman
and Chief Executive Officer, Gerald E. Bisbee, Jr., Ph.D., and its President and
Chief Operating Officer, Robert E. Ciri. The Company has entered into
confidentiality and noncompetition agreements with each of its executive
officers. The Company believes that its success in the future will also depend
upon its ability to attract and retain highly skilled technical, managerial and
marketing personnel. Such individuals are in high demand and are often subject
to competing offers. In particular, the Company's success will depend on its
ability to retain the services of its executive officers and to hire additional
management personnel as needed. As the Company's marketing efforts continue to
grow, the Company plans to reassign certain of its management employees from
administrative positions to management positions in marketing or client
relations, replacing them with newly hired personnel. For instance, the Company
is considering recruiting a new Chief Financial Officer, so that Brion D. Umidi,
who has served as the Vice President of Finance and Administration of the
Company since 1991, would be able to assume responsibility for management of the
Company's information systems business unit. The Company will also have an
ongoing need to expand the number of its management and support personnel. The
loss of the services of one or more members of management or key employees, or
the inability to hire additional personnel as needed, could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock. While the Company maintains a
key person life insurance policy on Dr. Bisbee, the amount of insurance may not
be sufficient to offset the impact of the Company's loss of the services of Dr.
Bisbee. See "Management."

William A. Knaus, M.D., a founder, a director and the Chief Scientific
Advisor of the Company, was instrumental in the creation of the APACHE critical
care methodology. Although the Company has obtained a perpetual license to this
methodology, there can be no assurance that a significant change in Dr. Knaus's
relationship with the Company would not have a material adverse effect on the
Company's business, financial condition and results of operations or on the
price of the Common Stock.

DEPENDENCE ON PROPRIETARY ASSETS

The Company has made significant investments in its methodologies,
databases and technology and relies on a combination of trade secret and
copyright laws, nondisclosure and other contractual provisions, and technical
measures to protect its proprietary rights. There can be no assurance that these
protections will be adequate or that the Company's competitors will not
independently develop methodologies, databases or technologies that are
substantially equivalent or superior to those of the Company. In addition, there
can be no assurance that the legal protections and precautions taken by the
Company will be adequate to prevent infringement or misappropriation of the
Company's proprietary assets.

Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that a license or similar agreement will be available on reasonable terms in the
event of an unfavorable ruling on any such claim. In addition, any such claim
may require the Company to incur substantial litigation expenses or subject the
Company to significant liabilities and could have a material adverse effect on
the Company's business, financial condition and results of operations and the
price of the Common Stock. See "Business -- Proprietary Rights."

The Company's ability to successfully maintain and expand its business
through the acquisition of rights to, and the refinement and development of, its
methodologies and databases is dependent, in large part, upon its contractual
relationships with academic researchers and physicians. There can be no
assurance that a disruption or severance of any one or more of these
relationships would not have a material adverse effect on the Company's
business, financial condition and results of operations or on the price of the
Common Stock. See "Business -- The APACHE Solution."

IDENTIFICATION AND INTEGRATION OF ACQUISITIONS

The Company may seek to expand its product line through the acquisition of
complementary businesses, products, methodologies, databases and technologies.
Acquisitions involve numerous risks, including

9
<PAGE> 12

difficulties in the assimilation of operations and products, the ability to
manage geographically remote units, the diversion of management's attention from
other business concerns, the risks of entering markets in which the Company has
either limited or no direct experience and the potential loss of key employees
of the acquired companies.

Identifying and pursuing acquisition opportunities, integrating acquired
products and businesses, and managing growth requires a significant amount of
management time and skill. The Company has limited experience in acquiring
businesses and there can be no assurance that the Company will be effective in
identifying and effecting attractive acquisitions or assimilating such
acquisitions in a timely fashion. Any delay or failure to successfully
assimilate such acquisitions could result in the expenditure of money and
increased demands on management's time and could have a material adverse effect
on the Company's business, financial condition and results of operations and on
the price of the Common Stock. In addition, acquisitions may involve the
expenditure of significant funds and/or the issuance of additional securities,
which may be dilutive to stockholders.

FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE CAPITAL WILL BE AVAILABLE

Since its inception, the Company has financed its operations through cash
provided by operations, the sale of equity and the issuance of debt instruments.
If the Company were unable to generate sufficient revenues to fund its
operations in the future, the Company may be required to raise additional funds
to meet its capital and operating requirements through public or private
financing, including equity financing. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, will require payment
of interest and may involve restrictive covenants that could impose limitations
on the operating flexibility of the Company. Adequate funds for the Company's
operations may not be available when needed and, if available, may not be on
terms attractive to the Company. The failure to obtain funding on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations and on the price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of substantial amounts of Common Stock in the public market after the
offering could adversely affect the prevailing market price for the Common Stock
and could impair the Company's future ability to raise capital through offerings
of its equity securities. In addition to the 2,000,000 shares offered hereby, a
total of 3,657,578 shares held by the directors, officers and other stockholders
of the Company will become available for sale in the public market 180 days
after the date of this Prospectus upon the expiration of certain agreements
entered into between the stockholders and the Underwriters, subject to the
provisions of Rule 144 of the Securities Act of 1933, as amended (the
"Securities Act"). In addition, the Company intends to file, as soon as
practicable after the expiration of such 180-day period, registration statements
under the Securities Act to register an aggregate of 1,770,000 shares of Common
Stock issued or reserved for issuance under the Company's employee benefit
plans. See "Management," "Shares Eligible for Future Sale" and "Underwriting."

After this offering and subject to the terms of the lock-up agreements, the
holders of approximately 4,517,833 shares of Common Stock, who will have the
right to acquire up to an aggregate of 942,870 additional shares of Common Stock
pursuant to the exercise of vested options and warrants, will be entitled to
certain rights to cause the Company to register the sale of such shares under
the Securities Act. In addition, the Company has undertaken to effect at least
one registration of Common Stock per year for the next four years for shares of
Common Stock held by stockholders with registration rights. By exercising their
registration rights, subject to certain limitations, such holders could cause a
large number of shares to be registered and become freely tradable without
restrictions under the Securities Act (except for those shares purchased in the
offering by affiliates of the Company) immediately upon the effectiveness of
such registration. Such sales may have an adverse effect on the market price for
the Common Stock and could impair the Company's ability to raise capital through
an offering of its equity securities. See "Recent Developments" and "Description
of Capital Stock -- Registration Rights."

10
<PAGE> 13

NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; SHARE PRICE VOLATILITY

There has been no prior public market for the Common Stock and there can be
no assurance that an active public market for the Common Stock will develop or
be sustained after the offering. The initial public offering price will be
determined by negotiations between representatives of the Company and the
representatives of the Underwriters (as defined in "Underwriting") and may not
be indicative of future market prices. See "Underwriting" for information
related to the method of determining the initial public offering price. The
trading price of the Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, changes in
earnings estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
healthcare or software and computer industries, developments or disputes
concerning copyrights or proprietary rights, regulatory developments and
economic or other factors. In addition, in recent years the stock market in
general, and the shares of healthcare and computer software companies in
particular, have experienced extreme price fluctuations. This volatility has had
a substantial effect on the market prices of securities issued by many companies
for reasons unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock. See "Underwriting."

EFFECT OF ANTI-TAKEOVER PROVISIONS

The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which prohibits the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date on which the person first becomes an "interested
stockholder," unless the business combination is approved in a prescribed
manner. The application of these provisions could have the effect of delaying or
preventing a change of control of the Company, which could adversely effect the
market price of the Company's Common Stock. See "Description of Capital Stock."

DILUTION; ABSENCE OF DIVIDENDS

Purchasers of shares of Common Stock in the offering will experience
immediate and substantial dilution of $8.59 per share in pro forma net tangible
book value per share. In addition, purchasers of shares of Common Stock in the
offering will incur additional dilution to the extent outstanding options and
warrants are exercised. See "Dilution." The Company has never declared or paid
any dividends on the Common Stock and does not anticipate paying any dividends
on the Common Stock in the foreseeable future. See "Dividend Policy."

11
<PAGE> 14

THE COMPANY

The Company was incorporated in Delaware in 1987 and maintains its
executive offices at 1650 Tysons Boulevard, McLean, Virginia 22102. The
Company's telephone number is (703) 847-1400. References in this Prospectus to
"APACHE" or the "Company" include APACHE Medical Systems, Inc. and its
wholly-owned subsidiary in the United Kingdom, Critical Audit, Ltd.

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of 2,000,000
shares of Common Stock offered hereby are estimated to be $21,570,000
($24,918,000 if the Underwriters' over-allotment option is exercised in full). A
portion of the net proceeds of the offering will be used to pay $909,464 of
accumulated dividends on the Company's preferred stock, assuming a consummation
date of July 3, 1996. The remainder of the net proceeds will be used for working
capital and general corporate purposes, including to fund expansion of the
Company's sales and marketing activities, to develop or acquire additional
methodologies and databases, or to acquire businesses, products or technologies
complementary to the Company's business. Although the Company regularly reviews
acquisition proposals involving complementary businesses, there are currently no
agreements or negotiations with respect to such acquisitions. Pending such use,
the Company intends to invest the net proceeds of this offering in
interest-bearing, investment-grade securities.

DIVIDEND POLICY

The Company has never declared or paid any dividends on its Common Stock
and does not anticipate paying dividends on its Common Stock in the foreseeable
future. The Company intends to retain any future earnings for use in the
operations, development and growth of its business.

12
<PAGE> 15

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996: (i) on an actual basis; (ii) on a pro forma basis to give effect
to the Recapitalization Transactions as if they occurred on March 31, 1996; and
(iii) on an as adjusted basis to reflect the receipt and application of the
estimated net proceeds from the sale of 2,000,000 shares of Common Stock
pursuant to this offering.

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, less current maturities............... $ 1,114 $ 271 $ 271
Redeemable convertible preferred stock....................... 21,029 -- --
Stockholders' equity (deficit):
Common stock, par value $.01 per share, 5,769,231 shares
authorized and 1,075,575 shares issued and outstanding,
actual; 30,000,000 shares authorized pro forma and as
adjusted; 4,553,467 shares issued and outstanding pro
forma; and 6,553,467 shares issued and outstanding as
adjusted(1)............................................. 11 46 66
Additional paid in capital................................. 1,364 20,266 41,816
Cumulative dividends and accreted issue costs on redeemable
preferred stock......................................... (2,113) -- --
Accumulated deficit........................................ (18,859) (18,859) (18,859)
-------- --------- ---------
Total stockholders' equity (deficit).................... (19,597) 1,453 23,023
-------- --------- ---------
Total capitalization.................................. $ 2,546 $ 1,724 $ 23,294
======== ========= =========
</TABLE>

- ------------------------------
(1) Does not include 1,409,645 shares reserved for issuance upon the exercise of
options and warrants outstanding as of March 31, 1996, exercisable at a
weighted average exercise price of $4.07 per share. See "Management --
Employee Benefit Plans" and "Description of Capital Stock."

13
<PAGE> 16

DILUTION

The net tangible book value of the Common Stock as of March 31, 1996 (on a
pro forma basis to give effect to the Recapitalization Transactions as if they
occurred on March 31, 1996) was $763,554, or $0.17 per share. Pro forma net
tangible book value per share represents the amount of the Company's total pro
forma tangible assets, less total pro forma liabilities, divided by 4,553,467
shares of pro forma Common Stock. See Note 2 of Notes to Consolidated Financial
Statements.

Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the offering made hereby and the as adjusted net tangible book value
per share of Common Stock immediately after completion of the offering. After
giving effect to the sale of 2,000,000 shares of Common Stock in this offering
at the initial public offering price of $12.00 per share and the receipt of the
estimated net proceeds therefrom, the as adjusted net tangible book value of the
Company as of March 31, 1996 would have been $22,333,554, or $3.41 per share.
This represents an immediate increase in pro forma net tangible book value of
$3.24 per share to existing stockholders and immediate dilution in pro forma net
tangible book value of $8.59 per share to purchasers of Common Stock in the
offering, as illustrated in the following table:

<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $12.00
Pro forma net tangible book value per share as of March 31, 1996........... $0.17
Increase per share attributable to new investors........................... 3.24
-----
As adjusted net tangible book value per share after the offering............. 3.41
------
Pro forma net tangible book value dilution per share to new investors........ $ 8.59
======
</TABLE>

The following table sets forth the pro forma number of shares of Common
Stock purchased from the Company, the total pro forma consideration paid and the
average price per share paid by existing stockholders and to be paid (at the
initial offering price of $12.00 per share) by purchasers of shares offered
hereby (before deducting the underwriting discounts and commissions and
estimated expenses payable by the Company).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.............. 4,553,467 69.5% $20,312,231 45.8% $ 4.46
New Investors...................... 2,000,000 30.5 24,000,000 54.2 $ 12.00
--------- ----- ----------- -----
Total......................... 6,553,467 100.0% $44,312,231 100.0%
========= ===== =========== =====
</TABLE>

The foregoing excludes 1,700,000 shares of Common Stock reserved for
issuance under the APACHE Medical Systems, Inc. Employee Stock Option Plan (the
"Stock Option Plan")(under which options for 866,705 shares at a weighted
average exercise price of $4.61 per share are outstanding), 70,000 shares of
Common Stock reserved for issuance under the APACHE Medical Systems, Inc.
Non-Employee Director Option Plan (the "Director Option Plan"), 65,735
outstanding options issued outside of the Stock Option Plan and the Director
Option Plan at a weighted average exercise price of $4.29 per share and 477,205
shares of Common Stock issuable upon the exercise of outstanding warrants at a
weighted average exercise price of $3.04 per share. To the extent such options
and warrants are exercised, there will be future dilution to investors in this
offering. See "Management -- Employee Benefit Plans" and "Description of Capital
Stock -- Warrants."

14
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statement of operations data presented below for each of
the years in the four-year period ended December 31, 1995, and the consolidated
balance sheet data as of the end of each of the years in the four-year period
ended December 31, 1995, are derived from the Company's consolidated financial
statements which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated statement of operations data for
the year ended December 31, 1991, and the consolidated balance sheet data as of
December 31, 1991, are derived from the Company's internal financial statements
which, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to reflect the financial position and
results of operations for the period presented. The consolidated financial data
as of March 31, 1996, and for the three months ended March 31, 1995 and 1996,
are derived from the unaudited consolidated financial statements of the Company
included elsewhere in this Prospectus, which have been prepared on a basis
consistent with the audited consolidated financial statements and, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position and
results of operations for the periods presented. The results of operations for
the three months ended March 31, 1996 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31,
1996. The data set forth below should be read in conjunction with the Company's
consolidated financial statements, related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Systems........................ $1,237 $ 827 $ 2,004 $ 3,587 $ 4,096 $ 700 $1,242
Support........................ 52 277 486 836 1,352 318 330
Professional services.......... 346 870 1,351 894 1,576 241 87
------ ------- ------- ------- --------- ------- ---------
Total revenue............. 1,635 1,974 3,841 5,317 7,024 1,259 1,659
Expenses:
Cost of operations............. 767 1,457 2,152 3,700 2,866 733 753
Research and development....... 393 667 1,017 1,813 1,919 578 364
Selling, general and
administrative............... 1,079 1,810 2,976 6,030 5,631 1,577 1,445
------ ------- ------- ------- --------- ------- ---------
Total expenses............ 2,239 3,934 6,145 11,543 10,416 2,888 2,562
------ ------- ------- ------- --------- ------- ---------
Loss from operations.............. (604) (1,960) (2,304) (6,226) (3,392) (1,629) (903)
Other income (expense):
Interest income................ 16 65 67 94 62 19 58
Interest expense............... -- (106) (102) (69) (483) (39) (106)
Other.......................... 6 (30) (45) 9 5 -- --
------ ------- ------- ------- --------- ------- ---------
Net loss.......................... $ (582) $(2,031) $(2,384) $(6,192) $(3,808) $(1,649) $ (951)
====== ======= ======= ======= ========= ======= =========
Pro forma net loss per share...... $(0.79) $(0.19)
========= =========
Pro forma weighted average number
of shares outstanding.......... 4,611,389 4,628,029
</TABLE>

<TABLE>
<CAPTION>
MARCH
DECEMBER 31, 31,
------------------------------------------------- --------
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 164 $ 3,342 $ 567 $ 209 $ 4,036 $ 2,627
Working capital (deficiency)............. (353) 3,271 (352) (1,896) 1,518 763
Total assets............................. 632 4,301 2,455 4,245 7,909 7,086
Long-term obligations, less current
maturities............................ 1,159 1,013 813 549 1,079 1,114
Redeemable convertible preferred stock... 2,000 7,944 8,124 14,515 20,732 21,029
Total stockholders' equity (deficit)..... (3,341) (5,290) (7,865) (14,399) (18,312) (19,597)
</TABLE>

15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company was incorporated in 1987 for the purpose of developing and
marketing clinically-based decision support products and services incorporating
the APACHE methodologies. The Company introduced its Medical Cost Management
Program in 1992 as an integrated decision support system that provides
physicians and healthcare administrators point-of-care, severity-adjusted
clinical and financial information on critical care patients. Early market
feedback indicated the need to extend the scope of the Company's product
offerings to include non-critical care patients and to develop a product
strategy that would provide for both group and patient-specific knowledge across
the continuum of care, incorporating clinical, administrative and financial
information. In 1995, the Company added acute care coverage to its line of
products and services, including an acute care module for the MCMP. In the first
quarter of 1996, APACHE announced the addition of cardiovascular care coverage.
Since 1993, APACHE has supported various suppliers to the healthcare marketplace
in their efforts to provide high-quality effective products and services to
healthcare providers. Recently, the professional services business unit was
expanded to provide similar services to healthcare providers, which represents
an extension of their traditional information system-based relationship with
APACHE.

The Company's revenue results primarily from: (i) licensing and sales of
information systems; (ii) support fees; and (iii) professional services
consulting. Systems revenue is derived mainly from the licensing and sale of
information system products and related implementation services to individual
hospitals, provider groups, integrated health services providers and long-term
sub-acute care facilities. The MCMP incorporates system integration,
installation, training, project management and program related consulting as
well as software licenses, necessary hardware and post-implementation customer
support services. Revenue derived from the sale of hardware does not constitute
a significant portion of systems revenue. For example, in 1995, hardware sales
comprised less than 20% of the total sales of MCMP systems and had a gross
margin of approximately 15%. The Company's support revenue is derived mainly
from annual client service or maintenance fees for the MCMP. Professional
services revenue relates primarily to value-added, database-driven consulting
services provided to pharmaceutical, biotechnology and other suppliers as well
as to provider clients. Professional services revenue has varied significantly
from period to period because to date the Company has generally made such
services available in response to specific customer requests rather than as part
of a concerted marketing effort. The Company's total revenue grew by
approximately 83% from 1993 to 1995. The Company's quarterly revenues and
operating results have varied significantly in the past and are likely to vary
significantly in the future.

The Company's cost structure includes the direct cost of operations,
research and development costs and selling, general and administrative expenses.
Cost of operations includes the cost of hardware and software sold, amortization
of capitalized software development costs and direct staffing and other costs
required to deliver the Company's products and services. The Company
historically has not identified cost of operations by its primary revenue
sources and, accordingly, is unable to develop historical gross margins, or
reliable estimates thereof, by revenue source. The Company is currently
implementing a process to identify such costs for future periods, and intends to
report gross margin by revenue source beginning with the three-month period
ending June 30, 1996. Research and development costs include the employee
related costs associated with the development and refinement of the Company's
products and services. Selling, general and administrative expenses include all
selling, marketing, accounting, facilities, human resources, legal and corporate
expenses. These costs have varied significantly due to the timing of investments
made in the Company's infrastructure, facilities and core staffing.

16
<PAGE> 19

maintain its profitability on a quarterly or annual basis or to sustain or
increase its revenue growth in future periods. The Company's limited
capitalization may adversely affect the ability of the Company to raise
additional capital in the future and could impair the Company's ability to
invest in research and development, sales and marketing programs and other
operations.

There are a number of current proposals to revise existing, or to adopt
new, state and federal government statutes, regulations and policies affecting
various aspects of the healthcare industry. These proposals, if adopted, could
affect the business, financial condition and results of operations of the
Company. However, given the number of proposals, the fact that many of them
conflict with one another and the overall state of uncertainty in this area, the
Company is unable to estimate the extent of the impact, if any, that would
result from the adoption of one or more of these proposals.

RESULTS OF OPERATIONS

The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Systems....................................... 52 % 67% 58 % 56% 75 %
Support....................................... 13 16 19 25 20
Professional services......................... 35 17 23 19 5
--- ---- --- ----- ----
Total revenue......................... 100 100 100 100 100
Expenses:
Cost of operations............................ 56 70 41 58 45
Research and development...................... 26 34 27 46 22
Selling, general and administrative........... 78 113 80 125 87
--- ---- --- ----- ----
Total expenses........................ 160 217 148 229 154
--- ---- --- ----- ----
Loss from operations............................ (60 ) (117) (48 ) (129) (54 )
Interest income............................... 2 2 1 1 3
Interest expense.............................. (3 ) (1) (7 ) (3) (6 )
Other......................................... (1 ) -- -- -- --
--- ---- --- ----- ----
Net loss........................................ (62 )% (116)% (54 )% (131)% (57 )%
=== ==== === ===== ====
</TABLE>

Three Months Ended March 31, 1996 and 1995

Revenue. Revenue for the three months ended March 31, 1996 increased 32% to
$1.7 million from $1.3 million in the prior year period. Systems revenue for the
three months ended March 31, 1996 increased 77% to $1.2 million from $700,000 in
the prior year period and accounted for all of the revenue growth. This increase
was due primarily to the increase in unit sales of the Company's MCMP product in
addition to the introduction and sale of new MCMP component products. Support
revenue for the three months ended March 31, 1996 increased 4% to $330,000 from
$318,000 in the prior year period due to an increase in the MCMP installed base
of clients. Professional service revenue for the three months ended March 31,
1996 decreased 64% to $87,000 from $242,000 in the prior year period. This
change is primarily related to variability in the timing of performance under
new and existing consulting contracts.

Cost of Operations. Cost of operations for the three months ended March 31,
1996 increased 3% to $753,000 from $733,000 in the prior year period, due
primarily to the increase of $53,000 in amortization expense of capitalized
software development costs. No amortization was recorded in the comparable prior
year period as the related products were not ready for sale. Cost of operations
for the three months ended March 31, 1996 decreased to 45% of revenue from 58%
in the prior year period, due to the increase in revenue for the period.

17
<PAGE> 20

Research and Development. Research and development expenses for the period
ended March 31, 1996 decreased 37% to $364,000 from $578,000 in the prior year
period, due primarily to a decrease in subcontracting costs for development
related activities. During the three months ended March 31, 1996, $42,000 of
product development activity was capitalized, compared to $68,000 in the prior
year period. Research and development expenses for the three months ended March
31, 1996 decreased to 22% of revenue from 46% in the prior year period,
primarily due to the increase in revenue.

Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 1996 decreased 8% to $1.4 million
from $1.6 million in the prior year period, due to a decrease in staffing and
related overhead costs and the implementation of cost controls. Selling, general
and administrative expenses for the three months ended March 31, 1996 decreased
to 87% of revenue from 125% for the prior year period due primarily to the
increase in revenue and the relative fixed nature of these costs.

Other Income (Expense). Other income (expense) decreased from ($20,000) in
the three months ended March 31, 1995 to ($48,000) for the three months ended
March 31, 1996. The decrease is attributable to the increase in non-cash imputed
interest expense resulting from the issuance of convertible debt, which was
partially offset by an increase in earnings from the Company's average cash and
cash equivalents balance.

Years Ended December 31, 1995 and 1994

Revenue. Revenue in 1995 increased 32% to $7.0 million from $5.3 million in
1994. Systems related revenue in 1995 increased 14% to $4.1 million from $3.6
million in 1994. This increase was primarily due to the increase in unit sales
of the Company's MCMP product and the introduction and sale of new MCMP
component products and other systems. Support revenue in 1995 increased 62% to
$1.4 million from $837,000 in 1994 due to an increase in the MCMP installed
client base. Professional services revenue in 1995 increased 76% to $1.6 million
from $894,000 in 1994 due to an increase in revenues from supplier studies
contracts in 1995.

Cost of Operations. Cost of operations in 1995 decreased 23% to $2.9
million from $3.7 million in 1994, due primarily to a decrease in staffing.
Staffing reductions resulted from realizing efficiencies in delivering,
installing and supporting new and existing clients. Cost of revenue in 1995
included $63,000 in amortization expense of capitalized software development
costs. No amortization was recorded in 1994 as the related products had not yet
been released. Cost of operations in 1995 decreased to 41% of revenue from 70%
in 1994, due to the same factors together with an increase in revenue during the
same period.

Research and Development. Research and development expenses in 1995
increased 6% to $1.9 million from $1.8 million in 1994, due to the enhancement
of current product lines as well as development activities for new products and
services. During 1995, $426,000 of product development activity was capitalized,
compared to $338,000 in 1994. Research and development expenses in 1995
decreased to 27% of revenue from 34% in 1994, primarily due to revenue
increasing at a faster pace than development-related activities.

Selling, General and Administrative. Selling, general and administrative
expenses in 1995 decreased 7% to $5.6 million from $6.0 million in 1994.
Staffing levels were lower in 1995 than in 1994, and 1994 included costs
associated with the move of the corporate offices. Selling, general and
administrative expenses in 1995 decreased to 80% of revenue from 113% in 1994
due to the same factors together with an increase in revenue during the same
period.

Other Income (Expense). Other income (expense) decreased from $35,000 in
1994 to ($416,000) in 1995. The decrease from 1994 to 1995 was attributable
primarily to an increase in non-cash imputed interest expense on convertible
debt and a decrease in interest income resulting from lower cash and cash
equivalents balances during the first three quarters of 1995, compared to 1994.

Years Ended December 31, 1994 and 1993

Revenue. Revenue in 1994 increased 38% to $5.3 million from $3.8 million
in 1993. Systems revenue in 1994 increased 79% to $3.6 million from $2.0 million
in 1993. This increase is due primarily to the increase in unit sales of the
Company's MCMP product and the introduction and sale of new MCMP component

18
<PAGE> 21

products. Support revenue in 1994 increased 72% to $837,000 from $486,000 in
1993 due to an increase in the MCMP installed client base. Professional services
revenue in 1994 decreased 34% to $894,000 from $1.4 million in 1993 due to a
decrease in revenues from supplier studies contracts as several significant
contracts were concluded.

Cost of Operations. Cost of operations in 1994 increased 72% to $3.7
million from $2.2 million in 1993, due primarily to additional staffing required
to establish the Company's primary delivery capabilities. Cost of operations in
1994 increased to 70% of revenue from 56% in 1993, due to the same factors.

Research and Development. Research and development expenses in 1994
increased 78% to $1.8 million from $1.0 million in 1993, due primarily to
additional staffing. During 1994, $338,000 of product development activity was
capitalized, compared to $0 in 1993. Research and development expenses in 1994
increased to 34% from 26% of revenue in 1993, primarily to the foregoing
factors.

Selling, General and Administrative. Selling, general and administrative
expenses in 1994 increased 103% to $6.0 million from $3.0 million in 1993, due
primarily to costs associated with the move of the corporate offices in 1994 and
an increase in staffing management, facilities, equipment and general expenses.
Selling, general and administrative expenses in 1994 increased to 113% of
revenue from 77% in 1994 due to the same factors.

Other Income (Expense). Other income (expense) increased from ($80,000) in
1993 to $35,000 in 1994. The increase was primarily attributable to the earnings
on the increase in the Company's cash and cash equivalents balances and a
decrease in interest expense due to a reduction in debt in 1994 compared to
1993.

19
<PAGE> 22

QUARTERLY RESULTS

The following tables set forth certain unaudited quarterly financial data,
as well as certain unaudited quarterly financial data as a percentage of
revenues, for 1994 and 1995 and for the first quarter of 1996. In the opinion of
the Company's management, this unaudited information has been prepared on the
same basis as the audited information included elsewhere in this Prospectus and
includes all adjustments necessary (consisting of normal recurring adjustments)
to present fairly the information set forth therein. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994 1995 1995 1995 1995
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Systems................ $ 772 $ 823 $ 1,304 $ 688 $ 700 $ 626 $ 1,256 $1,514
Support................ 59 171 288 319 318 282 366 387
Professional
services............. 280 227 197 189 241 408 524 402
------- -------- ------- -------- ------- -------- ------- -------
Total revenue...... 1,111 1,221 1,789 1,196 1,259 1,316 2,146 2,303
Expenses:
Cost of operations..... 583 862 990 1,265 733 715 686 732
Research and
development.......... 183 410 448 771 578 497 529 315
Selling, general and
administrative....... 1,246 1,412 1,428 1,945 1,577 1,379 1,232 1,443
------- -------- ------- -------- ------- -------- ------- -------
Total expenses..... 2,012 2,684 2,866 3,981 2,888 2,591 2,447 2,490
------- -------- ------- -------- ------- -------- ------- -------
Loss from operations..... (901) (1,463) (1,077) (2,785) (1,629) (1,275) (301) (187)
Interest income........ 33 35 21 4 19 8 2 33
Interest expense....... (21) (15) (17) (15) (39) (115) (140) (189)
Other.................. -- 1 6 2 -- -- 2 3
------- -------- ------- -------- ------- -------- ------- -------
Net loss................. $ (889) $ (1,442) $(1,067) $ (2,794) $(1,649) $ (1,382) $ (437) $ (340)
======= ======== ======= ======== ======= ======== ======= =======
<CAPTION>
THREE MONTHS ENDED
- ------------------------------------
MARCH 31,
1996
---------
(IN THOUSANDS)
<S> <C>
Revenue:
Systems................ $ 1,242
Support................ 330
Professional
services............. 87
-------
Total revenue...... 1,659
Expenses:
Cost of operations..... 753
Research and
development.......... 364
Selling, general and
administrative....... 1,445
-------
Total expenses..... 2,562
-------
Loss from operations..... (903)
Interest income........ 58
Interest expense....... (106)
Other.................. --
-------
Net loss................. $ (951)
=======

<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994 1995 1995 1995 1995
------- -------- ------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Systems................ 69% 67% 73% 58% 56% 48% 59% 66%
Support................ 5 14 16 27 25 21 17 17
Professional
services............. 25 19 11 16 19 31 24 17
------- -------- ------- -------- ------- -------- ------- -------
Total revenue...... 100 100 100 100 100 100 100 100
Expenses:
Cost of operations..... 52 71 55 106 58 54 32 32
Research and
development.......... 16 34 25 64 46 38 25 14
Selling, general and
administrative....... 112 116 80 163 125 105 57 63
------- -------- ------- -------- ------- -------- ------- -------
Total expenses..... 181 220 160 333 229 197 114 108
------- -------- ------- -------- ------- -------- ------- -------
Loss from operations..... (81) (120) (60) (233) (129) (97) (14) (8)
Interest income........ 3 3 1 -- 1 1 -- 1
Interest expense....... (2) (1) (1) (1) (3) (9) (7) (8)
Other.................. -- -- -- -- -- -- -- --
------- -------- ------- -------- ------- -------- ------- -------
Net loss................. (80)% (118)% (60)% (234)% (131)% (105)% (20)% (15)%
======= ======== ======= ======== ======= ======== ======= =======

<CAPTION>
THREE MONTHS ENDED
- ------------------------------------
MARCH 31,
1996
-------
<S> <C>
Revenue:
Systems................ 75%
Support................ 20
Professional
services............. 5
-------
Total revenue...... 100
Expenses:
Cost of operations..... 45
Research and
development.......... 22
Selling, general and
administrative....... 87
-------
Total expenses..... 154
-------
Loss from operations..... (54)
Interest income........ 3
Interest expense....... (6)
Other.................. --
-------
Net loss................. (57)%
=======
</TABLE>

20
<PAGE> 23

The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary from quarter to quarter in the
future. Quarterly revenues and operating results may fluctuate as a result of a
variety of factors, including: the Company's relatively long sales cycle,
variable customer demand for its products and services; changes in the Company's
product mix and the timing and relative prices of product sales; the loss of
customers due to consolidation in the healthcare industry; changes in customer
budgets; investments by the Company in marketing or other corporate resources;
acquisitions of other companies or assets; the timing of new product
introductions and enhancements by the Company and its competitors; changes in
distribution channels; sales and marketing promotional activities and trade
shows; and general economic conditions. Further, due to the relatively fixed
nature of most of the Company's costs, which primarily include personnel costs,
as well as facilities costs, any unanticipated shortfall in revenue in any
fiscal quarter would have an adverse effect on the Company's results of
operations in that quarter. Accordingly, the Company's operating results for any
particular quarterly period may not necessarily be indicative of results for
future periods.

In addition, the Company's quarterly results have been, and may continue to
be, affected by supplier and provider budgeting practices that cause many
discretionary purchase decisions to be made before certain quarter and year
ends. The timing of quarterly revenue is also affected by the ability of the
Company to perform on its contracts, which is subject to the availability of the
client personnel as well as the availability of the Company's personnel.
Although the Company has not historically experienced any material seasonality
in its operating results, the Company could experience such seasonality in the
future, which could cause fluctuations in the Company's quarterly results.

LIQUIDITY AND CAPITAL RESOURCES

The Company has never recorded an operating profit and had an accumulated
deficit of approximately $18.9 million as of March 31, 1996. Since its
inception, the Company has financed its operations primarily through the private
issuance of Common Stock, convertible preferred stock, stockholder notes and
other debt instruments for net proceeds aggregating $22.2 million and, to a
lesser extent, from revenues from operations. The Company's working capital
needs are expected to continue to increase as the Company pursues its growth
strategy and the Company does not expect to record a profit for at least the
next five quarters. As of March 31, 1996, the Company had net working capital of
$763,000, including cash and cash equivalents of $2.6 million. The Company
currently has no material commitments for capital expenditures.

Historically, the Company's operating activities have not generated
positive cash flow due to increasing accounts receivable attendant to the
Company's growth as well as research and development and other expenses. The
Company has executed a letter of intent to obtain a secured line of credit to
finance its accounts receivable growth. While the Company believes that it will
be successful in securing this line of credit, there can be no assurance that
the Company will be able to enter into a line of credit on terms satisfactory to
the Company.

The Company anticipates financing its growth strategy through the net
proceeds from this offering, its current cash resources, revenues from
operations and third party credit facilities. The Company believes the
combination of these sources will be sufficient to fund its operations and
satisfy the Company's cash requirements for the next 24 months. If proceeds from
the offering, together with such other sources of funds, are not sufficient to
fund operations until the Company achieves positive cash flow, the Company would
be required to seek additional capital by incurring additional indebtedness or
issuing, in public or private transactions, equity or debt securities. However,
there can be no assurance that suitable debt or equity financing would be
available to the Company.

The Company does not believe the impact of inflation has significantly
affected the Company's operations.

21
<PAGE> 24

BUSINESS

OVERVIEW

INDUSTRY BACKGROUND

The nearly $1 trillion healthcare industry in the United States has
undergone rapid changes during the past decade. Government regulators and the
private sector have instituted various measures intended to lower the rate of
increase in healthcare expenditures, including the institution of prospective
payment programs, reductions in reimbursement rates, discounted fee-for-service
programs and capitation payments. As a result of the continued migration from
fee-for-service towards managed care, significant components of the financial
risk inherent in the provision of healthcare have been transferred from payers
to providers. Providers include hospitals, physicians and integrated delivery
systems ("IDSs"), which are combinations of hospitals and physicians for managed
care contracting purposes. In response to the transfer of financial risk,
healthcare providers have increasingly focused their efforts on reducing costs
while continuing to meet expectations for high-quality care.

Hospitals initially responded to the increasing financial pressure by
pursuing administrative cost savings. These cost savings, such as those
resulting from negotiating discounted purchases and optimizing staff and
inventory, were facilitated in part through the analysis of data generated by
administrative and financial information systems. Although many of these
administrative savings initiatives have been implemented, the financial
pressures on providers continue to increase. The next opportunity to realize
significant savings is in more efficiently managing utilization of clinical
resources, such as controlling the number and type of procedures performed and
the length of a patient's stay. In order to realize such savings while
maintaining the quality of care, providers have sought access to sophisticated
clinical information.

Initial efforts to develop decision support tools were based on the use of
data derived from charge-based information such as billing and claims forms.
Charge-based systems have a number of limitations, including: (i) the lack of
clinical detail that is inherent in charge data; (ii) the lack of statistically
significant comparative clinical information against which individual cases can
be measured; (iii) the retrospective nature of the information, which is unable
to support medical decision makers during the care process; and (iv) clinicians'
skepticism of clinical data derived from financial records. Moreover, such
systems generally have not been designed to focus on high-risk, high-cost
patients, who typically account for a disproportionately large share of hospital
costs.

In recent years, it has become possible to develop clinical decision
support systems that overcome these limitations. Methodologies have been
developed that incorporate complex techniques of data collection and analysis to
allow the assessment and prediction of clinical outcomes, or results, of patient
treatment. Using these methodologies, extensive databases comprised of clinical
outcomes information have been created. The collection of information for these
databases has been made more affordable by the development of integration
technology, which allows the information to be drawn directly from patient
recordkeeping systems. Finally, more powerful software and hardware have become
available to collect, retrieve and analyze patient-specific clinical outcomes
data.

In response to these technological advancements and continued healthcare
industry trends, healthcare providers and suppliers are seeking more
sophisticated, outcomes-based clinical decision support information systems.
Such systems could provide timely access to patient-specific and
severity-adjusted clinical outcomes

22
<PAGE> 25

information to assist healthcare providers in making critical point-of-care
decisions. Ultimately, the Company believes that the availability of decision
support tools that measure the current health status of patients and help
predict clinical outcomes would facilitate the delivery of high-quality care at
a lower cost.

THE APACHE SOLUTION

APACHE believes that its products and services address the healthcare
industry's need for sophisticated outcomes-based clinical decision support
information systems. The APACHE solution bridges the gap between the information
needs of clinicians and those of hospital administrators by enabling joint
access to clinical and cost information, which facilitates both the containment
of costs and the delivery of high-quality care. The Company's systems, which
incorporate software, hardware and related consulting services, generate
information to assist providers in making timely and informed clinical resource
utilization and patient care decisions. These clinical decision support systems
are designed to enable providers to:

- Determine appropriate cost-effective treatment plans for individual
patients.

- Compare actual individual patient outcomes with both predicted patient
outcomes and statistically relevant similar hospital, regional and
national norms.

- Analyze the performance of physicians by using clinically-based,
peer-reviewed severity-adjustment methods.

- Analyze and measure quantifiable improvements in the clinical and cost
outcomes of specified groups of patients.

- Relate staffing and bed mix to the severity-adjusted mix of patients in a
hospital unit.

APACHE's products and services are differentiated from other healthcare
decision support systems by the combination of the following factors:

- Detailed Clinical Data. APACHE's products and services utilize detailed
clinical data on a variety of health parameters (e.g., vital signs,
laboratory results and measures of physiological function) and outcomes
data (e.g., adverse occurrences, morbidity and mortality). In addition,
APACHE's products and services utilize administrative and cost data, such
as active treatment data and patient length of stay data.

- Patient-specific, Severity-adjusted Data. APACHE's products and services
utilize clinical and cost data for individual patients, in addition to
patient groups. APACHE's methodologies severity-adjust these data to
enable the assessment of the overall health status of the patient.
Severity adjustment is a technique for weighting the relative factors
affecting the degree of illness of a patient. Physicians use APACHE's
patient-specific clinical decision support systems to develop individual
patient care plans incorporating APACHE's severity-adjusted outcomes
predictions.

- Concurrent, Predictive Outcomes Information. APACHE's systems support
physician decision making by providing outcomes information to the
physician in three timeframes: (i) predictions of the patient's outcomes
(e.g., mortality, adverse occurrences and length of stay); (ii) current
information, such as the patient's daily health status; and (iii)
historical or retrospective information about the patient or groups of
similar patients. In contrast to retrospective systems, APACHE's ability
to provide concurrent information permits the generation of predictive
information during the course of a patient's care, thereby enhancing a
physician's ability to direct treatment resources as the patient's health
status changes.

- Continuum of Care Capability. APACHE's products and services provide
information to the physician throughout a patient's hospital stay by
tracking the patient's outcomes with predictions on clinical and cost
results, both pre- and post-procedure, thereby enabling physicians to
better measure the appropriateness and adequacy of the care.

- High-risk, High-cost Patient Focus. Unlike decision support systems that
focus primarily on general hospital patients, APACHE's systems are
specifically designed to help predict outcomes for high-risk, high-cost
patients, such as cardiovascular care and critical care patients. These
patients typically represent a disproportionately large share of hospital
costs.

23
<PAGE> 26

APACHE's solution is derived from the Company's clinical outcomes
methodologies and proprietary databases.

Clinical Outcomes Methodologies. APACHE's methodologies include algorithms
that apply relative weightings to selected physiological variables to define a
patient's health status. APACHE's methods of measuring variations in a patient's
health status have been utilized in connection with more than 600 peer-reviewed
articles in professional journals. APACHE has acquired rights to and refined
these methodologies, which were originally developed over periods ranging from
six to 18 years by leading academic medical centers such as The George
Washington University Hospital, Dartmouth-Hitchcock Medical Center and The
Cleveland Clinic Foundation. APACHE acquired rights to its first methodology,
the critical care methodology, in 1988 through an exclusive commercial license
agreement with The George Washington University.

Proprietary Databases. The Company's databases include data on a variety of
health parameters, such as vital signs, laboratory results and measures of
physiological function, as well as outcomes data, such as adverse occurrences,
morbidity and mortality. The databases contain information from more than
550,000 patients, many of whom are high-risk, high-cost patients. The Company
created, and continues to refine, the critical care and sub-acute care
databases. APACHE acquired rights to its cardiovascular care and acute care
databases in connection with the acquisition of the rights to related
methodologies and has subsequently expanded and refined these databases.
APACHE's databases are periodically updated with patient data from customers as
well as special studies, with the goal of ensuring that the databases reflect
the results of current medical practice on a national basis.

APACHE's products and services currently include coverage of patients in
the following categories: cardiovascular care, critical care, acute care and
sub-acute care. The cardiovascular care category includes angioplasty, open
heart surgery and cardiac catheterization patients, among others. The critical
care category includes acute myocardial infarction, lung cancer and drug
overdose patients, among others. The acute care category includes congestive
heart failure, stroke and hysterectomy patients, among others. The sub-acute
care category includes emphysema, pneumonia and ventilator-dependent patients,
among others.

THE APACHE STRATEGY

The Company's objective is to become the leading provider of clinical
outcomes data and decision support systems and services to healthcare providers,
suppliers and payers. APACHE intends to achieve this objective through the
implementation of the following strategies:

- Leverage Existing Customer Base. APACHE's comprehensive and integrated
product line provides opportunities for the Company to market additional
products and services to its existing customer base. The modular nature
of APACHE's Medical Cost Management Program ("MCMP") allows healthcare
providers to add to an existing system as APACHE introduces new products
and services or as customer needs expand. The Company believes that many
of its existing Benchmark Study and Consulting Study customers will
purchase the Company's more sophisticated MCMP systems as they experience
the benefits of APACHE's products and services.

- Expand Market Share in the Provider Market. APACHE has provided products
or services to over 500 of the approximately 5,200 community hospitals
throughout the United States and, therefore, believes it has a
significant opportunity to expand its market share. The Company plans to
expand its market share by increasing (i) the range of products and
services offered; (ii) the size of the direct sales force; (iii) its
marketing budget; and (iv) its utilization of distribution relationships.

- Expand Market Share in the Supplier Market and Enter the Payer
Market. APACHE has performed clinical trial studies and disease
management projects for leading pharmaceutical and biotechnology
companies and plans to expand its presence in the supplier market. In
addition, while the Company currently markets its products and services
primarily to providers and suppliers, APACHE intends to pursue
opportunities in the healthcare payer market by leveraging existing
methodologies and databases to develop products and services for
healthcare payers.

- Add Methodologies, Databases, Products and Services. APACHE seeks to
acquire, license or develop new methodologies, databases, software and
technologies in order to enhance existing products as well

24
<PAGE> 27

as to offer new products and services across the continuum of care, both
within and outside of the hospital. In addition to its internal product
development activities, the Company expects to pursue the acquisition of
product lines and medical data resources and will consider the acquisition
of complementary businesses.

- Continue to Develop Relationships with Key Industry Participants. The
Company believes that relationships with key industry participants
enhance APACHE's ability to develop new products, increase penetration of
existing markets and gain access to new markets. The Company has formed a
relationship with Cerner Corporation ("Cerner") pursuant to which Cerner
has agreed to market one of APACHE's methodologies as a component of
Cerner's product line. In addition, the Company cooperates with other
industry participants, such as Hewlett-Packard Company and EMTEK Motorola
Healthcare Company, to incorporate APACHE's software into their critical
care products. APACHE intends to pursue strategic relationships with
other healthcare information systems companies, providers, suppliers and
payers.

APACHE PRODUCTS AND SERVICES

APACHE offers a comprehensive line of integrated clinical decision support
products and services to healthcare providers and suppliers. These products and
services encompass software, hardware, and related consulting services. The
following table summarizes the products and services offered or being developed
by the Company:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NUMBER OF
YEAR CUSTOMER CUSTOMER
PRODUCT/SERVICE INTRODUCED TYPE SALES(1) DESCRIPTION
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medical Cost Management 1992 Hospitals 50 Comprehensive clinical
Program and IDSs decision support system
- --------------------------------------------------------------------------------------------------------------
Outcomes Repository and 1996 Hospitals 2 Collection and integration
Integration Services(2) and IDSs system for a hospital's
clinical and financial data
- --------------------------------------------------------------------------------------------------------------
Enterprise Information 1995 Hospitals 24 Software tool to provide
System ("EIS") and IDSs comparative analysis of a
provider's performance
- --------------------------------------------------------------------------------------------------------------
Benchmark Study 1993 Hospitals 173 Comparative analysis and
and IDSs report of a provider's
clinical and financial
performance
- --------------------------------------------------------------------------------------------------------------
Hand-held Risk Predictor Under Hospitals N/A Portable electronic device
Development used to predict clinical
outcomes at the point of
care
- --------------------------------------------------------------------------------------------------------------
Consulting Studies 1994 Hospitals 11 Clinical process and
management consulting
- --------------------------------------------------------------------------------------------------------------
Supplier Studies 1993 Pharmaceutical 16 Studies that analyze
and Biotechnology clinical trial data and
Companies develop disease management
patient profiles and
outcomes data
- --------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Some customers have purchased more than one product or service.

(2) Available previously only as part of the MCMP.

25
<PAGE> 28

Medical Cost Management Program. The MCMP is the centerpiece of APACHE's
family of products and services. It is an integrated decision support system
comprised of software, hardware and related consulting services designed to
provide point-of-care, severity-adjusted clinical and financial information to
physicians within the hospital.

Healthcare providers can use the Company's MCMP system to: (i) manage the
quality and cost of care for high-risk, high-cost patients; (ii) compare actual
individual patient outcomes with both predicted patient outcomes and
statistically relevant similar hospital, regional and national norms; (iii)
analyze and compare the performance of physicians using clinically-based,
peer-reviewed severity-adjustment methods; (iv) analyze and measure quantifiable
improvements in the clinical and cost outcomes of specified groups of patients;
and (v) relate staffing and bed mix to the severity-adjusted mix of patients in
a hospital unit. Through the MCMP, a provider can develop a customized
outcomes-based clinical decision support program. The customer may select from
four care-specific modules: cardiovascular care, critical care, acute care and
sub-acute care. The reports and analyses that customers can produce using the
MCMP include length of stay reviews, physician profiling reports, readmission
reviews and non-surviving outlier reports.

The technical capabilities of the MCMP are combined with a four-step
clinical process improvement strategy that provides clinicians with a structured
approach for using information generated by a Company system to match the
patient's health status with the most appropriate care plan. First, the MCMP
analyzes and compares, initially through a Benchmark Study, the clinical and
financial data of a select group of the provider's patients who all suffer from
the same disease to the best demonstrated practices identified in APACHE's
database. Second, providers combine these guidelines with their patients'
severity-adjusted clinical data to target specific patients for active practice
management. Third, providers utilize the results from this analysis to develop
severity-adjusted guidelines and practice management strategies. In the final
step, the MCMP generates real-time, severity-adjusted information that the
provider can use to improve the cost-effectiveness and appropriateness of an
individual patient's care.

The hub of the MCMP is the Outcomes Repository, which holds the hospital's
relevant clinical and financial data. The Outcomes Repository can interface
electronically with the hospital's existing computerized systems, such as
laboratory, clinical registries, billing, admissions and cost accounting, and is
designed to reduce substantially manual data entry. The Outcomes Repository
interfaces can be real-time, providing current information to APACHE's software
applications. For example, when a laboratory test is completed, the results can
be made immediately available in the Outcomes Repository. The Company currently
offers Outcomes Repository interfaces for most major hospital information
systems, including those offered by HBO & Company, Shared Medical Systems, Inc.,
Cerner and Sunquest Information Systems, Inc.

The EIS is the analysis and reporting software tool that can also provide
the customer with easy access to data in the Outcomes Repository. This
Windows-based system uses point and click technology that requires little
training. The EIS is designed to operate on the desktop personal computers of
administrative and clinical decision makers.

Outcomes Repository and Integration Services. During the first quarter of
1996, the Company introduced the Outcomes Repository and associated services as
a stand-alone product line. It is designed for hospitals or IDSs that have
special integration or data repository requirements.

EIS. In addition to being a fully-integrated component of the MCMP, during
1995, the Company made the EIS available as a stand-alone product. Hospitals and
IDSs that do not purchase a complete MCMP can purchase an EIS to perform
comparative analysis and reporting of data from a stand-alone Outcomes
Repository or clinical data from other sources.

Benchmark Studies. APACHE offers Benchmark Studies that provide an
independent, severity-adjusted assessment of the customer's performance, with
particular focus on high-risk, high-cost patients. The first step of a Benchmark
Study is to gather physiological, outcome and other relevant retrospective data
from a sample of the provider's own patients. These data are then compared to
APACHE's national databases of severity-adjusted clinical information. This
comparison is used to generate a report that shows the provider's performance in
rendering patient care in the treatment of a specific medical condition and
allows six levels of

26
<PAGE> 29

normative comparisons of the provider's practices: best demonstrated practices,
optimal practices, similar hospital practices, regional practices, national
practices and international practices.

In addition to using the results of a Benchmark Study as a one-time
"snapshot" of the provider's historical performance, a provider can use the
study as the basis for adjusting its future practices to better align it with
the best demonstrated practices identified by the study. Hospitals can use
Benchmark Study data to identify areas for improvement in clinical practices,
quality and cost performance. Benchmark Studies are currently offered in
cardiovascular care, critical care, acute care and sub-acute care, and they can
serve as an entry point to the MCMP and other APACHE products and services.

Hand-held Risk Predictor. The Company is currently developing this portable
device, which is designed to make APACHE's outcomes predictions available at the
point of care in locations where an MCMP might not be needed (e.g., physicians'
offices). This device will provide severity-adjusted individual patient
predictions designed to assist clinicians in making informed decisions prior to
treatment. The development of this device is being conducted pursuant to an
agreement with one of the Company's healthcare provider customers, who is
currently testing prototype versions of the device. The Company intends to
develop this hand-held product further, to enable wireless access to a
customer's Outcomes Repository.

Consulting Studies. APACHE's clinical and financial consultants work with
existing MCMP customers and others in the following areas: (i) high-risk,
high-cost patient facilities planning and management; (ii) severity-adjusted
care guideline development; (iii) clinical process improvement for specific
diseases; (iv) strategic outcomes planning; (v) organizational and productivity
assessment; and (vi) population-based planning. APACHE's consultants also work
with customers to design and build customized outcomes solutions supporting the
customer's business strategies.

Supplier Studies. The Company offers clinical trial support services to
pharmaceutical and biotechnology companies. Through the use of its methodologies
and proprietary databases, APACHE assists these companies by providing clinical
trial data support for drugs under testing or review for approval by the FDA or
other regulatory authorities. APACHE also utilizes its methodologies and
proprietary databases to assist suppliers of disease management programs in
developing patient profiles and analyzing the outcomes of selected courses of
treatment. These programs, which typically focus on a specific chronic disease
such as congestive heart failure, consist of profiles of typical patients,
criteria for evaluating patient risks and needs, and recommended courses of
treatment. Suppliers of disease management programs can help healthcare
providers more efficiently treat these patients by providing a "prepackaged"
treatment program for common non-acute diseases.

Hardware. Incidental to the sale of its clinical decision support products
the Company offers hardware to its customers. Most of the Company's customers
purchase hardware from the Company as a matter of convenience; however,
customers may purchase the hardware directly from third-party vendors. While the
Company currently purchases the bulk of its hardware requirements from one
manufacturer, there are a number of other sources that offer functionally
equivalent hardware. Furthermore, the Company is not under any commitment to
purchase a minimum volume of hardware from any vendor.

CUSTOMER TRAINING AND SUPPORT

The Company provides training to customers on the use of APACHE's products.
In addition to direct user training, APACHE trains customer representatives to
train their own personnel. Following initial training, the Company provides a
high level of customer support including follow-up training, a toll-free,
24-hour-per-day, seven-day-per-week customer service hotline and periodic
product upgrades. Customers pay an annual support service fee approximately
equal to 15% of the hardware and software portion of the product price for these
ongoing support services.

CUSTOMERS

APACHE currently markets its products and services to two types of
customers: healthcare providers and healthcare suppliers. To date, APACHE has
sold its products and services to more than 280 customers. The

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<PAGE> 30

Company's healthcare provider customers, representing more than 500 hospitals
worldwide, are primarily medium to large individual hospitals, hospital systems
or alliances and large physician group practices. The Company's healthcare
supplier customers are primarily pharmaceutical manufacturers and biotechnology
companies. In addition, as the Company increases the range of products and
services offered, the Company intends to market to insurance companies, health
maintenance organizations and other managed care companies, and other healthcare
payers.

The Company's provider customer base is geographically diverse, including
urban and rural hospitals located primarily throughout the United States. The
Company has also sold an MCMP to a hospital in Australia and consulting services
to hospital groups in the United Kingdom and Japan. APACHE's supplier customers
are located primarily in the United States. While foreign activity has not been
material to date, the Company intends to develop further these markets in the
future.

The Company's provider customers include hospitals within investor-owned
hospital chains, such as Doctor's Hospital of Dallas, a member of Tenet
Healthcare Corporation, and St. Vincent Charity Hospital, a member of
Columbia/HCA Healthcare Corporation; academic and teaching hospitals, such as
The Cleveland Clinic Foundation and The Mayo Foundation; not-for-profit
hospitals within integrated systems, such as Kaiser Foundation Hospitals; and
community hospitals. In addition, APACHE's provider customers include Vencor,
Inc., a multi-facility provider of long-term acute and sub-acute care; medical
professional organizations, such as the American College of Cardiology, with
which the Company recently contracted to provide data analysis and risk modeling
services for approximately 200 hospitals; medical consortiums, such as the
University HealthSystem Consortium, with which the Company recently contracted
to conduct Benchmark Studies at approximately 40 hospitals; and medical
coalitions, such as the Cleveland Health Quality Choice Program.

TECHNOLOGY AND PRODUCT DEVELOPMENT

The Company believes that the timely development of new products and the
enhancement of existing products and services are important to continue to build
on its competitive position. APACHE releases upgrades and new products on a
periodic basis.

The Company's product development strategy is directed toward creating new
products that: (i) leverage APACHE's databases; (ii) increase the functionality
of current products; (iii) expand coverage along the continuum of care and to
additional disease or procedure groups; and (iv) provide customers with a
selection of decision support systems at various price points. The Company's
products are primarily internally developed software and analytical studies.
Hardware products offered by the Company are sourced from other vendors and
resold by APACHE as components of an integrated system incorporating the
Company's software. The software products are generally built on a client/server
architecture that includes UNIX workstation servers, Windows-based PCs,
graphical user interfaces and other software developed by third-party vendors.
The server hosts a comprehensive data repository using relational database
management system ("RDBMS") technologies and multidimensional database ("MDDB")
technologies. The server can interface with hospital systems, such as the
laboratory, admission and bedside charting systems, and uses the current
versions of the industry standard healthcare information protocols.

In addition, the Company has developed relationships with key industry
participants to enhance its product offerings. For example, the Company has
cooperated with Hewlett-Packard Company and EMTEK Motorola Healthcare Company to
incorporate APACHE's software into their critical care products.

APACHE's consultants offer guidance to the Company's research and
development process by providing current market research regarding customer
preferences. Consulting services build on the Company's databases, software
products and broad disease coverage. As these products and services continue to
evolve, additional consulting applications will be developed and marketed to
existing and new customers.

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<PAGE> 31

SALES AND MARKETING

The Company markets and sells its products and services generally through
its ten-person direct sales force, each of whom focuses on a specific geographic
region of the country. The Company has developed a customer profiling process
based upon criteria established by the Company that is designed to identify
healthcare providers that have the greatest opportunities for cost savings.
APACHE's direct sales force targets its marketing efforts at those healthcare
providers that are highlighted through this profiling process.

APACHE believes that the most effective use of its direct sales force in
marketing provider programs is to focus on individual hospitals, typically
having 250 or more licensed beds, hospital systems or alliances and large
physician group practices. The Company markets some of its provider programs,
particularly Benchmark Studies and the EIS, to smaller individual hospitals and
other healthcare providers through focused print advertising and telemarketing,
as well as through medical professional organizations and medical consortiums.
In addition, the Company has formed a relationship with Cerner pursuant to which
Cerner has agreed to market one of APACHE's methodologies as a component of
Cerner's product line.

APACHE's consulting services are marketed both as part of the MCMP and
separately by the Company's consultants as a stand-alone product. The Company's
supplier programs are marketed by the developers of those programs and other
Company professionals directly to pharmaceutical and biotechnology companies.

The Company intends to use a portion of the proceeds of the offering to
expand its direct sales force from ten to 14 representatives. This increase will
reduce the geographic responsibility for each salesperson, thereby allowing more
intense coverage in each region. In addition, APACHE may rely on strategic
relationships in the future to market certain of its provider programs, both
domestically and internationally.

PROPRIETARY RIGHTS

The Company has made significant investments in the development and
maintenance of its risk-adjustment methodologies and its proprietary clinical
and financial databases and software. The clinical databases maintained by the
Company include a highly detailed level of clinical information that the Company
believes provides a key advantage over competing decision support systems when
combined with APACHE's value-added clinical software. APACHE has
multi-disciplinary clinical and database management personnel that audit, edit
and standardize data from customers and other sources to maintain highly
statistically relevant databases. The Company believes that the sophistication
of its risk-adjustment methodologies, the richness of its corresponding
proprietary databases and the usefulness of its software provide better outcomes
measurements and utilization control than competitive systems.

The Company depends upon a combination of trade secret and copyright laws,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its methodologies, databases and software. The Company
has not filed any patent applications covering its methodologies and software.
The Company distributes its software products under agreements that grant
customers non-exclusive licenses and contain terms and conditions restricting
the disclosure and use of APACHE's databases or software and prohibiting the
unauthorized reproduction or transfer of its products. In addition, APACHE
attempts to protect the secrecy of its proprietary databases and other trade
secrets and proprietary information through agreements with employees and
consultants. Portions of APACHE's methodologies are, however, available in
scientific literature and bona fide researchers have been granted access to
portions of APACHE's databases for peer review and other research purposes.

The Company also seeks to protect the source code of its software and its
databases as trade secrets and under copyright law. The Company has copyright
registrations for certain of its software, user manuals and databases. The
copyright protection accorded to databases, however, is fairly limited. While
the arrangement and selection of data are protectible, the actual data are not,
and others are free to create databases that perform the same function. The
Company believes, however, that the creation of competing databases would be
very time consuming and costly.

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"APACHE" is registered as a trademark and/or service mark in connection
with certain of the Company's current products and services in the United
States, Australia, Benelux, Brazil, France, Germany, Sweden and the United
Kingdom. Applications to register the "APACHE" mark are pending in Canada and
Italy. The Company believes that it has developed substantial goodwill in
connection with its mark as an indicator of quality products and services.

The Company believes that, aside from the various legal protections of its
proprietary information and technologies, factors such as the technological and
creative skills of its personnel and its ongoing reliable product maintenance
and support are integral to establishing and maintaining its leadership position
within the healthcare industry due to the rapid pace of innovation within the
software industry. In addition, although the Company believes that its products
do not infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that a license or similar agreement will be available
on reasonable terms in the event of an unfavorable ruling on any such claim.

COMPETITION

The market for healthcare information systems and services is highly
competitive and rapidly changing. The Company believes that the principal
competitive factors for clinical outcomes systems are the quality and depth of
the underlying clinical outcomes databases, the proprietary nature of
methodologies, databases and technical resources, the usefulness of the data and
reports generated by the software, customer service and support, compatibility
with the customer's existing information systems, potential for product
enhancement, vendor reputation, price and the effectiveness of marketing and
sales efforts.

GOVERNMENT REGULATION

The confidentiality of patient records and the circumstances under which
such records may be released is subject to substantial regulation under state
and federal laws and regulations. To protect patient confidentiality, data
entries to APACHE's databases omit any patient identifiers, including name,
address, hospital and physician. The Company believes that its procedures comply
with the laws and regulations regarding the collection of patient data in
substantially all jurisdictions, but regulations governing patient
confidentiality rights are evolving rapidly and are often difficult to apply.
Additional legislation governing the dissemination of medical record information
has been proposed at both the state and federal level. This legislation may
require holders of such information to implement security measures that may be
of substantial cost to the Company. There can be no assurance that changes to
state or federal laws would not materially restrict the ability of the Company
to obtain patient information originating from records.

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<PAGE> 33

The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. During the past several years, government
regulation of reimbursement rates and capital expenditures in the United States
healthcare industry has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company's customers.
Healthcare industry participants may react to these proposals by curtailing or
deferring investments, including investments in the Company's products. The
Company cannot predict what impact, if any, such factors may have on its
business, financial condition and results of operations or on the price of the
Common Stock.

Certain products, including software applications, intended for use in the
diagnosis of disease or other conditions, or in the cure, treatment, mitigation
or prevention of disease, are subject to regulation by the FDA under the Federal
Food, Drug and Cosmetic Act of 1938 (the "FDCA"), as amended. The FDCA imposes
substantial regulatory controls over the manufacturing, testing, labeling, sale,
distribution, marketing and promotion of medical devices and other related
activities. These regulatory controls can include, for example, compliance with
the following: manufacturer establishment registration and device listing;
current good manufacturing practices; completion of premarket notification or
premarket approval; medical device adverse event reporting; and general controls
over misbranding and adulteration. Violations of the FDCA can result in severe
criminal and civil penalties, and other sanctions, including, but not limited
to, product seizure, recall, repair or refund orders, withdrawal or denial of
premarket notifications and approvals, and denial or suspension of government
contracts, and injunctions against unlawful product manufacture, labeling,
promotion, and distribution or other activities.

In its 1989 Policy for the Regulation of Computer Products (the "1989
Policy Statement"), the FDA stated that it intended to exempt certain clinical
decision support software products from a number of regulatory controls. Under
the 1989 Policy Statement, the FDA stated that it intended to promulgate
regulations exempting decision support software products that are intended to
involve "competent human intervention before any impact on human health occurs
(e.g., where clinical judgment and experience can be used to check and interpret
a system's output)" from the following controls: manufacturer establishment
registration and device listing, premarket notification, and compliance with the
medical device reporting and current good manufacturing practice regulations. In
the 1989 Policy Statement, the FDA stated that until it promulgated regulations
implementing the exemptions, manufacturers of eligible decision support software
products would not be required to comply with those controls.

Since issuing the 1989 Policy Statement, the FDA has neither promulgated
the exemption regulations discussed in the 1989 Policy Statement nor actively
sought to enforce compliance with the controls discussed in such Policy
Statement. Furthermore, the FDA has referred to the 1989 Policy Statement in
official presentations regarding software regulation and in decisions and
opinions regarding the regulatory status of various products. Over the last few
years, however, the FDA has stated that it intends to revise the 1989 Policy
Statement and to base exemptions from regulatory controls, if any, upon a
product specific "risk factor" analysis. The risk factors the FDA has proposed
using include: (i) seriousness of the disease to be diagnosed or treated; (ii)
time frame for use of the information; (iii) concordance with accepted medical
practice; (iv) format of data and its presentation; (v) individualized versus
aggregate patient care recommendations; and (vi) clarity of algorithms used in
the software. Given the formative state of the FDA's evaluation and possible
revision of the 1989 Policy Statement, there can be no assurance as to the
criteria or application of such revisions, if any.

The Company's products are intended to assist health care providers analyze
economic and quality data related to patient care and expected outcomes in order
to maximize or monitor the cost-effectiveness of general treatment plans and
practice guidelines. These products are not intended to provide specific
diagnostic data or results or affect the use of specific therapeutic
interventions. As such, the Company believes that its products are not medical
devices under the FDCA and, thus, are not subject to the controls imposed on
manufacturers of medical devices. The Company further believes that to the
extent that its products are determined to be medical devices, they fall within
the exemptions for decision support systems provided by the

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1989 Policy Statement. The Company has not taken action to comply with the
requirements that would otherwise apply if the Company's products were
non-exempt medical devices.

Since 1992, the Company's products have been widely marketed and have been
reviewed or evaluated in the medical literature. The FDA has neither requested
that the Company take any action to comply with any controls under the FDCA nor
notified the Company that it is not in compliance with any such controls. The
Company is not aware of the FDA requiring other developers of similar products
to take any action to comply with any controls under the FDCA, or of the FDA
notifying such developers that they are not in compliance with any such controls
with respect to those similar products.

Nevertheless, there can be no assurance that the FDA will not make such a
request or take other action to require the Company to comply with any or all
current or future controls applicable to medical devices. There can be no
assurance that, if such a request were made or other action were taken, the
Company could comply in a timely manner, if at all, or that any failure to
comply would not have a material adverse effect on the Company's business,
financial condition, results of operations or on the price of the Common Stock,
or that the Company would not be subjected to significant penalties or other
sanctions. There can be no assurance that the FDA will continue any or all of
the exemptions provided in the 1989 Policy Statement, or in a revised policy
statement, if any, or that the FDA will promulgate regulations formally
implementing such exemptions. There can be no assurance that the FDA will not
now or in the future make determinations that the Company's current or future
products are medical devices subject to FDA regulations and are ineligible for
the exemptions from those regulations. If the FDA made such determinations, the
Company would not be able to market its products without obtaining FDA clearance
of premarket notifications, or FDA approval of premarket approval applications,
submitted by the Company. The regulatory process can be lengthy, expensive, and
uncertain; securing FDA clearances or approvals may require the submission of
extensive non-clinical and clinical safety and effectiveness data together with
other supporting information to the FDA; and there could be no assurance as to
when if ever the FDA clearances or approvals would be obtained. There can be no
assurance that the Company's current or future products will qualify for future
exemptions, if any, nor can there be any assurance that any future requirements
will not have a material adverse effect on the Company's business, financial
condition, results of operations or on the price of the Common Stock.

EMPLOYEES

As of June 15, 1996, the Company employed a total of 63 full-time
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are excellent.

FACILITIES

The Company occupies approximately 21,000 square feet of space at its
headquarters in McLean, Virginia, under a lease expiring November 1999. The
Company also leases office space for two regional sales offices.

LEGAL PROCEEDINGS

The Company is a defendant from time to time in lawsuits incidental to its
business. The Company is not currently subject to, and none of its properties is
subject to, any material legal proceedings.

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RECENT DEVELOPMENTS

On June 3, 1996, the Company entered into a marketing agreement with an
affiliate of Premier Inc. ("Premier"), which provides buying services to a group
of approximately 1,800 hospitals. Pursuant to the agreement, the Premier
affiliate will designate the Company as the exclusive supplier to the hospitals
purchasing through the Premier buying group of clinically-based outcomes data
systems for high-risk, high-cost patients, including critical care,
cardiovascular care and medical-surgical care patients, through December 31,
1999. In return, the Company has agreed to provide certain discounts to these
hospitals and, following the consummation of the offering, will grant to the
Premier affiliate three options to purchase up to a total of 366,294 shares of
Common Stock. Each of the options will have a ten year term. One of the options
will vest upon grant and will permit the Premier affiliate to purchase 65,488
shares of Common Stock at an exercise price of $8.18 per share. The other two
options will vest, if at all, based on the volume of products and services sold
to Premier hospitals and allow the Premier affiliate to purchase up to 300,806
shares of Common Stock at an exercise price of $13.00 per share. The Company has
also entered into a registration rights agreement with the Premier affiliate
pursuant to which the Company has undertaken to effect at least one registration
of Common Stock per year for the next four years that may include shares held by
the Premier affiliate as well as by other Company stockholders with existing
registration rights. In addition, this agreement gives the Premier affiliate
certain other "piggyback" and demand registration rights.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

The following table sets forth certain information concerning executive
officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- ---- ------------------------------------------------------
<S> <C> <C>
Gerald E. Bisbee, Jr., Ph.D.(3)....... 53 Chairman and Chief Executive Officer
Robert E. Ciri........................ 44 President and Chief Operating Officer
Elizabeth A. Draper, R.N., M.S........ 49 Executive Vice President and Secretary
James C. Flounlacker.................. 35 Vice President, Client Services
Sherrie L. Jones...................... 40 Vice President, Sales and Marketing
Stephen C. Strategos.................. 39 Vice President, Systems Engineering
Douglas I. Thompson................... 37 Vice President, Consulting Services
Brion D. Umidi........................ 33 Vice President, Finance and Administration, Treasurer
Edward J. Connors..................... 67 Director
Thomas W. Hodson(1)(3)................ 49 Director
William A. Knaus, M.D.(2)............. 49 Director
Lawrence S. Lewin..................... 58 Director
Neal L. Patterson(1)(2)............... 46 Director
Stephen W. Ritterbush,
Ph.D.(1)(2)(3)...................... 49 Director
Francis G. Ziegler(1)(2).............. 56 Director
</TABLE>

- ------------------------------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

(3) Member of the Capital Financing Committee.

GERALD E. BISBEE, JR., PH.D. has been Chairman and Chief Executive Officer
of the Company since December 1989. Before joining APACHE, Dr. Bisbee was the
Chairman and CEO of the Hanger Orthopedic Group, Inc. which he created and
financed. He founded and managed the Health Care Group of the Corporate Finance
Department of Kidder, Peabody & Co., leaving to found Hanger in 1988. From 1978
until moving to Kidder, Peabody in 1984, he was President of the Hospital
Research and Educational Trust, a new venture and product development company
affiliated with the American Hospital Association. Dr. Bisbee also managed the
Yale University Health Services, which included a 22,000-member health
maintenance organization. He is a director of Cerner Corporation, Yamaichi
Funds, Inc. and Geriatric & Medical Companies, Inc. Dr. Bisbee received his B.A.
from North Central College, his M.B.A. from the Wharton School of the University
of Pennsylvania and his Ph.D. from Yale University, where his dissertation was
instrumental in the development of Diagnosis Related Groups ("DRGs").

ROBERT E. CIRI has been President and Chief Operating Officer of APACHE
since February 1996. For 15 years prior to joining APACHE, Mr. Ciri was employed
by Hewlett-Packard Company in the area of clinical systems and healthcare
information systems. From 1989 to 1995, he served as Hewlett-Packard's National
and North American Field Operations Manager of internally developed
applications, consulting, hardware, and services. From 1995 until joining
APACHE, he served as part of a special task force developing strategic business
plans for Hewlett-Packard's healthcare operation and integrated health system
account structure. Before joining Hewlett-Packard, Mr. Ciri was a hospital
administrator in New York, where he was involved with both inpatient and
ambulatory care programs. In addition to a B.S. from Rensselaer Polytechnic
Institute and an M.S. in medical biology and education, he has done
post-graduate work in an M.P.A. in healthcare administration and finance and in
the executive program at the Wharton School of the University of Pennsylvania.

ELIZABETH A. DRAPER, R.N., M.S. has been Executive Vice President and
Secretary of the Company since March 1988 and served as a director from the
founding of the Company until December 1994. From 1981 to 1988, Ms. Draper was
Senior Research Scientist at the ICU Research Unit at George Washington
University,

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where she was a founding member of the APACHE team. From 1976 until 1988, she
was an adjunct professor of physiology at the Graduate School of Nursing at The
Catholic University. Ms. Draper has 12 years of clinical experience in intensive
care nursing. She received her B.S. in nursing from the University of
Massachusetts and an M.S. in physiology from George Washington University.

JAMES C. FLOUNLACKER has been Vice President, Client Services of the
Company since April 1995. He joined APACHE in January of 1994 as Director of
Client Services. From September of 1991 until joining APACHE, Mr. Flounlacker
was Manager of Installation Services at American International Healthcare, Inc.,
where he lead a team of Project Managers responsible for installation and
implementation of a managed healthcare information system. From January 1991
until September 1991, Mr. Flounlacker was Manager of Acquisitions Development of
Columbia Freestate Health Plan, a health maintenance organization. Mr.
Flounlacker received his B.A. in English from the University of Maryland, and
his M.B.A. from Loyola College in Baltimore, Maryland.

SHERRIE L. JONES has served as Vice President, Sales and Marketing since
February 1996. From October 1994 until February 1996, she held the position of
Vice President, Marketing. Ms. Jones joined APACHE in early 1990 as a marketing
consultant responsible for assisting the design plan and market definition for
the APACHE Critical Care System, and later that year she assumed a permanent
position as a sales representative. Prior to joining APACHE, she spent 12 years
with Datapoint Corporation in the areas of accounting, finance, contracts
management and sales. Ms. Jones holds a B.A. in accounting from the University
of Texas.

STEPHEN C. STRATEGOS has been Vice President, Systems Engineering since
February of 1995. He joined APACHE in May 1991 as Director of Systems
Engineering. He has been responsible for the development and technical quality
of all software products since joining the Company. From 1990 until joining
APACHE, Mr. Strategos was the Director of Software Development at I-NET, Inc. in
Bethesda, Maryland, where he managed software development activities for the
Network Management division. Mr. Strategos received a B.A. in biology from State
University College at Oswego, New York and an M.S. in computer science from
State University of New York at Stony Brook.

DOUGLAS I. THOMPSON has served as Vice President, Consulting Services since
August 1993. From the time he joined APACHE until August 1993, he acted as Vice
President, Client Services. Mr. Thompson was a manager at Ernst & Young L.L.P.
in Phoenix, Arizona from 1989 until joining APACHE. While at Ernst & Young, he
led process improvement projects for hospital clients, which involved consulting
with physician groups on marketing, operations and organizational structure
issues, and prepared business plans for startup healthcare firms. Before joining
Ernst & Young, Mr. Thompson was employed from 1987 to 1988 by APM, Inc. in both
New York City and San Francisco as a consultant for healthcare clients. Mr.
Thompson received an M.B.A. in marketing from Columbia University and a B.S. in
business from Brigham Young University.

BRION D. UMIDI has been Vice President, Finance and Administration, and
Treasurer of the Company since February 1991. From 1987 until joining APACHE, he
was a commercial finance loan officer at the Mercantile Safe Deposit and Trust
Company in Baltimore, Maryland and an auditor with MNC Financial, Inc. in
Baltimore, Maryland from 1986 to 1987. He received his B.B.A. from Loyola
College in Baltimore, Maryland, where he majored in accounting and finance.

EDWARD J. CONNORS has served as a director of the Company since April 1990.
In 1993, he retired as the President and Chief Executive Officer of Mercy Health
Services, where he had been employed since 1976, and he is currently acting as
President Emeritus. Since 1993, Mr. Connors has been the President of
Connors/Roberts & Associates, a healthcare consulting firm located in
Morrisville, Vermont. He has also held academic and management leadership
positions at the University of Michigan and its hospital in Ann Arbor and the
University of Wisconsin Hospital in Madison. Mr. Connors has served as chair of
the AHA Board of Trustees and as chair of the American Healthcare Systems Board
of Governors. Mr. Connors has served as a Commissioner of the Joint Commission
on Accreditation of Healthcare Organizations Board of Commissioners and on the
Board of the American Hospital Association's Hospital Research and Educational
Trust. Currently, Mr. Connors serves on the Board of Trustees for the Eastern
Mercy Health System in

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Radnor, Pennsylvania, the Sisters of Providence Health System in Springfield,
Massachusetts, and Trinity College in Burlington, Vermont. Effective January 1,
1995, Mr. Connors assumed the responsibilities of Chairman of the Board of
Trustees of Fletcher Allen Health Care in Burlington, Vermont. In 1991, Mr.
Connors was elected to membership in the Institute of Medicine of the National
Academy of Science. Mr. Connors holds an M.H.A. from the University of
Minnesota.

THOMAS W. HODSON has served as a director of APACHE since December 1994 and
has been the Senior Vice President, Chief Financial Officer and a director of
Caremark International Inc. since August 1992. Caremark was spun off in 1992
from Baxter International, Inc., a manufacturer and marketer of healthcare
products, where Mr. Hodson had been Group Vice President for the Alternate Site
businesses from April 1992 until November 1992. From 1990 until April 1992, Mr.
Hodson was a Senior Vice President of Baxter, responsible for financial
relations, strategic planning, acquisitions and divestitures and corporate
communications. He holds a B.S. in business administration and economics from
Lehigh University and an M.B.A. from the Harvard Business School.

WILLIAM A. KNAUS, M.D. was a founder of the Company and currently serves as
the Company's Chief Scientific Advisor. He has been a director of the Company
since December 1994. Dr. Knaus is the Evelyn Troop Hobson Professor and Chairman
of the Department of Health Evaluation Sciences of the ICU at The University of
Virginia School of Medicine and a Fellow of the American College of Physicians.
He was the founder and, from 1978 to October 1995, a director of the ICU
Research Unit at George Washington University and developer of the APACHE
prognostic scoring system. Dr. Knaus has been honored with an appointment as a
professor at the University of Paris as well as numerous visiting lectureships
at universities in Western Europe, New Zealand and Australia. He is a
distinguished alumnus of both Widener and West Virginia Universities.

LAWRENCE S. LEWIN has been a director of the Company since December 1989
and has acted as the Chief Executive Officer and Chairman of Lewin-VHI, a
healthcare policy and management consulting firm, since December 1992. From 1987
until founding Lewin-VHI, he served as the Chief Executive Officer of Lewin-ICF,
a healthcare policy consulting firm. He founded Lewin and Associates, Inc. in
1970. He serves as a Trustee of Intermountain Health Care, Inc. and is a member
of the Advisory Board of Hambrecht & Quist Healthcare Investors and Life
Sciences Funds. Mr. Lewin holds an A.B. from Princeton's Woodrow Wilson School
of Public and International Affairs and an M.B.A. from the Harvard Business
School where he was a Baker Scholar.

NEAL L. PATTERSON has served as a director of APACHE since December 1989.
In 1980, Mr. Patterson was a founder of Cerner Corporation and has held the
position of its Chairman and Chief Executive Officer since 1986. He has played
an instrumental role in the development of the Healthcare Network Architecture,
which forms the basis for all Cerner systems, as well as the design of
individual products. Mr. Patterson has served as a director of LabOne, Inc.
since 1987. He holds a B.S. in finance and an M.B.A. from Oklahoma State
University.

STEPHEN W. RITTERBUSH, PH.D. has served as a director of APACHE since
December 1989. He is managing general partner of Fairfax Partners/The Venture
Fund of Washington, L.P., a venture capital fund, which he co-founded in 1989.
From 1986 to 1990, he was a director and an officer of ICF Kaiser International,
Inc., an environmental and remedial engineering firm. Prior to 1986, Dr.
Ritterbush served as President and Chief Executive Officer of Arthur D. Little
Far East, Inc., in Singapore. He holds a B.S. in engineering and a B.A. in
political science from Union College, in Schenectady, New York, an M.S. in
geophysics from the East West Center of the University of Hawaii, and an M.A.
and Ph.D. in international economics from the Fletcher School of Law and
Diplomacy of Tufts and Harvard Universities.

FRANCIS G. ZIEGLER has been a director of the Company since December 1994
and has acted as the President and Chief Executive Officer of Claneil
Enterprises, Inc., a privately owned holding company, since January 1993. He
joined Claneil in 1993 after thirty years as an operations and marketing
executive with Johnson & Johnson, where he served as President of five domestic
and international subsidiaries. Mr. Ziegler holds a B.S. in economics from St.
Peter's College, and attended the University of Santa Clara Business School, as
well as Advanced Management Programs at the Harvard and Columbia Business
Schools.

36
<PAGE> 39

ELECTION OF DIRECTORS

All of the current directors were elected to the Board of Directors
pursuant to a Stockholders Agreement, dated December 28, 1995, or its
predecessor agreements and serve for one-year terms or until their successors
are elected and qualified. The Stockholders Agreement, including all provisions
governing composition and election of the Board of Directors, will terminate
upon the closing of this offering.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has (i) an Audit Committee that reviews the results
and scope of the annual audit and other services provided by the Company's
independent public accountants; (ii) a Compensation Committee that makes
recommendations concerning salaries and incentive compensation for employees of
the Company; and (iii) a Capital Financing Committee that is responsible for
investigating and securing capital financing. The Company's Board of Directors
has designated the Compensation Committee as the administrator of the Company's
Stock Option Plan described below.

DIRECTOR COMPENSATION

Directors who are not currently receiving compensation as officers or
employees of the Company are entitled to reimbursement of expenses for attending
each meeting of the Board of Directors and each meeting of any committee.

EXECUTIVE COMPENSATION

The following table summarizes the compensation paid to or earned by the
following individuals for services rendered to the Company during the fiscal
year ended December 31, 1995: (i) the Chief Executive Officer ("CEO") and (ii)
the Company's four other most highly compensated executive officers (the CEO and
those officers are referred to herein collectively as the "Named Executive
Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL ALL OTHER
COMPENSATION COMPENSATION
------------ ------------
NAME AND PRINCIPAL POSITION SALARY($) ($)
- ------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Gerald E. Bisbee, Jr., Ph.D. -- Chairman and Chief Executive
Officer.......................................................... 150,000 2,598(1)
James L. Oakes, Jr. -- Chief Operating Officer(2).................. 144,000 --
Judith Hedstrom -- Vice President, Business Development(2)......... 109,979 --
Sherrie L. Jones -- Vice President, Sales and Marketing............ 108,045 --
Elizabeth A. Draper, R.N., M.S. -- Executive Vice President........ 106,000 --
</TABLE>

- -------------------------
(1) Consists of premiums paid on a life insurance policy.

(2) Mr. Oakes' employment terminated in April 1996. Ms. Hedstrom's employment
terminated in February 1996.

OPTION GRANTS

None of the Named Executive Officers was granted stock options during the
fiscal year ended December 31, 1995.

FISCAL YEAR-END VALUES

None of the Named Executive Officers exercised any stock options during
fiscal year 1995. The following table provides information regarding stock
options held by the Named Executive Officers as of the end of fiscal year 1995.

37
<PAGE> 40

OPTION VALUES AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
AT DECEMBER 31, 1995 OPTIONS AT DECEMBER 31, 1995(1)
------------------------------ --------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
- ---------------------------------- ----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Gerald E. Bisbee, Jr., Ph.D....... 377,449 22,728 2,339,755 107,903
James L. Oakes, Jr................ 17,483 52,449 -- --
Judith Hedstrom................... 18,064 16,902 16,537 15,469
Sherrie L. Jones.................. 5,766 15,214 -- --
Elizabeth A. Draper, R.N., M.S.... -- -- -- --
</TABLE>

- ------------------------------
(1) Value is calculated by subtracting the exercise price per share from $8.18,
the estimated fair market value at December 31, 1995 as determined by the
Board of Directors, and multiplying the result by the number of shares
subject to the option.

EMPLOYEE BENEFIT PLANS

Stock Option Plan

The Stock Option Plan was adopted by the Company's Board of Directors and
approved by the Company's stockholders on November 8, 1990. The Stock Option
Plan was amended and restated in April 1996. The Company has reserved 1,700,000
shares of Common Stock for issuance under the Stock Option Plan. Unless
terminated sooner by the Board of Directors, the Stock Option Plan will
terminate in April 2006.

The Stock Option Plan is administered by the Compensation Committee of the
Board of Directors. The Committee has the authority and discretion, subject to
the provisions of the Stock Option Plan, to select persons to whom options will
be granted, to designate the number of shares to be covered by options, to
specify the type of consideration to be paid to the Company, and to establish
all other terms and conditions of each stock option.

The Stock Option Plan provides for the grant of stock options to officers
and employees of the Company or its subsidiaries. Options granted under the
Stock Option Plan may be qualified or non-qualified stock options. The exercise
price for a stock option may not be less than the fair market value of the
Company's Common Stock on the date of grant. Stock options granted under the
Stock Option Plan may not be transferred other than by will or by the laws of
descent and distribution. Upon the occurrence of a Change of Control, as defined
in the Stock Option Plan, all outstanding unvested options under the Stock
Option Plan immediately vest.

Director Option Plan

In April 1996, the Company adopted the Director Option Plan, pursuant to
which non-employee directors of the Company will receive options to purchase
2,500 shares of Common Stock for each year of service. The exercise price of
such options shall be at the fair market value of the Company's Common Stock on
the date of grant. Stock options granted under the Director Option Plan may not
be transferred other than by will or by the laws of descent and distribution.
The Company has reserved 70,000 shares of Common Stock for issuance under the
Director Option Plan. The Director Option Plan may be terminated by the Board of
Directors at any time. Upon the occurrence of a Change of Control, as defined in
the Director Option Plan, all outstanding unvested options under the Director
Option Plan immediately vest.

38
<PAGE> 41

CERTAIN TRANSACTIONS

On February 23, 1995 and August 17, 1995, Caremark International Inc.
("Caremark") entered into convertible note agreements with the Company, pursuant
to which Caremark loaned $600,000 and $200,000, respectively, to the Company.
Caremark received warrants to purchase 119,881 shares of Common Stock at $1.43
per share and 24,452 shares of Common Stock at $8.18 per share in connection
with these loans. In December 1995, Caremark converted both loans into an
aggregate of 27,999 shares of Series F Convertible Preferred Stock, which shares
will be converted automatically at the closing of this offering into 97,899
shares of Common Stock. On an as-if converted basis, Caremark owns more than 5%
of the outstanding Common Stock of the Company, and Thomas W. Hodson, a director
of the Company, is Senior Vice President and Chief Financial Officer of
Caremark.

On February 24, 1995 and August 17, 1995, Benefit Capital Management
Corporation as Investment Manager for the Prudential Insurance Company of
America ("Benefit Capital") entered into convertible note agreements with the
Company pursuant to which Benefit Capital loaned $250,000 and $200,000,
respectively, to the Company. Benefit Capital received warrants to purchase
49,950 shares of Common Stock at $1.43 per share and 24,452 shares of Common
Stock at $8.18 per share, in connection with these loans. In December 1995, the
Company prepaid the $200,000 loan. The $250,000 loan is due and payable on
December 31, 1996, is non-interest bearing and is convertible at maturity into
30,458 shares of Common Stock. On an as-if converted basis, Benefit Capital owns
more than 5% of the outstanding Common Stock of the Company.

On April 16, 1995 and August 17, 1995, New York Life Insurance Company
("New York Life") entered into convertible note agreements with the Company,
pursuant to which New York Life loaned $800,000 and $100,000, respectively, to
the Company. New York Life received warrants to purchase 159,841 shares of
Common Stock at $1.43 per share and 12,226 shares of Common Stock at $8.18 per
share in connection with these loans. In December 1995, the Company prepaid the
$100,000 loan and New York Life agreed to extend the due date of the $800,000
loan from December 31, 1996 to December 31, 1997, in consideration of the
payment of interest on such loan at the per annum rate of 10% from and after
January 1, 1996. Prior to January 1, 1996, such loan had been non-interest
bearing. New York Life will convert the $800,000 loan into 97,805 shares of
Common Stock at the closing of this offering. On an as-if converted basis, New
York Life owns more than 5% of the outstanding Common Stock of the Company.

On February 24, 1995 and August 17, 1995, LHC Corporation ("LHC") entered
into convertible note agreements with the Company, pursuant to which LHC loaned
$100,000 and $100,000, respectively, to the Company. LHC received warrants to
purchase 19,981 shares of Common Stock at $1.43 per share and 12,226 shares of
Common Stock at $8.18 per share in connection with these loans. In December
1995, LHC agreed to extend the due date of both loans from December 31, 1996 to
December 31, 1997, in consideration of the payment of interest on such loans at
the per annum rate of 10% from and after January 1, 1996. Prior to January 1,
1996, the first $100,000 loan had been non-interest bearing and the second
$100,000 loan had borne interest at the prime rate plus 2%. LHC will convert
these loans into 24,452 shares of Common Stock at the closing of this offering.
Francis G. Ziegler, a director of the Company, is Chairman of LHC.

In connection with the Company's private placement of Series E Convertible
Preferred Stock, the Company issued a warrant to the placement agent, Allen &
Company Incorporated ("Allen"), which gives Allen the right to purchase 36,713
shares of Common Stock at a price of $8.18 per share. On an as-if converted
basis, including the warrant, Allen owns more than 5% of the outstanding Common
Stock of the Company.

In February 1995, the Company entered into an agreement with Cerner
Corporation ("Cerner") by which Cerner may incorporate certain of the Company's
proprietary methodologies into Cerner products and license such products to end
users in return for royalty payments to the Company. Cerner made a payment of
$250,000 against future royalties. Neal L. Patterson, a director of the Company,
is the Chairman and Chief Executive Officer of Cerner Corporation.

Each of the transactions described above was a negotiated transaction and
was approved by a disinterested majority of the Company's Board of Directors.
The Company believes that each of these transactions was fair to the Company and
on terms no less favorable than would have been available in similar
transactions with unaffiliated third parties. In addition, each of these
transactions was initiated at the request of the Company's management rather
than at the request of the affiliated party and the material terms of the
transactions and the nature of the interest of the affiliated party were fully
disclosed to the disinterested directors.

39
<PAGE> 42

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock (including shares of
Common Stock issuable upon the Recapitalization Transactions) as of the date
hereof, and as adjusted to give effect to the sale of shares of Common Stock
offered hereby, by (i) each person known by the Company to be the beneficial
owner of more than 5% of the outstanding Common Stock, (ii) each director of the
Company, (iii) each Named Executive Officer and (iv) all of the Company's
executive officers and directors as a group. Except as indicated in the
footnotes to the table, the Company believes that the persons named in the table
have sole voting and investment power with respect to the shares of Common Stock
indicated:

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF TOTAL
SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
OWNED(1) OFFERING OFFERING
------------ ---------- ---------
<S> <C> <C> <C>
5% STOCKHOLDERS
Caremark International Inc.(2)................................. 876,602 18.6 13.1
Benefit Capital Management Corporation(3)...................... 582,487 12.5 8.8
Baxter Healthcare Corporation(4)............................... 573,346 12.5 8.7
Allen & Company Incorporated(5)................................ 538,449 11.7 8.1
New York Life Insurance Company(6)............................. 460,405 9.7 6.8
Fairfax Partners/The Venture Fund of Washington, L.P.(7)....... 454,546 9.9 6.9
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Gerald E. Bisbee, Jr., Ph.D.(8)................................ 400,177 8.0 5.7
James L. Oakes, Jr.(9)......................................... 32,780 * *
Judith S. Hedstrom(10)......................................... 18,064 * *
Sherrie L. Jones(11)........................................... 5,766 * *
Elizabeth A. Draper, R.N., M.S................................. 176,521 3.9 2.7
Edward J. Connors(12).......................................... 10,490 * *
Thomas W. Hodson(13)........................................... 880,099 18.6 13.1
William A. Knaus, M.D.(14)..................................... 405,752 8.9 6.2
Lawrence S. Lewin(15).......................................... 10,490 * *
Neal L. Patterson(16).......................................... 194,233 4.2 3.0
Stephen W. Ritterbush, Ph.D.(17)............................... 465,036 10.1 7.0
Francis G. Ziegler(18)......................................... 196,091 4.3 3.0
All directors and executive officers as a group (15
persons)(19)................................................. 2,880,491 53.8 39.2
</TABLE>

- ------------------------------
* Represents less than 1% of the outstanding Common Stock.

(1) Unless otherwise indicated in these footnotes, each stockholder has sole
voting and investment power with respect to the shares listed in the table.
Share ownership information includes shares of Common Stock issuable
pursuant to outstanding options that may be exercised within 60 days after
March 31, 1996.

(2) Includes 144,333 shares issuable upon exercise of vested warrants. The
address of Caremark is 2215 Sanders Road, Suite 400, Northbrook, Illinois
60062. Mr. Hodson, a director of the Company, is the Senior Vice President,
Chief Financial Officer and a director of Caremark, which is a publicly
traded corporation.

(3) Includes 74,402 shares issuable upon exercise of vested warrants. Benefit
Capital holds all shares and warrants in its capacity as Investment Manager
for the Prudential Insurance Company of America Separate Account
#VCA-GA-5298 and disclaims beneficial ownership of all such shares and
warrants. Prudential Insurance Company of America is a publicly traded
corporation. The address of Benefit Capital is 39 Old Ridgebury Road,
Danbury, Connecticut 06817.

40
<PAGE> 43

(4) The address of Baxter Healthcare Corporation is 17221 Red Hill Avenue,
Irvine, California 92714. Baxter Healthcare Corporation is a publicly
traded corporation.

(5) Includes 36,713 shares issuable upon exercise of a vested warrant. Allen
disclaims beneficial ownership of 8,812 of such shares. Allen also
disclaims beneficial ownership of 5,504 shares of the 250,245 shares listed
above, which are held by Allen as nominee for certain of its officers and
directors. Also includes 288,204 shares beneficially owned by other
officers, directors and related parties of Allen, the beneficial ownership
of which is disclaimed by Allen. Allen is a privately held investment
banking company. The address of Allen is 711 Fifth Avenue, New York, New
York 10022. The individual officers, directors and related parties of Allen
have the voting and investment power with respect to the shares they
beneficially own.

(6) Includes 172,067 shares issuable upon exercise of vested warrants. The
address of New York Life Insurance Company is 51 Madison Avenue, New York,
New York 10010. New York Life Insurance Company is a mutual insurance
company owned by its policyholders.

(7) Includes 17,483 shares issuable upon exercise of a vested warrant. The
address of Fairfax Partners/The Venture Fund of Washington, L.P. is 1568
Spring Hill Road, Suite 200, McLean, Virginia 22102. Mr. Ritterbush, a
director of the Company, is the managing general partner of Fairfax
Partners/The Venture Fund of Washington, L.P.

(8) Consists of 400,177 shares issuable upon exercise of vested options. Dr.
Bisbee's address is c/o APACHE Medical Systems, Inc., 1650 Tysons
Boulevard, McLean, Virginia 22102.

(9) Consists of 32,780 shares issuable upon exercise of vested options.

(10) Consists of 18,066 shares issuable upon exercise of vested options.

(11) Consists of 5,770 shares issuable upon exercise of vested options.

(12) Consists of 10,490 shares issuable upon exercise of vested options.

(13) Consists of 3,497 shares issuable upon the exercise of vested options held
by Mr. Hodson and 876,602 shares owned or to be owned of record by
Caremark. Mr. Hodson disclaims all beneficial ownership of such 876,602
shares.

(14) Dr. Knaus' address is c/o Department of Health Evaluation Sciences, Box
600, University of Virginia School of Medicine, Charlottesville, Virginia
22908.

(15) Consists of 10,490 shares issuable upon exercise of a vested option.

(16) Consists of 10,490 shares issuable upon exercise of a vested option held by
Mr. Patterson and 183,743 shares owned or to be owned of record by Cerner.
Mr. Patterson disclaims beneficial ownership of such 183,743 shares.

(17) Consists of 10,490 shares issuable upon exercise of a vested option held by
Dr. Ritterbush and 454,546 shares owned or to be owned of record by Fairfax
Partners/The Venture Fund of Washington, L.P. Dr. Ritterbush disclaims
beneficial ownership of such 454,546 shares.

(18) Consists of 3,497 shares issuable upon exercise of a vested option held by
Mr. Ziegler and 192,594 shares owned or to be owned of record by LHC
Corporation. Mr. Ziegler disclaims beneficial ownership of such 192,594
shares.

(19) Includes 590,733 shares issuable upon exercise of vested options and
options that will vest within 60 days. Also includes 1,707,485 shares
(194,023 of which are issuable upon the exercise of vested warrants), the
beneficial ownership of which is disclaimed by the directors and executive
officers.

41
<PAGE> 44

DESCRIPTION OF CAPITAL STOCK

Immediately following the closing of the offering made hereby, the
authorized capital stock of the Company will consist of 30,000,000 shares of
Common Stock, par value $.01 per share, and 1,543,704 shares of preferred stock,
par value $.01 per share.

COMMON STOCK

The Company is authorized to issue 30,000,000 shares of Common Stock. As of
March 31, 1996, the Company had outstanding 1,075,575 shares of Common Stock and
had 13 holders of record of the Common Stock. Upon the consummation of the
offering made hereby, assuming a July 3, 1996 consummation date, there will be
6,571,353 shares of Common Stock outstanding after giving effect to (i) the sale
of the shares of Common Stock offered hereby, (ii) the automatic conversion of
200,000 outstanding shares of Series A Convertible Preferred Stock, 140,754
outstanding shares of Series B Convertible Preferred Stock, 118,110 outstanding
shares of Series C Convertible Preferred Stock, 209,994 outstanding shares of
Series D Convertible Preferred Stock, 174,995 outstanding shares of Series E
Convertible Preferred Stock and 27,999 outstanding shares of Series F
Convertible Preferred Stock into an aggregate of 3,294,519 shares of Common
Stock, (iii) the conversion of certain promissory notes having an aggregate
principal amount of $1,000,000 into an aggregate of 122,257 shares of Common
Stock and (iv) the payment of $939,940 of accumulated dividends through the
issuance of an aggregate of 78,331 shares of Common Stock. Such total excludes
shares issuable upon the exercise of outstanding options and warrants. Each
stockholder of record is entitled to one vote for each outstanding share of
Common Stock owned by him on every matter properly submitted to the stockholders
for their vote.

The holders of Common Stock are entitled to receive ratably such dividends
as are declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock have the right to a ratable
portion of assets remaining after payment of liabilities. Holders of Common
Stock have neither preemptive rights nor rights to convert their Common Stock
into any other securities and are not subject to future calls or assessments by
the Company. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and the shares
offered hereby upon issuance and sale will be, fully paid and non-assessable.

PREFERRED STOCK

Upon the consummation of this offering all of the issued and outstanding
shares of the preferred stock will be converted into 3,294,519 shares of Common
Stock. Following such conversion, the Board of Directors of the Company may not
authorize the issuance of shares of preferred stock.

WARRANTS

In connection with the Company's private placement of Series E Convertible
Preferred Stock, the Company issued a warrant to the placement agent, Allen,
which gives Allen the right to purchase 36,713 shares of Common Stock at a price
of $8.18 per share. Additionally, the Company issued warrants to purchase an
aggregate of up to 349,653 shares of Common Stock at $1.43 per share in February
1995 and April 1995 and 73,356 shares of Common Stock at $8.18 per share to four
lenders in connection with loan transactions consummated in August 1995. In May
1991, the Company issued a warrant to purchase up to 17,483 shares of Common
Stock at $2.86 per share to a lender in connection with a loan transaction.

REGISTRATION RIGHTS

The Company has granted certain registration rights to its preferred
stockholders (the "Preferred Holders"), certain majority common stockholders
(the "Key Holders") and an affiliate of Premier (the "Business Holder")
(collectively, the "Holders"), who will own in the aggregate 4,517,833 shares of
Common Stock upon consummation of this offering and have the right to acquire
through the exercise of vested options and warrants up to an aggregate of
942,870 additional shares of Common Stock. The Holders have "piggyback"
registration rights to request that the Company register any of their shares in
the event that the

42
<PAGE> 45

Company proposes to register any of its securities under the Securities Act
(other than a registration effected solely to implement an employee benefit plan
or a transaction to which Rule 145 of the Securities and Exchange Commission is
applicable). However, if such piggyback rights are exercised in connection with
an underwritten public offering of the Company's Common Stock, the managing
underwriter of such an offering has the right to exclude or otherwise limit the
number of such shares to be included in such public offering. The Company has
undertaken annually for the next four years to initiate a registration with
respect to which the Holders will have piggyback rights. Additionally, the
Preferred Holders have "demand" registration rights to have the Company prepare
and file, on two occasions, a registration statement so as to permit a public
offering and sale of their shares of Common Stock, provided that Preferred
Holders owning at least 51%, in the case of the first demand, or 25%, in the
case of the second demand, of the shares covered by the registration rights must
demand such registration and must dispose of at least 20% of the then
registrable stock through the registration statement. After the first demand by
the Preferred Holders, the Business Holder shall have one right (or two under
certain circumstances) to demand a registration of at least 50,000 shares of
their Common Stock. Once the Company is eligible to register its securities on
Form S-3 with the Securities and Exchange Commission, the Preferred Holders can
demand up to six additional registrations, each at least six months apart and
for an aggregate expected public offering price of at least $500,000, and after
January 1, 2001, the Business Holder can demand up to two additional
registrations on Form S-3, each at least six months apart and for at least
50,000 shares.

DELAWARE LAW AND CERTAIN LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS

Section 203 of Delaware General Corporation Law

Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder", which is defined as a person who,
together with any affiliates or associates of such person, beneficially owns,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of such assets having an aggregate value in excess of 10% of the consolidated
assets of the corporation, and certain transactions that would increase the
interested stockholder's proportionate share ownership in the corporation)
between an interested stockholder and a corporation for a period of three years
after the date the interested stockholder becomes an interested stockholder,
unless (i) the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an interested
stockholder, (ii) the interested stockholder acquired at least 85% of the voting
stock of the corporation (other than stock held by directors who are also
officers or by certain employee stock plan) in the transaction in which it
becomes an interested stockholder or (iii) the business combination is approved
by a majority of the board of directors and by the affirmative vote of 66 2/3%
of the outstanding voting stock that is not owned by the interested stockholder.

Indemnification and Limitation of Liability

The Company's Amended and Restated Certificate of Incorporation provides
that the Company shall, subject to certain limitations, indemnify its directors
and officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful.

Section 102 of the Delaware General Corporation Law ("DGCL") permits a
Delaware corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. DGCL Section
102 provides, however, that liability for breaches of the duty of loyalty, acts
or omissions not in good faith or involving intentional misconduct, or knowing
violation of the law, and the unlawful purchase or redemption of stock or
payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. The Company's Restated
Certificate of Incorporation includes a provision which

43
<PAGE> 46

eliminates, to the fullest extent permitted, director liability for monetary
damages for breaches of fiduciary duty.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock will be First Chicago
Trust Company of New York.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of this offering, assuming a July 3, 1996 consummation
date, the Company will have 6,571,353 outstanding shares of Common Stock,
including shares of Common Stock issuable upon the Recapitalization
Transactions. Of these shares, the 2,000,000 shares of Common Stock sold in this
offering (assuming the Underwriters' over-allotment option is not exercised)
will be freely tradable without restriction or further registration under the
Securities Act unless purchased by affiliates of the Company (as such term is
defined under the Securities Act). The 4,571,353 shares held by existing
stockholders, representing 70% of the total number of shares of Common Stock to
be outstanding upon the completion of this offering, may not be resold except
pursuant to an effective registration statement filed by the Company or an
applicable exemption from registration, including an exemption under Rule 144.
In addition, certain holders of Common Stock have agreed that they will not,
without obtaining the prior written approval of the Representatives (as defined
in "Underwriting"), directly or indirectly offer for sale, sell, transfer,
encumber, contract to sell, grant any option, right or warrant to purchase or
otherwise dispose (or announce any offer, sale, transfer, encumbrance, contract
to sell, grant of an option to purchase or other disposition) of any shares of
Common Stock, or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock, for a period of 180 days after the effective date
of the Registration Statement of which this Prospectus forms a part.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company (as defined
in Rule 144, an "Affiliate"), who has beneficially owned "restricted securities"
(as that term is defined in Rule 144) for a period of at least two years from
the later of the date such restricted securities were acquired from the Company
or the date they were acquired from an Affiliate, is entitled to sell, within
any three-month period, a number of such securities that does not exceed the
greater of (i) 1% of the then outstanding shares of the Company's Common Stock
(approximately 65,713 shares immediately after this offering) or (ii) the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks preceding the filing of notice of such sale. Sales under Rule 144
are also subject to certain restrictions on the manner of sale, notice
requirements, and the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering, subject to the 180-day restriction on transfer
described in the preceding paragraph. The Securities and Exchange Commission has
proposed an amendment to Rule 144 that would reduce the holding period required
for shares subject to Rule 144 to become eligible for sale in the public market.
If the proposed amendment becomes effective, the two-year and three-year holding
periods referred to in this paragraph will be reduced to one-year and two-year
holding periods, respectively.

Under Rule 701 under the Securities Act, certain shares issued pursuant to
employee benefit plans or arrangements in effect prior to this offering are
eligible for resale 90 days after the Company becomes a reporting company under
the Exchange Act and may be sold by persons other than Affiliates subject only
to the manner of sale provisions of Rule 144 and by Affiliates without
compliance with the holding period requirements of Rule 144.

As soon as practicable following the expiration of the 180-day period
described above, the Company intends to file a registration statement or
statements on Form S-8 under the Securities Act to register the shares of Common
Stock issuable pursuant to the Stock Option Plan and the Director Option Plan.
As of

44
<PAGE> 47

March 31, 1996, options issued pursuant to the Stock Option Plan to purchase
approximately 866,705 shares were outstanding, of which options to purchase
646,483 shares were exercisable. Shares issued upon the exercise of the options
generally will be eligible for sale in the public market after the effective
date of such registration, subject, in certain cases, to the lock-up agreements
described herein and volume and other restrictions.

Prior to this offering, there has been no public market for the Common
Stock. No predictions can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the specific
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market
could adversely affect the market price of the Company's Common Stock.

After the completion of this offering, certain persons will be entitled to
certain rights with respect to registration under the Securities Act of
approximately 5,395,215 shares of Common Stock (including shares issuable upon
the exercise of outstanding warrants). In addition, after the completion of this
offering, the Company will issue options to purchase up to an aggregate of
366,294 shares of Common Stock to an affiliate of Premier. The Premier affiliate
will be entitled to certain rights with respect to registration under the
Securities Act of the shares issuable upon exercise of these options. See
"Recent Developments" and "Description of Capital Stock -- Registration Rights."

45
<PAGE> 48

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Cowen & Company, Lehman Brothers Inc. and Volpe, Welty & Company (the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Cowen & Company.............................................................. 446,668
Lehman Brothers Inc. ........................................................ 446,666
Volpe, Welty & Company....................................................... 446,666
Bear, Stearns & Co. Inc. .................................................... 40,000
Donaldson, Lufkin & Jenrette Securities Corporation.......................... 40,000
Hambrecht & Quist LLC........................................................ 40,000
Montgomery Securities........................................................ 40,000
J.P. Morgan Securities Inc. ................................................. 40,000
Oppenheimer & Co., Inc. ..................................................... 40,000
Prudential Securities Incorporated........................................... 40,000
Smith Barney Inc. ........................................................... 40,000
UBS Securities LLC........................................................... 40,000
Crowell, Weedon & Co. ....................................................... 25,000
Jefferies & Company.......................................................... 25,000
Johnston, Lemon & Co. Incorporated........................................... 25,000
Legg Mason Wood Walker, Incorporated......................................... 25,000
McDonald & Company Securities, Inc. ......................................... 25,000
Punk, Ziegel & Knoell........................................................ 25,000
Raymond James & Associates, Inc. ............................................ 25,000
Scott & Stringfellow, Inc. .................................................. 25,000
Unterberg Harris............................................................. 25,000
Vector Securities International, Inc. ....................................... 25,000
Wessels, Arnold & Henderson.................................................. 25,000
Wheat First Butcher Singer................................................... 25,000
----------
Total................................................................... 2,000,000
==========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby (other
than the shares subject to the over-allotment option) if any such shares are
purchased.

The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $.47 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.10 per share to certain dealers. After
the initial public offering, the offering price and other selling terms may be
changed by the Representatives of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus to cover over-allotments, if any. To the extent the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the above table bears to 2,000,000,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 2,000,000 shares are being offered.

The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, as amended.

46
<PAGE> 49

The Company, certain of its officers and directors who own shares of Common
Stock and certain other stockholders and option holders of the Company have
entered into agreements providing that, for a period of 180 days after the date
of this Prospectus, they will not, without the prior written consent of Cowen &
Company, on behalf of the Underwriters, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into, or exercisable or exchangeable for, Common Stock, or any option, warrant
or right to purchase any shares of Common Stock or any such convertible,
exercisable or exchangeable securities or grant any option to dispose of any
shares of Common Stock. See "Shares Eligible for Future Sale."

The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock was determined by negotiations among the Company and the
Representatives of the Underwriters. Among the factors considered in such
negotiations were prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and stages of development
of other companies which the Company and the Representatives of the Underwriters
believed to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Gardner, Carton & Douglas, Chicago, Illinois. Certain legal matters
in connection with this offering will be passed upon for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom, New York, New York.

EXPERTS

The consolidated financial statements and schedule of the Company as of
December 31, 1994 and 1995, and for each of the years in the three-year period
ended December 31, 1995, have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C. 20549, a Registration Statement on Form S-1, including
amendments thereto, under the Securities Act of 1933 with respect to shares of
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith, certain portions of which have been omitted as
permitted by the rules and regulations of the SEC. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other documents referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being deemed to
be qualified in its entirety by such reference. The Registration Statement,
including all exhibits and schedules thereto, may be inspected without charge at
the principal office of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven World
Trade Center, Suite 1300, New York, New York 10048, and copies of all or any
part thereof may be obtained from such offices upon the payment of the
prescribed fees. In addition, electronically filed documents, including reports,
proxy and information statements and other information regarding the Company,
can be obtained from the SEC's Web site at: http://www.sec.com.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent certified public
accountants and quarterly reports containing unaudited financial statements for
the first three quarters of each fiscal year.

47
<PAGE> 50

APACHE MEDICAL SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S> <C>
PAGE
----
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets -- December 31, 1994 and 1995, March 31, 1996 and Pro
Forma March 31, 1996............................................................... F-3
Consolidated Statements of Operations -- Years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1995 and 1996................................. F-4
Consolidated Statements of Changes in Stockholders' Deficit -- Years ended December
31, 1993, 1994 and 1995 and the three months ended March 31, 1996.................. F-5
Consolidated Statements of Cash Flows -- Years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1995 and 1996................................. F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>

F-1
<PAGE> 51

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
APACHE Medical Systems, Inc.:

We have audited the accompanying consolidated balance sheets of APACHE
Medical Systems, Inc., and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of APACHE
Medical Systems, Inc., and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.

March 22, 1996, except as to note 12
which is as of June 18, 1996

McLean, Virginia

KPMG Peat Marwick LLP

F-2
<PAGE> 52

APACHE MEDICAL SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996

<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ---------------------------
--------------------------- PRO FORMA
1994 1995 1996 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 208,596 $ 4,035,787 $ 2,626,806 $ 2,626,806
Accounts receivable, net of allowance for
doubtful accounts of $143,000 in 1994, $190,800
in 1995 and $190,800 at March 31, 1996 (note
3)............................................. 934,524 1,419,959 2,201,841 2,201,841
Other trade receivables (note 3)................. 181,436 162,466 147,301 147,301
Prepaid expenses and other....................... 156,860 124,690 145,833 145,833
------------ ------------ ------------ ------------
Total current assets...................... 1,481,416 5,742,902 5,121,781 5,121,781
Other trade receivables, net of current maturities
(note 3)......................................... 348,289 74,875 35,736 35,736
Furniture and equipment (note 6)................... 2,900,820 2,887,115 2,893,073 2,893,073
Less accumulated depreciation and amortization... (823,318) (1,496,114) (1,654,462) (1,654,462)
------------ ------------ ------------ ------------
Net furniture and equipment........................ 2,077,502 1,391,001 1,238,611 1,238,611
Capitalized software development costs, net........ 337,944 700,543 689,732 689,732
------------ ------------ ------------ ------------
Total assets.............................. $ 4,245,151 $ 7,909,321 $ 7,085,860 $ 7,085,860
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable........................... $ 1,428,925 $ 921,726 $ 812,395 $ 812,395
Accrued expenses................................. 585,726 723,024 738,761 738,761
Preferred stock dividends payable................ -- -- -- 821,670
Current maturities of obligations under capital
leases (note 6)................................ 108,960 190,797 174,617 174,617
Current maturities of notes payable --
stockholders (note 4).......................... -- 250,000 250,000 250,000
Current maturities of notes payable -- other
(note 5)....................................... 122,115 224,020 200,980 200,980
Deferred revenue................................. 1,132,170 1,915,192 2,181,815 2,181,815
------------ ------------ ------------ ------------
Total current liabilities................. 3,377,896 4,224,759 4,358,568 5,180,238
Deferred rent benefit (note 6)..................... 202,590 186,431 181,335 181,335
Obligations under capital leases, net of current
maturities (note 6).............................. 117,722 62,405 36,752 36,752
Notes payable -- stockholders, net of current
maturities and discounts (note 4)................ 100,000 835,000 901,250 58,250
Notes payable -- other, net of current maturities
(note 5)......................................... 330,975 181,282 175,999 175,999
------------ ------------ ------------ ------------
Total liabilities......................... 4,129,183 5,489,877 5,653,904 5,632,574
Redeemable convertible preferred stock (note 8).... 14,514,906 20,731,878 21,029,333 --
Stockholders' Equity (Deficit) (note 9):
Common stock, $.01 par value, authorized shares,
4,947,552 at December 31, 1994, 5,769,231 at
December 31, 1995, 5,769,231 at March 31, 1996
and 30,000,000 pro forma at March 31, 1996;
issued and outstanding shares, 1,072,835 at
December 31, 1994, 1,075,458 at December 31,
1995, 1,075,575 at March 31, 1996, and
4,553,467 pro forma at March 31, 1996.......... 10,728 10,755 10,756 45,535
Additional paid-in capital....................... 568,633 1,363,272 1,364,223 20,266,696
Cumulative dividends and accreted issue costs on
redeemable convertible preferred stock......... (878,112) (1,778,689) (2,113,411) --
Accumulated deficit.............................. (14,100,187) (17,907,772) (18,858,945) (18,858,945)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)...... (14,398,938) (18,312,434) (19,597,377) 1,453,286
------------ ------------ ------------ ------------
Commitments (notes 6 and 11)
Total liabilities and stockholders' equity
(deficit)............................... $ 4,245,151 $ 7,909,321 $ 7,085,860 $ 7,085,860
============ ============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 53

APACHE MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1995 and 1996

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Systems..................... $ 2,004,184 $ 3,586,991 $ 4,096,458 $ 699,665 $ 1,241,750
Support..................... 485,798 836,530 1,351,963 317,535 330,439
Professional services....... 1,350,643 893,610 1,575,684 241,500 86,883
----------- ----------- ----------- ----------- -----------
Total revenue....... 3,840,625 5,317,131 7,024,105 1,258,700 1,659,072
Expenses:
Cost of operations.......... 2,150,879 3,700,297 2,866,055 732,949 753,608
Research and development.... 1,017,374 1,812,579 1,919,264 577,970 363,824
Selling, general and
administrative........... 2,976,235 6,030,427 5,630,611 1,577,225 1,444,991
----------- ----------- ----------- ----------- -----------
Total expenses...... 6,144,488 11,543,303 10,415,930 2,888,144 2,562,423
----------- ----------- ----------- ----------- -----------
Loss from operations.......... (2,303,863) (6,226,172) (3,391,825) (1,629,444) (903,351)
Other income (expense):
Interest income............. 67,298 93,849 62,354 18,680 57,810
Interest expense............ (102,110) (68,733) (482,890) (38,974) (105,632)
Other, net.................. (45,261) 9,438 4,776 195 --
----------- ----------- ----------- ----------- -----------
Net loss...................... (2,383,936) (6,191,618) (3,807,585) (1,649,543) (951,173)
Accretion of dividends and
issue costs on redeemable
convertible preferred
stock....................... (179,495) (669,720) (900,577) (205,100) (334,722)
----------- ----------- ----------- ----------- -----------
Net loss to common
stockholders...... $(2,563,431) $(6,861,338) $(4,708,162) $(1,854,643) $(1,285,895)
=========== =========== =========== =========== ===========
Pro Forma (unaudited):
Pro Forma net loss per
share....................... $ (0.79) $ (0.19)
=========== ===========
Weighted average number of
shares used for calculation
of Pro Forma loss per
share....................... 4,611,389 4,628,029
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 54

APACHE MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Years ended December 31, 1993, 1994 and 1995
and three months ended March 31, 1996

<TABLE>
<CAPTION>
CUMULATIVE DIVIDENDS
AND ACCRETED
COMMON STOCK ADDITIONAL ISSUE COSTS ON
------------------- PAID-IN CUMULATIVE REDEEMABLE ACCUMULATED
SHARES AMOUNT CAPITAL PREFERRED STOCK DEFICIT TOTAL
--------- ------- ---------- --------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ 1,064,093 $10,641 $ 241,540 $ (28,897) $ (5,524,633) $ (5,301,349)
Accretion of dividends and
issue costs on redeemable
preferred stock........... -- -- -- (179,495) -- (179,495)
Net loss.................... -- -- -- -- (2,383,936) (2,383,936)
--------- ------- ---------- ---------- ------------ ------------
Balance at December 31,
1993........................ 1,064,093 10,641 241,540 (208,392) (7,908,569) (7,864,780)
Issuance of common stock.... 8,742 87 71,413 -- -- 71,500
Issuance of common stock
options................... -- -- 255,680 -- -- 255,680
Accretion of dividends and
issue costs on redeemable
preferred stock........... -- -- -- (669,720) -- (669,720)
Net loss.................... -- -- -- -- (6,191,618) (6,191,618)
--------- ------- ---------- ---------- ------------ ------------
Balance at December 31,
1994........................ 1,072,835 10,728 568,633 (878,112) (14,100,187) (14,398,938)
Issuance of convertible
preferred stock
warrants.................. -- -- 787,166 -- -- 787,166
Issuance of common stock.... 2,623 27 7,473 -- -- 7,500
Accretion of dividends and
issue costs on redeemable
preferred stock........... -- -- -- (900,577) -- (900,577)
Net loss.................... -- -- -- -- (3,807,585) (3,807,585)
--------- ------- ---------- ---------- ------------ ------------
Balance at December 31,
1995........................ 1,075,458 10,755 1,363,272 (1,778,689) (17,907,772) (18,312,434)
Issuance of common stock
(unaudited)............... 117 1 951 -- -- 952
Accretion of dividends and
issue costs on redeemable
preferred stock
(unaudited)............... -- -- -- (334,722) -- (334,722)
Net loss (unaudited)........ -- -- -- -- (951,173) (951,173)
--------- ------- ---------- ---------- ------------ ------------
Balance at March 31, 1996
(unaudited)................. 1,075,575 $10,756 $1,364,223 $(2,113,411) $(18,858,945) $(19,597,377)
========= ======= ========== ========== ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 55

APACHE MEDICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1993, 1994 and 1995
and three months ended March 31, 1995 and 1996

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------- -----------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................. $(2,383,936) $(6,191,618) $(3,807,585) $(1,649,543) $ (951,173)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 167,862 445,885 736,050 148,449 216,157
Gain on forgiveness of debt........ -- (19,500) -- -- --
Options issued for software
license.......................... -- 255,680 -- -- --
Loss on sale of furniture and
equipment........................ -- -- 68,735 -- --
Accretion of interest.............. -- -- 366,167 17,416 66,250
Provision for doubtful accounts.... -- 78,429 47,838 -- 25,000
(Increase) decrease in accounts
receivable....................... (572,275) 45,471 (533,273) 372,716 (806,882)
(Increase) decrease in other trade
receivables...................... -- (529,725) 292,381 (49,133) 54,304
(Increase) decrease in other
current assets................... (29,078) (65,074) 32,173 (146,079) (26,244)
Increase (decrease) in accounts
payable and accrued expenses..... 195,561 1,375,761 (369,901) 284,726 (93,595)
Increase (decrease) in deferred
rent............................. 3,832 184,566 (16,159) (6,284) (5,096)
Increase in deferred revenue....... 459,276 672,896 783,020 252,336 266,623
----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities.................... (2,158,758) (3,747,229) (2,400,554) (775,396) (1,254,656)
Cash Flows from Investing Activities:
Purchase of furniture and
equipment.......................... (495,366) (1,785,514) (56,985) (6,747) (5,958)
Proceeds from sale of furniture and
equipment.......................... -- 206,247 221,217 92,517 --
Capitalized software development
costs.............................. -- (337,944) (425,852) (66,725) (41,896)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities.......... (495,366) (1,917,211) (261,620) 19,045 (47,854)
Cash Flows from Financing Activities:
Principal payments on borrowings..... (124,425) (390,108) (347,788) (10,480) (28,323)
Principal payments on capital lease
obligation......................... (31,508) (25,366) (192,742) (27,043) (41,833)
Proceeds from issuance of note
payable............................ 46,000 -- 2,350,000 950,000 --
Proceeds from issuance of preferred
stock, net of issuance costs....... (11,250) 5,721,596 4,672,395 -- (37,267)
Proceeds from issuance of common
stock upon exercise of options..... -- -- 7,500 -- 952
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities.......... (121,183) 5,306,122 6,489,365 912,477 (106,471)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents..................... (2,775,307) (358,318) 3,827,191 156,126 (1,408,981)
Cash and Cash Equivalents at Beginning
of Period............................ 3,342,221 566,914 208,596 208,596 4,035,787
----------- ----------- ----------- ----------- -----------
Cash and Cash Equivalents at End of
Period............................... $ 566,914 $ 208,596 $ 4,035,787 $ 364,722 $ 2,626,806
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 56

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) NATURE OF THE BUSINESS

APACHE Medical Systems, Inc. (the "Company"), a Delaware corporation, was
incorporated on September 1, 1987. The Company is a leading provider of
clinically-based decision support information systems to the healthcare
industry. The Company offers healthcare providers and suppliers a comprehensive
line of outcomes-based products and services, encompassing software, hardware,
and related consulting services.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Use of Estimates

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Critical Audit, Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Activities of the subsidiary to date have been immaterial. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results inevitably will differ from those estimates.

Revenue Recognition

Revenues for sales of systems requiring production activities both before
and subsequent to delivery are recognized by the percentage-of-completion method
using significant milestones to estimate progress toward completion. Sales of
other systems and products are recognized at delivery. Systems support fees are
recognized ratably over the period of performance. Professional service revenues
are recognized as these services are provided. Amounts received prior to the
performance of service or completion of a milestone are deferred.

Prior to 1995, all revenues associated with the sales of systems were
recorded when the system was delivered, net of an accrual for the estimated cost
of fulfilling the Company's obligations. The new method of accounting was
adopted to more accurately reflect timing of the recognition of the contractual
amount of revenue consistent with the timing of further production activities by
the Company subsequent to the initial delivery, and has been applied by
restating all periods presented in the accompanying consolidated financial
statements.

Cost of Operations

Cost of operations consists primarily of cost of equipment sold,
amortization of software development costs, direct personnel costs and other
direct costs.

Furniture and Equipment

Furniture and equipment are stated at cost. Furniture and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation and amortization are calculated on the straight-line basis over the
estimated useful lives of the assets ranging from 3 to 5 years. Amortization of
equipment held under capital leases is provided on the straight-line basis over
the shorter of the estimated useful life of the assets or the life of the lease.

Cash and Cash Equivalents

The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents for purposes of the statement of
cash flows. Cash equivalents consisted of approximately $2,600,000 of interest
bearing overnight bank investment accounts at December 31, 1995 and a $50,000
certificate of deposit at December 31, 1994, which are carried at cost which
approximates market.

F-7
<PAGE> 57

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Software Capitalization

The Company capitalizes certain software development costs subsequent to
the establishment of technological feasibility of its products. Technological
feasibility is established generally upon completion of a working model of a
product. Costs incurred prior to technological feasibility are expensed and are
included as research and development costs in the accompanying consolidated
financial statements. Amortization of capitalized costs begins when products are
available for general release to customers and is computed on a
product-by-product basis in the amount which is the greater of (a) the ratio
that current revenues bear to the total of the current and future anticipated
revenues, or (b) the straight-line method over the remaining estimated economic
life of the product, not to exceed three years. Such costs are reflected in cost
of operations.

The Company capitalized approximately $0, $338,000 and $426,000 in software
development costs during 1993, 1994, and 1995, respectively. Amortization of
software development costs approximated $0, $0 and $63,000 in 1993, 1994 and
1995, respectively.

Income Taxes

The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

Current Vulnerability Due to Certain Concentrations

The Company currently depends on certain suppliers for the provision of
computer hardware to its customers. The Company has not experienced and does not
expect any disruption of such services and the Company believes that
functionally equivalent computer hardware is available from other sources.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents and
trade receivables. Concentrations of credit risk with respect to trade
receivables result from the Company's customer base comprising primarily
hospitals and other health care industry companies. Management regularly
monitors the creditworthiness of its customers and believes that it has
adequately provided for any exposure to potential credit losses. No single
customer accounted for more than 10 percent of revenues in 1993, 1994 or 1995.

Impact of Recently Issued Accounting Standards

In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement 121
in the first quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption will be material.

F-8
<PAGE> 58

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Stock Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price not less than the fair value of the shares as determined
by the Board of Directors at the date of grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees, and, accordingly, recognizes compensation expense for stock option
grants only when the exercise price is less than the fair value of the shares at
the date of grant.

Interim Financial Information (Unaudited)

The unaudited interim information as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996, including such information included in the
Notes to Consolidated Financial Statements is unaudited. It has been prepared on
the same basis as the annual consolidated financial statements and, in the
opinion of the Company's management, reflects normal recurring adjustments
necessary for a fair presentation of the information for the periods presented.
Operating results for any quarter are not necessarily indicative of results for
any future periods.

Pro Forma Balance Sheet (Unaudited)

Upon the consummation of this offering, all of the outstanding shares of
Series A, B, C, D, E and F Redeemable Convertible Preferred Stock, and, at the
holders' option, cumulative dividends to date, will automatically convert into
shares of common stock. The unaudited pro forma presentation of the balance
sheet has been prepared assuming the automatic conversion of the preferred stock
into 3,294,519 shares of common stock on March 31, 1996, and the conversion of
$733,350 of accrued dividends into 61,116 shares of common stock based on the
stated preference of the holders. Cumulative dividends of $821,670, which are to
be paid with the proceeds of this offering, have been reflected as dividends
payable, and $558,391 of accreted issue costs have been reflected as a decrease
in paid-in capital. Additionally, notes payable with an outstanding principal
balance of $1,000,000 and a net carrying value of approximately $843,000 will
convert into 122,257 shares of common stock.

Pro Forma Net Loss Per Common Share (Unaudited)

The pro forma net loss per common share is computed based upon the weighted
average number of common shares and common equivalent shares (using the treasury
stock method) outstanding after certain adjustments described below. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive, except that, in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
common and common equivalent shares issued during the twelve-month period prior
to the filing of the initial public offering ("cheap stock") even when
antidilutive, have been included in the calculation as if they were outstanding
for all periods, using the treasury stock method and the initial public offering
price of $12.00 per share. In the computation of pro forma net loss per share,
accretion of preferred stock to the mandatory redemption amount is not included
as an increase to net loss. The pro forma net loss per common share gives effect
to the mandatory conversion of all outstanding shares of preferred stock,
including certain accumulated dividends, the conversion of certain convertible
debt, including the reduction of related interest, and the cheap stock related
to stock options and warrants, all effective upon the consummation of this
offering.

F-9
<PAGE> 59

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) ACCOUNTS RECEIVABLE

Accounts receivable are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ----------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Billed accounts...................................... $1,008,565 $1,296,671 $1,822,806
Unbilled accounts.................................... 68,959 314,088 569,835
---------- ---------- ----------
1,077,524 1,610,759 2,392,641
Less allowance for doubtful accounts................. (143,000) (190,800) (190,800)
---------- ---------- ----------
$ 934,524 $1,419,959 $2,201,841
========== ========== ==========
</TABLE>

Unbilled accounts represent revenue that has been recognized for work
performed for which billings had not been presented to customers, as such
accounts were not billable under contract terms at the balance sheet date. It is
anticipated that substantially all of these accounts will be billed and
collected within one year of the respective balance sheet date.

In 1994, the Company sold software systems on trade terms that allow for
payment over an agreed upon period. Amounts due under such installment terms are
included as other trade receivables in the accompanying financial statements and
are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
YEAR 1995 1996
-------------------------------------------- ------------ ---------
<S> <C> <C>
1996........................................ $159,534 $ 104,640
1997........................................ 76,811 76,811
-------- --------
Total amounts............................... 236,345 181,451
Less imputed interest at 14%................ 35,369 29,991
-------- --------
Installment trade receivables............... 200,976 151,460
Less current maturities..................... 143,493 127,949
-------- --------
Noncurrent installment trade receivables.... $ 57,483 $ 23,511
======== ========
</TABLE>

In 1994, the Company leased equipment to certain of its customers under
sales-type leases. Future minimum lease receipts under sales-type equipment
leases are included in other trade receivables in the accompanying consolidated
balance sheet and are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
1996........................................ $ 22,062 $14,368
1997........................................ 20,223 20,223
------- -------
Total minimum lease payments to be
received.................................. 42,285 34,591
Less amounts representing interest at 14%... 5,920 3,014
------- -------
Net investment in sales-type leases......... 36,365 31,577
Less current maturities..................... 18,973 19,352
------- -------
Noncurrent maturities....................... $ 17,392 $12,225
======= =======
</TABLE>

F-10
<PAGE> 60

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) NOTES PAYABLE -- STOCKHOLDERS

Notes payable -- stockholders, which are all unsecured, consist of the
following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- ----------
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Convertible notes payable, interest at 10 percent, interest
imputed at 22%, principal and interest due December 31,
1997..................................................... $ -- $1,000,000 $1,000,000
Less imputed interest...................................... -- (210,000) (157,000)
-------- ---------- ----------
-- 790,000 843,000
Convertible notes payable, non-interest bearing, interest
imputed at 22%, principal due December 31, 1996.......... -- 250,000 250,000
Less imputed interest...................................... -- (55,000) (41,750)
-------- ---------- ----------
-- 195,000 208,250
Notes payable, non-interest bearing, principal due after
cumulative year-end retained earnings exceeds $200,000... 100,000 100,000 100,000
-------- ---------- ----------
100,000 1,085,000 1,151,250
Less current maturities.................................... -- (250,000) (250,000)
-------- ---------- ----------
$100,000 $ 835,000 $ 901,250
======== ========== ==========
</TABLE>

Interest expense relating to notes payable-stockholders was approximately
$29,000, $6,000 and $366,167 for the years ended December 31, 1993, 1994, and
1995, respectively.

The 10% convertible notes were originally issued in February and April 1995
as non-interest bearing notes in the amount of $1,750,000 with detachable
warrants to purchase 349,653 shares of the Company's common stock at $1.43 per
share. The warrants have been valued at $691,166, which amount has been included
as capital stock and debt discount which is being amortized to interest expense
over the life of the note. The original notes were due December 31, 1996. The
notes are convertible at the holder's option into shares of the Company's
preferred stock at the same price and terms as the then most recently completed
preferred equity investment in the Company. In December 1995, $600,000 of these
notes were converted to 20,999 shares of Series F redeemable, convertible
preferred stock. Further, at that date, $900,000 of these notes were amended to
mature on December 31, 1997, bearing stated interest at 10% beginning January 1,
1996, payable at maturity. The interest at the stated rate and the remaining
imputed interest will be recognized over the life of the note. At December 31,
1995 and March 31, 1996, $250,000 of the originally issued non-interest bearing
notes remain outstanding.

In August 1995, the Company issued $600,000 of convertible notes, with
stated interest at prime plus 2 percent, due December 31, 1996, with detachable
warrants to purchase 73,356 shares of the Company's common stock at $8.18 per
share. The warrants did not become exercisable until 120 days after issuance and
were cancellable if the notes were repaid or converted prior to that date. The
warrants have been valued at $96,000 which amount has been included as capital
stock and debt discount which is being amortized to interest expense over the
life of the note. The notes have the same convertibility features as the
February and April notes. In December 1995, subsequent to the warrant
cancellation date, $200,000 of these notes were converted to 7,000 shares of
Series F redeemable convertible preferred stock, $300,000 were repaid and
$100,000 were amended to mature December 31, 1997, bearing stated interest at
10% beginning January 1, 1996, payable at maturity. The interest at the stated
rate and the remaining imputed interest will be recognized over the life of the
note.

F-11
<PAGE> 61

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) NOTES PAYABLE -- OTHER

Notes payable -- other consist of promissory notes to various medical and
financial institutions. All the notes are unsecured.

Notes payable -- other consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Note payable, 6% interest, payable in monthly
installments of principal plus interest through March
1996................................................... $ 13,288 $ -- $ --
Note payable, 10% interest payable semi-annually,
principal payable in annual installments of $34,500
through May 1998....................................... 117,895 83,395 83,395
Note payable, 10% interest payable semi-annually,
principal payable in annual installments of $34,500
commencing August 1994 through August 1998............. 138,000 138,000 138,000
Note payable, prime plus 2% interest (10.75% at December
31, 1995), payable in monthly installments of principal
plus interest through November 1999.................... 105,645 105,645 103,884
Note payable, prime plus 2% interest (10.75% at December
31, 1995), payable in monthly installments of principal
plus interest through January 1999..................... 78,262 78,262 51,700
-------- -------- --------
453,090 405,302 376,979
Less current maturities.................................. 122,115 224,020 200,980
-------- -------- --------
$330,975 $181,282 $ 175,999
======== ======== ========
</TABLE>

During 1995, the Company had not complied with the repayment terms of three
notes with an outstanding balance of $321,907 at December 31, 1995. These notes
were brought to a current status, or were repaid, in April, 1996. Amounts
classified as current liabilities at December 31, 1995 include amounts for which
the note holder could demand repayment.

Scheduled maturities of notes payable -- other are as follows (1995
delinquent installments of $133,891 are included as 1996 maturities):

F-12
<PAGE> 62

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) LEASE COMMITMENTS

Future minimum lease payments at December 31, 1995, under non-cancelable
operating and capital leases are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------------------------------------------- -------- ----------
<S> <C> <C>
1996......................................................... $213,862 $ 433,562
1997......................................................... 66,352 446,569
1998......................................................... -- 459,966
1999......................................................... -- 433,701
-------- ----------
Total........................................................ 280,214 $1,773,798
==========
Less amounts representing interest at 6% to 18%.............. 27,012
--------
Present value of net minimum lease payments.................. 253,202
Less current maturities...................................... 190,797
--------
$ 62,405
========
</TABLE>

Operating Leases

In 1994, the Company entered into a new lease agreement for its current
office space. The lease stipulates a rent abatement period of six months. Rent
expense is recorded on a straight-line basis over the term of the lease. The
difference between rent payments and rent expense resulted in a deferred rent
benefit.

Total rent expense under all operating leases was approximately $153,000,
$358,000 and $416,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $101,000 for the three months ended March 31, 1996.

Capital Leases

During 1994 and 1995, the Company entered into agreements to sell and
leaseback certain of its office equipment. The resulting leases are capital
leases that expire at various dates through 1997.

Office equipment and related accumulated amortization under capital leases
included in furniture and equipment on the accompanying balance sheet at
December 31, 1995 is as follows:

<TABLE>
<S> <C>
Office equipment................................... $380,429
Less accumulated amortization...................... 223,732
--------
$156,697
========
</TABLE>

(7) INCOME TAXES

The Company had no provision for income taxes in 1993, 1994 or 1995 or the
three months ended March 31, 1996 as a result of its net losses for both
financial statement and income tax purposes.

F-13
<PAGE> 63

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) INCOME TAXES -- (CONTINUED)
The approximate tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1995 are as follows:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities
Book value of equipment in excess of tax
basis................................... $ (37,000) $ (28,100)
Capitalized software development costs..... (126,800) (262,500)
---------- ----------
Gross deferred tax liabilities............... (164,300) (290,600)
Deferred tax assets:
Accrued vacation........................... 51,700 28,100
Allowance for doubtful accounts............ 53,600 71,600
Deferred rent benefit...................... 76,000 69,900
Excess of tax over book revenue
recognized.............................. 429,400 997,500
Net operating loss carryforwards........... 5,287,600 6,715,400
---------- ----------
Gross deferred tax assets.................... 5,898,300 7,882,500
Less deferred tax assets valuation
allowance.................................. 5,734,000 7,591,900
---------- ----------
Net deferred tax assets...................... 164,300 290,600
---------- ----------
Total deferred tax assets (liabilities)...... $ -- $ --
========== ==========
</TABLE>

The change in the total valuation allowance for the years ended December
31, 1994 and 1995 were increases of $3,512,500 and $1,857,900, respectively.

The Company has a net operating loss carryforward for income tax reporting
purposes at December 31, 1995 of $13,795,000, which expire in approximate
amounts as follows: $2,000,000 in 2004, $1,000,000 in 2005, $500,000 in 2006,
$2,000,000 in 2007, $800,000 in 2008, $6,200,000 in 2009 and $1,300,000 in 2010.
The Company's ability to use the carryforwards is subject to limitations
resulting from changes in ownership, as defined by the Internal Revenue Code.

(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company has 200,000 shares of Series A redeemable convertible preferred
stock ("Series A"), 211,131 shares of Series B redeemable convertible preferred
stock ("Series B"), 118,110 shares of Series C redeemable convertible preferred
stock ("Series C"), 209,994 shares of Series D redeemable convertible preferred
stock ("Series D"), 174,995 shares of Series E redeemable convertible preferred
stock ("Series E") and 27,999 shares of Series F redeemable convertible
preferred stock ("Series F" and, together with the Series A, Series B, Series C,
Series D and Series E, the "Series Preferred") issued and outstanding. The net
proceeds from the issuance of the preferred stock were as follows: Series A,
$2,000,000; Series B, $3,139,078; Series C, $2,776,120; Series D, $5,721,596;
Series E, $4,672,395; and Series F, $800,000. Issue costs are accreted to
stockholders' equity in amounts relative to increases in redemption values over
time.

In conjunction with the 1995 issuance of Series E, the Company issued
36,713 warrants to purchase common stock at $8.18 to a stockholder relating to
transaction fees. In the opinion of management, the value of these warrants do
not materially effect the financial statements.

F-14
<PAGE> 64

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
Among others, the principal rights, privileges, and preferences of all
Series Preferred stockholders, all as defined in the Company's Amended and
Restated Certificate of Incorporation or as set forth in the respective Series
Preferred Stock Purchase Agreements, are as follows:

Redemption:

Unless previously converted to common stock, all Series Preferred are
redeemable at the option of the holders in annual increments of 33.33%
commencing January 1, 1998. The redemption price is $10.00, $23.09, $25.40
per share for Series A, B, and C, respectively, and $28.58 per share for
Series D, E, and F, plus all accrued and unpaid dividends, if any. No
shares have been redeemed through March 31, 1996.

At December 31, 1995, the maximum aggregate redemptions that could be
demanded of the Company in each of the next five years are as follows:
1996, $0; 1997, $0; 1998, $6.683 million; 1999, $6.683 million; and 2000,
$6.684 million.

Liquidation preference:

In the event of a liquidation event, as defined in the Series
Preferred Stock Purchase Agreements, all Series Preferred stockholders are
ranked prior to all other classes of stock. All Series Preferred
stockholders are ranked equally and distributions are to be made in
proportion to the value of the investments originally made. As of December
31, 1995 all Series Preferred stockholders have an aggregate liquidation
preference equal to their initial investment of $20,050,000, as follows:
Series A, $2,000,000; Series B, $3,250,000; Series C, $3,000,000; Series D,
$6,000,000; Series E, $5,000,000; and Series F, $800,000.

Conversion:

All Series Preferred is convertible into common stock at the option of
the holder and conversion is mandatory in certain circumstances, including
the closing of a public stock offering meeting defined criteria. Subject to
certain adjustments, the Series A, B, C, D, E and F are convertible into
699,302 shares, 738,222 shares, 412,973 shares, 734,246 shares, 611,877
shares, and 97,899 shares of the Company's common stock, respectively. All
Series Preferred stockholders have certain anti-dilution protection rights.
The Company has reserved 3,294,519 shares of common stock for issuance upon
conversion of preferred stock.

Dividends and Voting rights:

Dividends, if any, declared and payable to common stockholders must
also first be paid to all Series Preferred stockholders. Dividends are
cumulative as of November 1, 1993, for Series A and B; as of November 1,
1994, for Series C; as of November 1, 1995, for Series D; and as of
November 1, 1997, for Series E and F. The annual dividend payable is
equivalent to $0.80 per share for Series A, $1.8472 per share for Series B,
$2.032 per share for Series C and $2.286 per share for Series D, E and F.

Holders of all Series Preferred have voting rights equal to the number
of common shares into which each class of Series Preferred is convertible.
Unpaid and undeclared dividends for the years ended December 31, 1993, 1994
and 1995, respectively, are as follows: Series A, $26,670, $160,000 and
$160,000; Series B, $43,330, $260,000 and $260,000; Series C, $0, $40,000
and $240,000; and Series D, $0, $0 and $80,000, and have been accreted in
stockholders' equity (deficit). Total Series Preferred dividends accreted
for the three months ended March 31, 1996 amounted to $285,000. Upon
conversion,

F-15
<PAGE> 65

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK -- (CONTINUED)
cumulative dividends may be paid in cash or shares of common stock at the
option of each holder of Series Preferred.

Other rights, privileges and preferences:

The Company is prohibited from making, among other things, certain
further amendments to its Amended and Restated Certificate of Incorporation
without the affirmative vote of 66.67% of Series Preferred stockholders
voting together as a class. Holders of Series Preferred have certain demand
and "piggyback" registration rights with respect to these securities, or
the securities they may be converted into, and possess certain rights
relating to election of Board of Director slots.

(9) COMMON STOCK, OPTIONS AND WARRANTS

Common Stock

The Company is restricted from paying dividends on common stock unless and
until all cumulative preferred stock dividends have been paid.

Stock Warrants

The Company has 17,483 outstanding warrants issued to a stockholder in 1991
with an exercise price of $2.86 per share which expire in 2001; 349,653
outstanding warrants issued to stockholders in 1995 with an exercise price of
$1.43 per share which expire in 2000; and 110,069 outstanding warrants issued to
stockholders in 1995 with an exercise price of $8.18 per share which expire in
2000.

Stock Options

The Company has a nonqualified employee stock option plan (the "Plan") for
the benefit of its employees and directors. All options are subject to
forfeiture until vested, and unexercised options expire on the tenth anniversary
of the year granted. Vesting periods are from one to five years. The Company has
also granted 65,735 vested stock options outside the Plan with an exercise price
of $4.29 per share.

F-16
<PAGE> 66

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) COMMON STOCK, OPTIONS AND WARRANTS -- (CONTINUED)
The following is a summary of the option transactions for the years ending
December 31, 1993, 1994 and 1995:

<TABLE>
<CAPTION>
EXERCISE
PRICE SHARES
---------- -------
<S> <C> <C>
Outstanding, December 31, 1992.............................. $0.72-2.86 616,797
Granted................................................... 7.26 78,852
Forfeited................................................. 6.61-7.26 6,740
---------- --------

Outstanding, December 31, 1993.............................. 0.72-7.26 688,909

Granted................................................... 4.29-8.18 205,256

Forfeited................................................. 2.86-8.18 13,768
---------- --------

Outstanding, December 31, 1994.............................. 0.72-8.18 880,397

Granted................................................... 8.18 93,511

Forfeited................................................. 7.26-8.18 102,239

Exercised................................................. 2.86 2,623
---------- --------

Outstanding, December 31, 1995.............................. 0.72-8.18 869,046

Granted................................................... 8.18 87,413

Forfeited................................................. 7.26-8.18 23,902

Exercised................................................. 8.18 117
---------- --------

Outstanding, March 31, 1996................................. $0.72-8.18 932,440
========== =========

</TABLE>

At December 31, 1995 and March 31, 1996, options for 655,226 and 712,218
shares were exercisable and 42,143 and 153,488 shares were available for grant
under the Plan, respectively.

(10) RELATED PARTY TRANSACTION

The Company entered into a license agreement with a stockholder on February
2, 1995. The stockholder is licensed to sell a product of the Company for which
the stockholder will pay a royalty on each sale. The stockholder made a payment
against future royalties of $250,000.

(11) OTHER COMMITMENTS

In 1994, the Company purchased rights to databases and methodologies from
an unrelated company in exchange for 65,735 irrevocable options to purchase the
Company's common stock for $4.29 per share. The estimated fair value of the
stock option, $255,680, was recorded as software license expense. The Company
also committed $200,000, payable in monthly installments through March 1996, for
enhancements to the databases and the methodologies. At December 31, 1995,
$25,000 of these installment payments were remaining.

The Company has entered into an exclusive 10 year licensing agreement with
an unrelated company for its database and methodologies. The Company is
committed to pay $1,000,000 from 1994 to 1998 for the license and royalties on
the sale of the Company's product related to these methodologies. The Company is

F-17
<PAGE> 67
APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) OTHER COMMITMENTS -- (CONTINUED)
also committed to pay $100,000 per year from 1994 to 1998 for marketing
services. Amounts committed by the Company related to this arrangement are as
follows at December 31:

(12) SUBSEQUENT EVENTS

On June 18, 1996, the Company effected a 1-for-2.86 reverse stock split.
Accordingly, all shares and per share amounts have been adjusted to reflect the
reverse stock split as though it had occurred at the beginning of the initial
period presented. Additionally, the authorized common shares of the Company were
increased to 30,000,000.

Effective January 1996, the Board of Directors increased the number of
shares available under the Plan by 174,825 shares. In April 1996, the Board of
Directors amended and restated the Plan to, among other things, increase the
number of shares available for issuance under the Plan to 1,700,000.
Additionally, the Company adopted a Non-Employee Directors Option plan with a
total of 70,000 shares available for grant at fair market value on the grant
date. Further, the Company authorized a future Employee Stock Purchase Plan.

In June 1996, the Company entered into a marketing agreement pursuant to
which the Company may, among other things, grant options to purchase up to
366,294 shares of common stock, subject to defined terms and conditions. If
granted, options to purchase 65,488 shares of common stock will have an exercise
price of $8.18 per share and options to purchase 300,806 shares of common stock
will have an exercise price of $13.00 per share.

(13) PROFIT SHARING PLAN

The Company sponsors a profit sharing plan intended to qualify under
Section 401(k) of the Internal Revenue Code. All employees are eligible to
participate in the plan after three months of service. Employees may contribute
a portion of their salary to the plan, subject to annual limitations imposed by
the Internal Revenue Code. The Company may make matching or discretionary
contributions to the plan at the discretion of the Board of Directors, but has
made no such contribution to date. Employer contributions generally vest over
seven years.

(14) SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was $114,000, $67,000 and $33,000 for the years
ended December 31, 1993, 1994 and 1995 and $8,000 and $15,000 for the three
months ended March 31, 1995 and 1996.

The following is supplemental information concerning non-cash investing and
financing activities:

During 1993, the Company allowed a customer/noteholder to offset an
invoice due the Company against the amount owed on the note of $54,300.

During 1994, the Company issued 8,742 shares of common stock in
exchange for the forgiveness of $91,000 of debt. The difference between the
amount of debt forgiven and the estimated fair value of the common stock,
$71,000, was recorded as other income.

F-18
<PAGE> 68

APACHE MEDICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED)
During 1994, the Company entered into an agreement for the sale and
leaseback of certain equipment. The lease is classified as a capital lease
and a capital lease obligation of $202,247 was recorded.

During 1995, the Company issued 27,999 shares of Series F upon
conversion of $800,000 of convertible debt.

During 1995, the Company entered into two agreements for the sale and
leaseback of certain equipment. The leases are classified as capital leases
and a total capital lease obligation of $219,262 was recorded.

During 1995, the Company issued warrants to acquire common stock in
connection with the issuance of convertible notes payable and Series E. The
estimated value of the warrants is included in additional paid-in capital
and $787,166 of debt discount was recorded.

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments included in current assets and current liabilities
include cash and cash equivalents, accounts and trade receivables and accounts
payable and accrued expenses. The carrying amounts of these instruments
approximate fair value because of the short maturity of those instruments.

Notes payable-stockholders and obligations under capital leases have
carrying values that approximate fair values as the significant notes are
carried net of imputed interest calculated at approximate current market rates.

F-19
<PAGE> 69

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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 5
The Company............................. 12
Use of Proceeds......................... 12
Dividend Policy......................... 12
Capitalization.......................... 13
Dilution................................ 14
Selected Consolidated Financial Data.... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................... 16
Business................................ 22
Recent Developments..................... 33
Management.............................. 34
Certain Transactions.................... 39
Principal Stockholders.................. 40
Description of Capital Stock............ 42
Shares Eligible for Future Sale......... 44
Underwriting............................ 46
Legal Matters........................... 47
Experts................................. 47
Additional Information.................. 47
Index to Consolidated Financial
Statements............................ F-1
</TABLE>

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UNTIL JULY 23, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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2,000,000 SHARES

APACHE LOGO

APACHE Medical
Systems, Inc.

COMMON STOCK
------------------------------

PROSPECTUS
------------------------------
COWEN & COMPANY
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
June 28, 1996

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