APACHE MEDICAL SYSTEMS INC, DEF 14A, 1999-04-14

APACHE MEDICAL SYSTEMS INC
DEF 14A, 1999-04-14
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1
SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT
OF 1934 (AMENDMENT NO.)

Filed by the Registrant |X|

Filed by a Party other than the Registrant |_|

Check the appropriate box:

|_| Preliminary Proxy Statement

|_| Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)
(2))

|X| Definitive Proxy Statement

|_| Definitive Additional Materials

|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

APACHE MEDICAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

|X| No fee required.

|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
----------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------------

|_| Fee paid previously with preliminary materials.

|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.

(1) Amount previously paid:
- --------------------------------------------------------------------------------

(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------

(3) Filing party:
- --------------------------------------------------------------------------------

(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2

[APACHE MEDICAL SYSTEMS, INC. LOGO]

APACHE MEDICAL SYSTEMS, INC.

1650 TYSONS BOULEVARD, SUITE 300
MCLEAN, VIRGINIA 22102

April 14, 1999

Dear Stockholder:

You are cordially invited to attend the APACHE Medical Systems, Inc. Annual
Meeting of Stockholders to be held at 10:00 a.m. Eastern Daylight Time,
Wednesday, May 12, 1999 at the Company's principal executive offices, 1650
Tysons Boulevard, Suite 300, McLean, Virginia 22102.

The matters proposed for consideration at the meeting are the election of
seven directors, the ratification of the adoption of the Company's Non-Employee
Director Supplemental Stock Option Plan, the approval of the proposal to amend
the Employee Stock Option Plan to increase the number of shares of the Company's
Common Stock that may be issued under it, the ratification of the appointment of
Ernst & Young LLP as the Company's auditors, and the transaction of other
business as may come before the meeting or any adjournment thereof. The
accompanying Notice of Annual Meeting of Stockholders and Proxy Statement
discuss these matters in further detail. We urge you to review this information
carefully.

You will have an opportunity to discuss each item of business described in
the Notice of Annual Meeting of Stockholders and Proxy Statement and to ask
questions about the Company and its operations.

It is important that your shares be represented and voted at the Annual
Meeting. Whether or not you plan to attend, please sign and promptly return the
enclosed proxy card using the envelope provided. If you do attend the Annual
Meeting, you may withdraw your proxy and vote your shares in person.

Sincerely,
/s/ PETER GLADKIN
Peter Gladkin
President and Chief Executive Officer
<PAGE> 3

APACHE MEDICAL SYSTEMS, INC.
1650 TYSONS BOULEVARD, SUITE 300
MCLEAN, VIRGINIA 22102

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

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

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

The Annual Meeting of Stockholders of APACHE Medical Systems, Inc. will be
held on Wednesday, May 12, 1999 at 10:00 a.m. Eastern Daylight Time at the
Company's principal executive offices, 1650 Tysons Boulevard, Suite 300, McLean,
Virginia 22102, for the following purposes:

1. To elect seven directors for the ensuing year;

2. To ratify the adoption of the Company's Non-Employee Director
Supplemental Stock Option Plan;

3. To approve the proposal to amend the Employee Stock Option Plan;

4. To ratify the appointment of Ernst & Young LLP as auditors; and

5. To transact such other business as may properly come before the
meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on Thursday, April
1, 1999 as the record date for the determination of stockholders entitled to
notice of and to vote at the Annual Meeting of Stockholders.

The Company requests that all stockholders, whether or not you expect to
attend the meeting, sign the enclosed proxy and return it as promptly as
possible in the accompanying stamped envelope. You may revoke your proxy at any
time before it is voted. If you are present at the meeting, you may vote your
shares in person and the proxy will not be used.

You are respectfully urged to read the Proxy Statement contained in this
booklet for further information concerning the matters to be acted upon at the
Annual Meeting and the use of the proxy. A copy of the Company's Annual Report
for the fiscal year ended December 31, 1998 accompanies this Proxy Statement.

By Order of the Board of Directors

/s/ SCOTT A. MASON

Scott A. Mason
Secretary and Executive Vice President

April 14, 1999

IMPORTANT -- PLEASE MAIL YOUR SIGNED PROXY
PROMPTLY IN THE ENCLOSED ENVELOPE
<PAGE> 4

APACHE MEDICAL SYSTEMS, INC.
1650 TYSONS BOULEVARD, SUITE 300
MCLEAN, VIRGINIA 22102

PROXY STATEMENT

FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 12, 1999

GENERAL INFORMATION

This Proxy Statement is furnished in connection with the solicitation of
proxies to be voted at the Annual Meeting of Stockholders of APACHE Medical
Systems, Inc. (the "Company" or "APACHE") to be held on Wednesday, May 12, 1999
at 10:00 a.m. Eastern Daylight Time, at the Company's principal executive
offices, 1650 Tysons Boulevard, Suite 300, McLean, Virginia 22102. The purpose
of the annual meeting and the matters to be acted upon are set forth in the
accompanying notice of annual meeting. This Proxy Statement and the proxy are
being mailed to stockholders on or about April 14, 1999.

The enclosed proxy is solicited by the Board of Directors of the Company
and will be voted at the Annual Meeting and any adjournments thereof. Shares
represented by a properly executed proxy in the accompanying form will be voted
at the Annual Meeting in accordance with any instructions specified by the
stockholder. If no instructions are given, the stockholder's shares will be
voted in accordance with the recommendations of the Board of Directors "FOR"
each of the proposals presented in this Proxy Statement. Those recommendations
are described later in this Proxy Statement.

The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock entitled to vote will constitute a quorum for the
transaction of business. Votes cast in person or by proxy, abstentions and
broker non-votes (as hereinafter defined) will be tabulated by the inspectors of
election and will be considered in the determination of whether a quorum is
present at the annual meeting. The inspectors of election will treat shares
represented by executed proxies which abstain as shares that are present and
entitled to vote for purposes of determining the approval of such matter. If,
with respect to any shares, a broker or other nominee submits a proxy indicating
that instructions have not been received from the beneficial owners or the
persons entitled to vote and that such broker or other nominee does not have
discretionary authority to vote such shares (a "broker non-vote") on one or more
proposals, those shares will not be treated as present and entitled to vote for
purposes of determining the approval of any such proposal.

The proxy may be revoked at any time before it is exercised by delivering a
written notice of revocation to the Secretary of the Company. All written
notices of revocation or other communications with respect to revocation of
proxies should be addressed to the Company's Corporate Secretary at its
principal executive offices as follows: APACHE Medical Systems, Inc., 1650
Tysons Boulevard, Suite 300, McLean, Virginia 22102, Attention: Corporate
Secretary. If you attend the Annual Meeting in person, you may revoke your proxy
by either giving notice of revocation to the inspectors of election at the
Annual Meeting or by voting at the Annual Meeting in person.

The only items of business that the Board of Directors intends to present
or knows will be presented at the Annual Meeting are the items discussed in this
Proxy Statement. The proxy confers discretionary authority upon the persons
named therein, or their substitutes, to vote on any other items of business that
may properly come before the meeting.

All holders of record of the Common Stock of the Company at the close of
business on April 1, 1999 will be eligible to vote at the annual meeting. As of
April 1, 1999, the Company had 7,343,176 shares of Common Stock, par value $.01
per share ("Common Stock"), issued and outstanding. Each share is entitled to
one vote.

SECURITY OWNERSHIP

The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock as of March 5, 1999 by (i)
each person known by the Company to beneficially
<PAGE> 5

own more than 5% of the Company's Common Stock, (ii) each director and nominee
for director, (iii) each of the executive officers and the former executive
officer of the Company named in the Summary Compensation Table under "Executive
Compensation," and (iv) by all directors, nominees for director and executive
officers of the Company as a group. The number of shares of Common Stock
outstanding on March 5, 1999 was 7,343,176. Except as noted, all information
with respect to beneficial ownership has been furnished by the respective
director or officer or is based on filings with the Securities and Exchange
Commission (the "SEC"). Unless otherwise indicated below, the persons named
below have sole voting and investment power with respect to the number of shares
set forth opposite their names. Beneficial ownership of the Common Stock has
been determined for this purpose in accordance with Rules 13d-3 and 13d-5 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
provide, among other things, that a person is deemed to be the beneficial owner
of the Common Stock if such person, directly or indirectly, has or shares voting
power or investment power in respect of such stock or has the right to acquire
such ownership within sixty days. Accordingly, the amounts shown in the table do
not purport to represent beneficial ownership for any purpose other than
compliance with SEC reporting requirements. Further, beneficial ownership as
determined in this manner does not necessarily bear on the economic incidence of
ownership of the Common Stock. Unless otherwise indicated below, the address of
those identified in the table is APACHE Medical Systems, Inc., 1650 Tysons
Boulevard, Suite 300, McLean, Virginia 22102.

<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED
------------------------ ------------ ------------
<S> <C> <C>
Caremark, Inc.(1)........................................... 876,602 11.94%
Manning & Napier Advisors, Inc.(2).......................... 758,175 10.32%
Baxter Healthcare Corporation(3)............................ 573,346 7.81%
New York Life Insurance Company(4).......................... 460,405 6.27%
Fairfax Partners/The Venture Fund of Washington, L.P.(5).... 454,546 6.19%
Allen & Company Incorporated(6)............................. 367,308 5.00%
Peter Gladkin(7)............................................ 134,100 1.79%
Gerald E. Bisbee, Jr., Ph.D.(8)............................. 433,677 5.58%
James L. Elder, Jr.(9)...................................... 31,279 *
Richard Dessimoz............................................ 0 *
Scott A. Mason(10).......................................... 380,414 5.15%
Donald W. Seymour(11)....................................... 45,988 *
Edward J. Connors(12)....................................... 16,490 *
Thomas W. Hodson(13)........................................ 35,490 *
William A. Knaus(14)........................................ 432,542 5.88%
Lawrence S. Lewin(15)....................................... 17,490 *
Violet Shaffer(16).......................................... 16,113 *
All Directors, Nominees and Executive Officers as a Group
(13 persons)(17).......................................... 1,563,583 19.35%
</TABLE>

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

(1) Stock ownership is based on a Schedule 13G filed May 18, 1998. Stock
ownership includes 144,333 shares issuable upon exercise of vested
warrants. Caremark, Inc. is a subsidiary of MedPartners, Inc. The address
of Caremark, Inc., is 2215 Sanders Road, Suite 400, Northbrook, IL 60062.

(2) Stock ownership is based on a Schedule 13G filed on February 2, 1999.
Manning & Napier Advisors, Inc. is an investment adviser registered under
the Investment Advisers Act of 1940. The address of Manning & Napier
Advisors, Inc., is 1100 Chase Square, Rochester, NY 14604.

(3) Stock ownership is based on a Schedule 13G filed on September 15, 1998.
Baxter Healthcare Corporation shares the power to vote and dispose of the
shares of Common Stock with Baxter
2
<PAGE> 6

International, Inc., the owner of 100% of the capital stock of Baxter
Healthcare Corporation. The address of Baxter Healthcare Corporation is One
Baxter Parkway, Deerfield, IL 60015.

(4) Stock ownership is based on a Schedule 13G filed on February 13, 1997. New
York Life Insurance Company is an insurance company as defined in Section
3(a)(19) of the Exchange Act. The address of New York Life Insurance
Company is 51 Madison Avenue, Room 206, New York, NY 10010.

(5) Stock ownership is based on a Schedule 13G filed on February 15, 1997.
Fairfax Partners/The Venture Fund of Washington L.P. is a limited
partnership. The address of Fairfax Partners/The Venture Fund of Washington
L.P. is 8000 Towers Crescent Drive, Suite 940, Vienna, VA 22182.

(6) Stock ownership is based on a Schedule 13G filed on February 11, 1999.
Stock ownership includes shares issuable upon the exercise of 27,901 vested
warrants. Allen & Company Incorporated is a registered broker-dealer under
Section 15 of the Exchange Act. Allen & Company Incorporated shares the
power to vote and dispose of the shares of Common Stock with Allen Holding,
Inc. The address of Allen & Company Incorporated is 711 Fifth Avenue, New
York, NY 10022.

(7) Includes 134,000 shares of Common Stock issuable upon exercise of vested
options.

(8) Includes 432,677 shares of Common Stock issuable upon exercise of vested
options. The address of Dr. Bisbee is 110 Wellesley Drive, New Canaan, CT
06840.

(9) Includes 12,500 shares of Common Stock issuable upon exercise of vested
options. Excludes 10,800 shares held by the Elder Family Dynasty Trust, of
which Mr. Elder disclaims beneficial ownership.

(10) Includes 42,250 shares of Common Stock issuable upon exercise of vested
options.

(11) Includes 16,583 shares of Common Stock issuable upon exercise of vested
options.

(12) Includes 15,490 shares of Common Stock issuable upon exercise of vested
options.

(13) Includes 25,490 shares of Common Stock issuable upon exercise of vested
options.

(14) Includes 15,490 shares of Common Stock issuable upon exercise of vested
options. Includes 9,300 shares purchased by Dr. Knaus in the names of his
children. The address of Dr. Knaus is Department of Health, Evaluation
Sciences, University of Virginia, School of Medicine, Charlottesville, VA
22908.

(15) Includes 15,490 shares of Common Stock issuable upon exercise of vested
options.

(16) Includes 6,250 shares of Common Stock issuable upon exercise of vested
options.

(17) Includes shares which may be acquired pursuant to outstanding options by
the person or persons listed, as follows: Mr. Gladkin, 134,000; Dr. Bisbee,
432,677; Mr. Elder, 12,500; Mr. Mason, 42,250; Mr. Seymour, 16,583; Mr.
Connors, 15,490; Mr. Hodson, 25,490; Dr. Knaus, 15,490; Mr. Lewin, 15,490;
Ms. Shaffer, 6,250; other executive officers, 20,000.

ELECTION OF DIRECTORS

(PROPOSAL 1)

Seven directors are to be elected to serve for a term of one year or until
their respective successors are duly elected and qualified. Directors are
elected by a plurality of the votes of the shares of Common Stock present in
person or represented by proxy and entitled to vote at the Annual Meeting. In
the event that any nominee should become unable or unwilling to serve as a
director, it is the intention of the persons named in the proxy to vote for the
election of such substitute nominee for the office of director as the Board of
Directors may recommend. It is not anticipated that any nominee will be unable
or unwilling to serve as a director.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE
COMPANY VOTE "FOR" THE ELECTION OF THE NOMINEES TO SERVE AS DIRECTORS.

NOMINEES FOR DIRECTORSHIPS

The names, ages, principal occupations and other information concerning the
director nominees, based upon information received from them, are set forth
below.

3
<PAGE> 7

Gerald E. Bisbee, Jr., Ph.D., 56. (President and Chief Executive Officer
until December 31, 1997, Chairman of the Board of Directors from 1989 through
November 5, 1997 and director since 1989). Dr. Bisbee is presently Chairman,
President and Chief Executive Officer of ReGen Biologics, Inc., which conducts
research and development, manufacturing and marketing of tissue engineering,
biological and other orthopedic products and services. Before joining APACHE as
Chairman and Chief Executive Officer in December 1989, Dr. Bisbee was the
Chairman and Chief Executive Officer 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 and the athletic medicine
department. He is a director of Cerner Corporation and SG Pacific Funds, 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.

Edward J. Connors, 70. (Director since 1990). Mr. Connors retired as the
President and Chief Executive Officer of Mercy Health Services in 1993, 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 American Hospital Association Board of
Trustees and of the American Healthcare Systems Board of Governors, as a
Commissioner of the Joint Commission on Accreditation of Healthcare
Organizations and on the Board of the American Hospital Association's Hospital
Research and Educational Trust. In December of 1997, Mr. Connors completed his
term as Chairman of the Board of Directors of Fletcher Allen Health Care in
Burlington, Vermont. Fletcher Allen Health Care is an integrated, academically
based health care delivery system involving 250 full-time physicians who serve
on the faculty of the University of Vermont Medical School, two hospitals and
several affiliated organizations. In January of 1998, Mr. Connors became the
Chairman of the Board of Catholic Health East which has been formed through the
merger of three Catholic systems and 12 religious congregations on the East
Coast. In 1991, Mr. Connors was elected to membership in the Institute of
Medicine of the National Academy of Science. He holds an M.H.A. degree from the
University of Minnesota.

Richard Dessimoz, 51. (Director since 1998). Mr. Dessimoz has been Vice
President and Chief Executive Officer of Wabash National Finance Corporation
since its inception in December 1991 and as Director of Wabash since December
1995. Prior to his employment by Wabash, he was employed from 1989 to 1991 by
Premier Equipment Leasing Company as Chief Executive Officer and from 1985 to
1989 by Evans Transportation Company as Chief Operating Officer. Mr. Dessimoz
holds a law degree from Northwestern University Law School and an M.B.A. with a
concentration in finance from the University of Chicago Graduate School of
Business.

Peter Gladkin, 51. (Chief Executive Officer and Director since 1998). Mr.
Gladkin has served as President and Chief Executive Officer and as a director of
the Company since July 1998. Prior to joining the Company, Mr. Gladkin was
President and Chief Operating Officer of Health Data Sciences Corporation
("HDS") from 1994 to 1996, as well as from 1996 to 1997 after HDS was acquired
by Medaphis Corporation. Mr. Gladkin was with Hewlett Packard Company ("HP")
from 1971 to 1994 during which time he was responsible for various sales,
marketing, and business entities throughout the U.S., Europe and worldwide. From
1987 to 1994, while at HP, he was General Manager of the Healthcare Information
Systems, a strategic business unit of HP's Medical Products Group.

Thomas W. Hodson, 52. (Director since 1994 and Chairman of the Board of
Directors since November 5, 1997 and acting Chief Executive Officer from
December 31, 1997 to July 1998). Mr. Hodson has been a director and Vice
Chairman and Chief Executive Officer of NeuroSource, Inc., a private company
which manages neuromedical physician practices, since September 1, 1997 and
until that time was an
4
<PAGE> 8

independent financial/strategic consultant since October 1996. From August 1992
until October 1996, he was the Senior Vice President, Chief Financial Officer
and a director of Caremark International, Inc. 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., 52. (Director since 1994). Dr. Knaus was a founder
of the Company and currently serves as the Company's Chief Scientific Advisor.
Since October 1995, Dr. Knaus has been the Evelyn Troop Hobson Professor and
Chairman of the Department of Health Evaluation Sciences at the University of
Virginia School of Medicine and a Fellow of the American College of Physicians.
In addition, Dr. Knaus currently serves as a consultant to the National
Geographic Society. 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, 60. (Director since 1989). Mr. Lewin has acted as the
Chief Executive Officer of the Lewin Group, a healthcare policy and management
consulting firm he founded in 1970, which was successively acquired by ICF,
Inc., in December 1987, and VHI, in December 1992. In May of 1996, the firm
became part of Quintiles Transnational Inc. He serves as a Trustee of
Intermountain Health Care, Inc., is a member of the Advisory Board of Hambrecht
& Quist Healthcare Investors and Life Sciences Funds and is a director of
Quintiles Transnational and Accountable Oncology Associates. 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. He
is an elected member of the National Academy of Sciences/Institute of Medicine
and serves on its governing council.

5
<PAGE> 9

INFORMATION CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES

During the 1998 fiscal year, there were six meetings of the Board of
Directors, two of which were telephonic meetings. Each director attended at
least 75% of the aggregate total number of the meetings of the Board of
Directors and the meetings of the Board Committees on which he served.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has standing Finance and Audit, and Compensation
Committees, which deal with certain specific areas of the Board's
responsibility. The Board of Directors does not have a standing nominating
committee or other committee performing a similar function.

The Finance and Audit Committee, which met three times in conjunction with
meetings of the Board of Directors during the 1998 fiscal year, recommends the
firm to be appointed as independent public accountants to audit the Company's
financial statements and reviews the scope and results of the audit and other
services provided by the Company's independent public accountants. The members
of the Finance and Audit Committee until July 15, 1998 were Gerald E. Bisbee,
Jr., Thomas W. Hodson, Lawrence S. Lewin and Francis G. Ziegler. Since July 15,
1998, the members of the Finance and Audit Committee have been Messrs. Bisbee,
Hodson, and Lewin. Richard E. Dessimoz joined the committee in December 1998.

The Compensation Committee, which met five times during the 1998 fiscal
year, develops the Company's executive compensation philosophy and reviews and
recommends the compensation programs for officers of the Company, including
salaries and incentive compensation. The Compensation Committee also administers
the Employee Stock Option Plan and the Employee Stock Purchase Plan. The members
of the Compensation Committee until July 15, 1998 were Edward J. Connors, Thomas
W. Hodson, William A. Knaus, M.D. and Francis G. Zeigler. Since July 15, 1998,
the members of the Compensation Committee have been Messrs. Connors, Hodson, and
Knaus.

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.

William A. Knaus, M.D. is the Chief Scientific Advisor of the Company.
While Dr. Knaus is not directly compensated for his services in that capacity,
the Company pays the University of Virginia, his current employer, for services
rendered to the Company by Dr. Knaus.

The Company's directors who are not employees of the Company are eligible
to participate in the Company's Non-Employee Director Stock Option Plan (the
"Director Option Plan"). The Director Option Plan is administered by the
Chairman of the Board of Directors along with other directors, if any, selected
by the Chairman. Pursuant to the Director Option Plan, non-employee directors of
the Company receive options to purchase 2,500 shares of Common Stock in January
of each year. The exercise price of the options is the fair market value of the
Common Stock on the date of grant. Stock options granted under the Director
Option Plan have a term of 10 years and are not exercisable during the first 12
months following grant. 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.

EXECUTIVE COMPENSATION

The following table summarizes the compensation paid to or earned by the
Chief Executive Officer, the four most highly compensated executive officers and
a former executive officer of the Company for the last two fiscal years (the
"Named Executive Officers"). None of the Named Executive Officers was employed
by the Company in 1996. The information below does not reflect the cancellation
of existing employee options

6
<PAGE> 10

and the issuance of new options with lower exercise prices effective January 2,
1998 and November 18, 1998. See "Report of the Compensation Committee of the
Board of Directors -- Report on Repricing of Options."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------------------------- NUMBER OF
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#) ($)
- --------------------------- ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Peter Gladkin(1)............. 1998 $105,417 -- -- 500,000 $225,800(2)
Chief Executive Officer and
President
Scott A. Mason(3)............ 1998 180,042 $ 44,338 -- 124,236 49,433(4)
Secretary and Executive 1997 175,000 100,688 -- 180,000 55,896(5)
Vice President
Donald W. Seymour(6)......... 1998 154,313 40,825 -- 47,958 --
Vice President of National 1997 150,000 70,465 -- 40,000 4,704(7)
Health Advisors
James L. Elder, Jr.(8)....... 1998 162,020(9) 14,000 30,000 6,446(10)
Vice President of Sales 1997 118,365(11) -- 50,000 19,189(12)
Violet Shaffer(13)........... 1998 128,594 -- -- 30,000 --
Vice President of Marketing 1997 29,406 15,750
Thomas W. Hodson(14)......... 1998 -- -- -- 2,500 --
Director
</TABLE>

- ---------------
(1) Mr. Gladkin commenced employment with the Company on July 1, 1998. He has
served as Chief Executive Officer and President since July 1998.
(2) Includes $80,000 for moving expenses, $25,800 for consulting fees prior to
his employment with the Company, $20,000 for travel expenses prior to
employment and $100,000 which was paid to Mr. Gladkin as an advance against
a pending contractual matter, which was resolved in the first quarter of
1999.
(3) Mr. Mason's 1997 compensation includes payments from National Health
Advisor, Ltd. ("NHA"). On June 2, 1997, the Company merged with NHA and Mr.
Mason became an employee of the Company.
(4) Includes $49,433 in life insurance premiums.
(5) Includes $2,610 in health insurance premiums, $3,853 in long-term
disability insurance premiums and $49,433 in life insurance premiums.
(6) Mr. Seymour's 1997 compensation includes payments from NHA. On June 2,
1997, the Company merged with NHA and Mr. Seymour became an employee of the
Company.
(7) Includes $1,545 in health insurance premiums and $3,160 in long-term
disability insurance premiums.
(8) Mr. Elder commenced employment with the Company on June 23, 1997.
(9) Includes $27,020.36 in commissions paid.
(10) Payment of moving expenses.
(11) Includes $47,750 in commissions paid.
(12) Payment of moving expenses.
(13) Ms. Shaffer commenced employment with the Company on September 22, 1997.
(14) Mr. Hodson served as the Company's acting President and Chief Executive
Officer from January 1, 1998 to July 1, 1998.

7
<PAGE> 11

OPTION GRANTS IN 1998

The following table shows information with respect to grants of options to
the Named Executive Officers for the fiscal year ended December 31, 1998. The
options were granted under the Company's Employee Stock Option Plan. The
information below does not reflect the cancellation of existing employee options
and the issuance of new options with lower exercise prices effective January 2,
1998 and November 18, 1998. See "Report of the Compensation Committee of the
Board of Directors -- Report on Repricing of Options."

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------------------- ANNUAL RATE OF STOCK
NUMBER OF PRICE APPRECIATION FOR
SECURITIES % OF TOTAL OPTIONS OPTION TERM(1)
UNDERLYING OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED EMPLOYEES IN 1998 ($/SH)(2) DATE 5%($) 10%($)
- ---- ------------------ ------------------ -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter Gladkin............... 500,000 46.7% 2.51 7/1/08 $790,000 $2,000,000
Chief Executive Officer
and President

Scott A. Mason.............. 75,000 7.0 0.54 12/21/08 25,500 64,500
Secretary and Executive 10,000 0.9 0.94 11/18/08 5,900 15,000
Vice President 5,625 0.5 2.06 4/13/08 7,256 18,450
13,611 1.3 2.06 4/13/08 17,558 44,644
20,000 1.9 1.28 1/28/08 19,800 49,000

Donald W. Seymour........... 10,000 0.9 0.94 11/18/08 5,900 15,000
Vice President of National 10,000 0.9 0.94 11/18/08 5,900 15,000
Health Advisors 2,333 0.2 2.06 4/13/08 3,009 7,652
5,625 0.5 2.06 4/13/08 7,256 18,450
20,000 1.9 1.28 1/28/08 19,800 49,000

James L. Elder, Jr. ........ 10,000 0.9 0.94 11/18/08 5,900 15,000
Vice President of Sales 20,000 1.9 1.28 1/28/08 19,800 49,000

Violet Shaffer.............. 10,000 0.9 0.94 11/18/08 5,900 15,000
Vice President of 20,000 1.9 1.28 1/28/08 19,800 49,000
Marketing

Thomas W. Hodson............ 2,500 0.2 1.44 1/2/08 2,275 5,725
Director
</TABLE>

- ---------------
(1) Amounts reflect certain assumed rates of appreciation set forth in the SEC's
executive compensation disclosure rules. Actual gains, if any, on stock
options exercised, will depend on future performance of the Common Stock. No
assurance can be given that the amounts reflected in these columns will be
achieved.
(2) Options are granted at the fair market value on the date of grant which
means the average of the highest and lowest quoted selling prices for the
shares on the date of grant.

8
<PAGE> 12

1998 YEAR-END OPTION VALUES

The following table provides information regarding stock options held by
the Named Executive Officers as of December 31, 1998. None of those individuals
exercised any stock options during the 1998 fiscal year. The information below
does not reflect the cancellation of existing employee options and the issuance
of new options with lower exercise prices effective January 2, 1998 and November
18, 1998. See "Report of the Compensation Committee of the Board of
Directors -- Report on Repricing of Options."

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR-END(#) FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter Gladkin............... 0 $0 40,000 460,000 $0 $0
Scott A. Mason.............. 0 0 4,375 299,861 0 0
Donald W. Seymour........... 0 0 4,375 83,583 0 0
James L. Elder, Jr. ........ 0 0 2,500 77,500 0 0
Violet Shaffer.............. 0 0 3,250 42,500 0 0
Thomas W. Hodson............ 0 0 25,490 0 0 0
</TABLE>

- ---------------
(1) Value is calculated by subtracting the exercise price per share from the
last reported market price at December 31, 1998 and multiplying the result
by the number of shares subject to the option.

EXECUTIVE EMPLOYMENT CONTRACTS

In May 1998, the Company entered into an employment agreement with Mr.
Peter Gladkin, the Company's President and Chief Executive Officer. The term of
the agreement is from July 1, 1998 to July 1, 2000, unless extended by written
agreement prior to April 1, 2000. The Company has the right to terminate the
agreement without cause upon sixty days prior written notice, provided that the
Company pays Mr. Gladkin's salary and continues his Company-provided health
benefits, life insurance and other welfare benefits for a period of twelve
months. In addition, any unvested stock options that would have vested within
nine months after the termination date will vest upon termination.

In June 1997, the Company entered into an employment agreement with Scott
A. Mason, the Secretary and Executive Vice President of the Company. The
original term of the agreement was for twelve months from June 1997 with
automatic twelve month extensions thereafter until terminated by Mr. Mason upon
ninety days prior written notice. The Company has the right to terminate the
agreement without cause upon ninety days advance written notice, provided that
the Company pays Mr. Mason's salary and a portion of his bonus and continues his
Company-provided health benefits, life insurance and other welfare benefits for
a period of twelve months.

In June 1997, the Company, through its wholly owned subsidiary National
Health Advisors, Ltd. (NHA), entered into an employment agreement with Mr.
Donald Seymour, Vice President of NHA. The term of the agreement is from June 2,
1997 to June 2, 1998 with automatic twelve month extensions thereafter unless
terminated by the Company or Mr. Seymour upon ninety days prior written notice.
The Company has the right to terminate Mr. Seymour without cause upon ninety
days prior written notice, provided that the Company pays Mr. Seymour's salary
and a portion of his bonus and continues his Company-provided health benefits,
life insurance and other welfare benefits for a period of six months.

In March 1998, the Company entered into an employment agreement with Mr.
James L. Elder, Jr., the Company's Vice President of Sales. The term of the
agreement is from January 1, 1998 to December 31, 1998 with automatic twelve
month extensions thereafter unless terminated by the Company or Mr. Elder upon
ninety days prior written notice. The Company has the right to terminate Mr.
Elder without cause, provided that the Company pays Mr. Elder's salary and
continues his Company-provided health insurance benefits for a period of twelve
months.

9
<PAGE> 13

In April 1998, the Company entered into an employment agreement with Ms.
Violet Shaffer, the Company's Vice President of Marketing. The term of the
agreement is from January 1, 1998 to December 31, 1998 with automatic twelve
month extensions thereafter unless terminated by the Company or Ms. Shaffer upon
ninety days prior written notice. The Company has the right to terminate Ms.
Shaffer without cause provided that the Company pays Ms. Shaffer's salary and
Company-provided health benefits for a period of six months. The Company's Board
of Directors has the discretion to extend the payment of Ms. Shaffer's salary
and provision of her health benefits for an additional six months.

REPORT ON EXECUTIVE COMPENSATION OF THE
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

EXECUTIVE COMPENSATION PHILOSOPHY

The Compensation Committee of the Board is responsible for reviewing the
Company's executive compensation program and policies each year and determining
the compensation of the Company's executive officers. The Compensation
Committee's decisions are made within parameters established by the Company's
Board of Directors in the form of an overall executive compensation philosophy.

The Company's compensation program and policies are designed to help the
Company attract, motivate and retain individuals of outstanding ability in key
positions in order to maximize return to stockholders. The primary objectives of
the Company's executive compensation program are to: (1) provide total
compensation opportunities that are competitive with opportunities provided to
executives of comparable companies in the decision support industry at
comparable levels of performance; (2) ensure that executive's total compensation
levels vary based on both the Company's short-term financial performance, and
growth in stockholder value over time; (3) focus and motivate executives on the
achievements of defined objectives; and (4) reward executives in accordance with
their relative contributions to achieving strategic milestones and upholding key
mission-related objectives. In designing and administering its executive
compensation program, the Company attempts to strike an appropriate balance
among these objectives.

During 1998, the Compensation Committee performed an annual review of the
Company's compensation program for senior executives. This annual review was
conducted as a follow-up to the major review of the Company's compensation
program for senior executives that the Company undertook in 1996. During the
1996 review, the Committee concluded that the Company's most direct competitors
for executive talent are in the decision support industry. The Committee
principally compared the Company to a self-selected group of decision support
companies of comparable size (the "Compensation Comparable Group"). The
Compensation Comparable Group is similar, but not identical to, the peer
performance group used in calculating the cumulative total return discussed
under "Company Performance" below. Based upon the recommendations of consultants
engaged on the project, the Committee established as a goal compensation ranges
for executive personnel nominally based on the 50th percentile of competitive
data for similarly sized decision support organizations.

During 1998, Board of Directors successfully recruited a new President and
Chief Executive Officer, Vice President of Finance and Chief Financial Officer,
and Vice President, Corporate Counsel.

In response to (1) significant turnover among the Company's senior
management personnel and (2) concerns and recommendations expressed in September
1998 by the Company's Chief Executive Officer, the Company has implemented
certain changes in its policies with respect to stock options for senior staff,
as discussed below under "Long-Term Incentive Compensation." In addition, the
Company entered into employment agreements with members of its senior staff that
are designed to provide additional assurances to these key employees.

The Compensation Committee will annually revisit the manner in which it
implements the Company's compensation policies in connection with executive
staff. However, the Company's policies will continue to be designed to align the
interests of the Company's executives and senior staff with the long-term
interests of the stockholders.

10
<PAGE> 14

The Company's executive compensation programs, which include no special
perquisites, consist of three principal elements: base salary; short-term
incentive cash payments; and long-term stock options, each of which is discussed
below.

BASE COMPENSATION

Generally, in establishing compensation the Compensation Committee believes
that positions are competitively paid if the executive's salary falls within
P20% of the 50th percentile of the comparison group for base salary. The
Compensation Committee reviews annually updated competitive salary and total
compensation levels for executive staff. Individual adjustments are determined
within the total executive compensation budget as approved by the Compensation
Committee and are based upon individual achievement and contribution. Salary
decisions are made as part of the Company's structured annual review process and
upon the recommendation to the Compensation Committee by the Chief Executive
Officer.

SHORT-TERM INCENTIVE COMPENSATION

The Company's compensation philosophy emphasizes incentive pay to leverage
both individual and organizational performance and to raise the Company's total
compensation position in the marketplace. The Committee's guideline is that base
salary and short-term incentive compensation, if earned, should nominally place
executives in the 60th percentile of the comparison group for total base and
bonus compensation. The Company's short-term incentive compensation program
rewards executives for accomplishing annual financial, operational, and
individual objectives. The program provides varied award opportunities that
correspond to each participant's level of responsibility and influence on
strategic initiatives and operations of the Company. The annual incentive
program is funded only if specific financial goals are achieved at threshold
levels. In 1998, certain executives participated in the incentive compensation
program at targeted levels (as a percentage of base salaries) ranging between
10% and 70%. Participants in the incentive compensation program receive bonus
payments that include awards for financial performance (measured by Company
revenues and earnings per share) as well as operational and individual
achievement of goals. Eligible executives with the Company's National Health
Advisors unit received bonuses for 1998 consistent with that business unit's
historical bonus program.

LONG-TERM INCENTIVE COMPENSATION

The Company's stockholders approved in 1996 the adoption of a stock option
plan that is designed to reward employees for long-term growth consistent with
stockholder return. The ultimate value of the long-term incentive compensation
awards is dependent on the actual performance of the Company's stock price over
time.

In mid-December 1997, the Company's senior staff recommended to the Board
of Directors that the Company's approach to the granting of stock options be
changed in a manner designed to minimize employee turnover and encourage focus
on the Company's 1998 business plan. In response to these recommendations and
for the reasons discussed below under the heading "Report on Repricing of
Options," effective January 2, 1998, the Board of Directors cancelled
outstanding options held by the Company's employees and consultants, including
the Company's senior staff (other than the Company's former President and Chief
Executive Officer), and issued replacement options with exercise prices of $2.00
per share.

In addition, the senior staff recommended an approach for 1998
performance-based option grants. At meetings of the Compensation Committee and
Board of Directors held on December 17, 1997 and January 28, 1998, the
Compensation Committee and the Board of Directors considered and granted an
aggregate of 156,000 performance-based incentive stock options to twelve members
of the Company's senior staff effective January 28, 1998. The exercise price of
these options is equal to the average of the high and low prices of the Common
Stock on January 28, 1998, or $1.28 per share. A portion of the options vested
based on the Company's realization of performance targets for the first quarter
of 1998. The balance of the options will vest on the fifth anniversary of the
grant date, January 28, 2003, provided the employee remains employed by the
Company at that time.

11
<PAGE> 15

Also in November 1998, the Chief Executive Officer recommended and the
Board of Directors approved and granted 10,000 incentive stock options to each
Vice President and Executive Vice President. The options were granted on
November 18, 1998 at a price of $0.9375 per share. The options will vest over
five years but the vesting will be accelerated at the end of 1999 if the Company
meets certain revenue and operating profit goals during 1999.

CEO COMPENSATION

The Compensation Committee established the compensation of Peter Gladkin,
the Company's Chief Executive Officer since July 1998, using the criteria
discussed previously. Mr. Gladkin's 1998 salary was determined based on the
Compensation Committee's overall assessment of Mr. Gladkin's performance
capabilities and competitive market data on salary levels within the
Compensation Comparable Group. Mr. Gladkin's performance was reviewed in
November 1998 with a view to his accomplishment of certain goals relating to
long-term profitability and short-term and long-term growth. Incentive
compensation for Mr. Gladkin was based upon achievement of Company-wide
financial and operating performance and achievement of individual goals. Mr.
Gladkin was granted a bonus in the form of stock options in January 1999 with
respect to performance during the year ended December 31, 1998 as per the terms
of his employment agreement.

Thomas Hodson, a member of the Company's Board of Directors, served as the
Company's acting Chief Executive Officer from January 1998 to July 1998. Mr.
Hodson did not receive a salary or other compensation from the Company for his
service as the acting Chief Executive Officer.

Dr. Bisbee, the Company's former Chairman, Chief Executive Officer and
President, resigned as Chairman on November 5, 1997 and as President and Chief
Executive Officer effective at the close of business on December 31, 1997. Under
Dr. Bisbee's Employment Agreement, entered into during April 1997, Dr. Bisbee is
entitled to a continuation of his salary and Company-provided health benefits,
life insurance, and other welfare benefits during 1998 and 1999. Dr. Bisbee
remains a member of the Company's Board of Directors, and his outstanding vested
options may be exercised until six months following the expiration of his tenure
as a member of the Company's Board of Directors, which is the period applicable
to Board members generally.

COMPENSATION DEDUCTIBILITY

Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), imposes a limit on tax deductions for annual compensation in excess of
one million dollars paid by a corporation to its chief executive officer and the
other four most highly compensated executive officers of the corporation. This
provision excludes certain forms of "performance based compensation" from the
compensation taken into account for purposes of the limit. The Compensation
Committee believes that it has structured its current compensation programs in a
manner to preserve full deductibility to the Company of executive compensation
under the Code. The Compensation Committee will continue to assess the impact of
Section 162(m) of the Code on its compensation practices and determine what
further action, if any, is appropriate.

REPORT ON REPRICING OF OPTIONS

During 1998, the Company continued to experience significant turnover of
personnel. This turnover, which was unacceptably high during 1997 and continued
into 1998, is a matter of concern to the Company's Board of Directors.

12
<PAGE> 16

As discussed above, in mid-December, 1997 the Company's senior staff,
including all of its vice presidents, recommended to the Board of Directors that
existing employee stock options should be cancelled and replaced with new
non-qualified stock options with lower exercise prices. This proposal was
initially discussed by the Compensation Committee of the Board on December 17,
1997 and then considered at a meeting of the Board of Directors held on December
31, 1997. The Board was concerned about the impact on stockholders of the
cancellation of old options and issuance of replacement options at a lower
exercise price. However, the Board concluded that, because of the highly unusual
circumstances, the senior staff's recommendation was in the interests of the
Company and its stockholders. Among other things, the Board was eager to reward
members of the senior staff who had demonstrated loyalty to the Company, and
felt that the senior staff's recommendation was important to the retention and
the motivation of the senior staff, who are essential to the Company's on-going
business.

Several features of the new options are designed to preserve the interests
of stockholders. Rather than granting the options with an exercise price equal
to the then fair market price per share, the exercise price was established at
$2.00 per share, or $.56 (38%) in excess of the average market price on January
2, 1998, the effective date of the new non-qualified stock options. The new
options vest 20% immediately at the date of grant for employees who have been
with the Company for at least one year (but are not exercisable until July 2,
1998) and 20% on January 2, 1999, 2000, 2001, and 2002. For employees who have
been with the Company for less than one year, options vest 20% each year for
five years from the date of grant.

Options for an aggregate of 502,073 shares held by existing employees and
consultants were repriced effective January 2, 1998 as part of the action
described above. The Board determined not to reprice any options held by Dr.
Bisbee or members of the Board of Directors as part of this action.

In November 1998, the Company's Board of Directors authorized a repricing
program which allowed current, active employees to reprice all of their
outstanding options to purchase Common Stock of the Company for a like number of
shares. The exercise price of these options is equal to the average of the high
and low prices of the Company's Common Stock on November 18, 1998, or $0.9375
per share. The vesting schedule remains unchanged. Options previously issued to
non-employees were not repriced. In connection with this repricing, the Company
and Mr. Gladkin agreed to amend his employment agreement to reprice 200,000
options as set forth in the table below. Of the 500,000 options granted to Mr.
Gladkin in 1998, 300,000 options were not repriced and remain at their original
exercise price.

The table below sets forth information with respect to the repricing of
options held by any executive officer of the Company, including the Named
Executive Officers, since the completion of the Company's initial public
offering.

OPTION REPRICINGS

13
<PAGE> 17

<TABLE>
<CAPTION>
AVERAGE OF THE LENGTH OF
HIGH AND LOW ORIGINAL
NUMBERS OF PRICES OF OPTION TERM
SECURITIES COMMON REMAINING AT
EFFECTIVE UNDERLYING STOCK EXERCISE NEW DATE OF
DATE OF OPTIONS AT TIME OF PRICE AT TIME EXERCISE REPRICING IN
NAME AND POSITION REPRICING REPRICED REPRICING OF REPRICING PRICE YEARS/DAYS
- ----------------- --------- ---------- -------------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Scott A. Mason........................... 01/02/98 180,000 1.44 6.88 2.00 9/151
Executive Vice President and
Secretary 11/18/98 180,000 0.94 2.00 0.94 8/196
11/18/98 20,000 0.94 1.28 0.94 9/71
11/18/98 13,611 0.94 2.06 0.94 9/146
11/18/98 5,625 0.94 2.06 0.94 9/146
Karen C. Miller.......................... 11/18/98 50,000 0.94 1.94 0.94 9/317
Vice President, Finance and Chief
Financial Officer
Donald W. Seymour........................ 01/02/98 40,000 1.44 6.88 2.00 9/151
Vice President of Consulting 11/18/98 40,000 0.94 2.00 0.94 8/196
11/18/98 20,000 0.94 1.28 0.94 9/71
11/18/98 2,333 0.94 2.06 0.94 9/146
11/18/98 5,625 0.94 2.06 0.94 9/146
Violet Shaffer........................... 01/02/98 15,000 1.44 3.47 2.00 9/263
Vice President of Marketing 11/18/98 15,000 0.94 2.00 0.94 8/308
11/18/98 750 0.94 1.44 0.94 8/308
11/18/98 20,000 0.94 1.28 0.94 9/71
</TABLE>

The Compensation Committee:

Edward J. Connors, Chairman
Thomas W. Hodson
William A. Knaus, M.D.

The report of the Compensation Committee of the Board of Directors shall
not be deemed to be incorporated into any filing under the Securities Act of
1933, as amended (the "Securities Act"), or the Exchange Act, notwithstanding
any general statement contained in any such filing incorporating this proxy
statement by reference, except to the extent that the Company specifically
incorporates this information by reference.

RATIFICATION OF THE ADOPTION OF THE
NON-EMPLOYEE DIRECTOR SUPPLEMENTAL STOCK OPTION PLAN

(PROPOSAL 2)

In March 1999, the Board adopted, subject to shareholder approval, the
Company's Non-Employee Director Supplemental Stock Option Plan (the
"Supplemental Stock Option Plan") and authorized that 120,000 shares of the
Company's Common Stock be reserved for issuance upon exercise of options granted
under the Director Stock Option Plan.

The Board believes that the ownership of Common Stock by directors supports
the maximization of long-term stockholder value by aligning the interests of
directors with those of stockholders. The plan is designed to facilitate the
ownership of Common Stock by non-employee directors by providing for the grant
of stock options to non-employee directors.

Approval of the adoption by the Board of the Supplemental Stock Option Plan
requires the affirmative vote of the holders of a majority of the votes cast at
the meeting.

14
<PAGE> 18

If the Supplemental Stock Option Plan is approved, the grant of an option
by the Board of Directors on January 26, 1999 to each of Messrs. Bisbee,
Connors, Dessimoz, Hodson, Knaus and Lewin to purchase 16,700 shares of Common
Stock at a price of $1.25 per share will become effective.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE
COMPANY VOTE FOR THE APPROVAL OF THE ADOPTION OF THE SUPPLEMENTAL STOCK OPTION
PLAN.

The essential features of the Supplemental Stock Option Plan are outlined
below. This description is qualified in its entirety by the complete
Supplemental Stock Option Plan, a copy of which is attached as Appendix A.
Subject to stockholder approval of the Supplemental Stock Option Plan, the
Company intends to file a registration statement on Form S-8 under the
Securities Act of 1933, as amended, covering 120,000 shares of Common Stock
issuable under the Supplemental Stock Option Plan.

General. The purpose of the Supplemental Stock Option Plan is to enable
the Company to attract, retain and reward qualified non-employee directors by
offering them an opportunity to have a greater proprietary interest in and a
closer identity with the Company and its financial success. By permitting
options to be granted on a discretionary basis, the Supplemental Stock Option
Plan gives the Company more flexibility to address special situations than is
possible under the existing APACHE Medical Systems, Inc. Non-Employee Director
Stock Option Plan. The Supplemental Stock Option Plan is intended to apply to
the supplemental grant of an option to purchase 16,700 shares of Common Stock to
each non-employee director by the Board on January 26, 1999. Options granted
under the Supplemental Stock Option Plan shall be nonqualified stock options.

Eligibility. Options shall be granted under the Supplemental Stock Option
Plan solely to individuals who are non-employee members of the Board of
Directors on the date of grant (the "Participants"). The term "Non-Employee
Directors" shall have the meaning ascribed to it in Rule 16b-3(b)(3) of the
Exchange Act.

Administration. The Supplemental Stock Option Plan will be administered by
a committee composed of at least two Non-Employee Directors (the "Committee").
Members of the Committee shall be designated by the Chairman of the Board and
shall include the Chairman of the Board if the Chairman is also a Non-Employee
Director. The Committee may employ such legal counsel, consultants and agents as
it may deem desirable for the administration of the Supplemental Stock Option
Plan.

The Committee shall have the authority to construe and interpret the
Supplemental Stock Option Plan and to establish, amend or waive rules and
regulations for its administration. Subject to the limitations of the express
provisions of the Supplemental Stock Option Plan, options may be subject to such
provisions as the Committee may deem advisable, and may be amended by the
Committee from time to time. No amendment, however, may adversely affect the
rights of the holder of an Option without such holder's consent.

No member of the Committee shall be liable for any action or determination
made in good faith with respect to the Supplemental Stock Option Plan or any
option awarded under it. To the maximum extent permitted by applicable law, each
member of the Committee shall be indemnified and held harmless by the Company
against any cost or expense (including legal fees) or liability (including any
sum paid in settlement of a claim with the approval of the Company) arising out
of any act or omission to act in connection with the Supplemental Stock Option
Plan, unless arising out of such member's own fraud or bad faith. Such
indemnification shall be in addition to any rights of indemnification the
members may have as members of the Board or under the by-laws of the Company.

In addition to the authority otherwise expressly granted to the Board under
the Supplemental Stock Option Plan, the Board at its discretion may carry out
any of the functions of the Committee as set forth in the Supplemental Stock
Option Plan.

Shares subject to the Supplemental Stock Option Plan. The aggregate shares
of Common Stock that may be issued under the Supplemental Stock Option Plan
shall not exceed 120,000, as adjusted in accordance with the provisions set
forth below (see "Adjustment Provisions"). If any option granted under the
Supplemental Stock Option Plan (the "Option") should lapse, expire, terminate,
be forfeited or be cancelled without the issuance of shares, the Common Stock
subject to or reserved for such Option may be used again

15
<PAGE> 19

for new grants of Options under the Supplemental Stock Option Plan. However, the
number of shares of Common Stock issued under the Supplemental Stock Option Plan
may never exceed the total number of shares reserved for issuance. Any shares of
Common Stock withheld or surrendered to pay withholding taxes, or withheld or
surrendered in full or partial payment of the exercise price of an Option as
permitted under the terms of the Supplemental Stock Option Plan (see "Terms and
Conditions" below) shall be added to the aggregate shares of Common Stock
available for issuance.

Adjustment Provisions. In the event of a stock split, stock dividend,
recapitalization, reclassification or combination of shares, a merger, a sale of
assets or any such similar event, the Committee shall adjust equitably (a) the
number and class of shares or other securities that are reserved for issuance
under the Supplemental Stock Option Plan, (b) the number and class of shares or
other securities that are subject to outstanding Options, and (c) the
appropriate Fair Market Value (as that term is defined in the Supplemental Stock
Option Plan) and other price determinations applicable to Options pursuant to
the terms set forth in the Supplemental Stock Option Plan.

Terms and Conditions. Each Option granted under the Supplemental Stock
Option Plan shall be evidenced by an agreement, in a form approved by the
Committee. Each Option shall be subject to the following terms and conditions,
and to such other terms and conditions as the Committee may deem appropriate
that are not inconsistent with the provisions of the Supplemental Stock Option
Plan:

Timing of Option Grants and Number of Underlying Shares. Options
shall be granted to such Participants as the Committee may designate, at
such times as the Committee may determine. Each Option agreement shall
designate the number of shares of Common Stock underlying the Options to
which the agreement pertains.

Exercise Price. The per share exercise price of each Option granted
under the Supplemental Stock Option Plan shall be 100% of the Fair Market
Value per share of Common Stock at the date the Option is granted.

Vesting of Options. Each Option agreement shall specify the manner in
which the Option shall vest.

Option Period. Each Option agreement shall specify the period for
which the Option thereunder is granted and shall provide that the Option
shall expire at the end of such period.

Payment. The exercise price of an Option shall be paid in full at the
time of exercise (i) in cash, (ii) through the surrender of
previously-acquired shares of Common Stock having a Fair Market Value equal
to the exercise price of the Option, (iii) through the withholding by the
Company (at the election of the Participant) of shares of Common Stock
having a fair market value equal to the exercise price, or (iv) by a
combination of (i), (ii) and (iii).

Termination of Options Upon Termination Due to Disability or Death. Upon
the termination of a Participant's membership on the Board by reason of
disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986,
as amended, (a "Disability")) or death, such Participant's Options shall become
or remain fully vested and shall be exercisable by such Participant (or, in the
case of death, by his or her estate) for not later than the earlier of one year
after the termination date or the expiration of the term of the Options.

Termination of Options Upon Termination Other than for Cause. Upon the
termination of a Participant's membership on the Board or for any reason other
than for Cause (as defined below -- see "Termination of Options Upon Termination
for Cause"), Disability or death, such Participant's Options (to the extent
vested prior to such termination) may be exercised by such Participant during
the three month period commencing on the date of termination, but not later than
the expiration of the term of the Options. If a Participant dies during such
three month period, his or her estate may exercise the Options (to the extent
such Options were vested and exercisable prior to death), but not later than the
earlier of one year after the date or the expiration of the term of the Options.

Termination of Options Upon Termination for Cause. Upon termination of a
Participant's membership on the Board for Cause, the Participant's right to
exercise his or her Options shall terminate at the time notice of termination is
given by the Company to such Participant. "Cause" is defined to include (i) the
commission
16
<PAGE> 20

of an action against or in derogation of the interests of the Company which
constitutes an act of fraud, dishonesty or moral turpitude or which, if proven
in a court of law, would constitute a violation of a criminal code or similar
law; (ii) a material breach of any material duty or obligation imposed upon the
Participant by the Company; (iii) divulging the Company's information; or (iv)
the performance of any similar action that the Committee, in its sole
discretion, may deem to be sufficiently injurious to the interests of the
Company so as to constitute substantial cause for termination.

Term of Plan. The Supplemental Stock Option Plan shall continue until
terminated by the Board or until no Common Stock remains available for issuance
under the Supplemental Stock Option Plan, whichever occurs first.

Change in Control. In the event of a Change in Control, all outstanding
Options shall fully vest in each Participant. "Change in Control" shall have the
meaning ascribed to it in the Supplemental Stock Option Plan.

Nontransferability. During the lifetime of a Participant, any Option
granted to him or her shall be exercisable only by him or her by his or her
guardian or legal representative. No Option shall be assignable or transferable,
except by will or by laws of descent and distribution, and no option shall be
subjected to any encumbrance, pledge or charge of any nature.

Amendment or Discontinuance of the Plan. The Board, acting by a majority
of its members, without further action on the part of the stockholders, may from
time to time alter, amend or suspend the Supplemental Stock Option Plan or any
Option granted thereunder or may at any time terminate the Supplemental Stock
Option Plan. However, the Board may not take any action that would cause the
Supplemental Stock Option Plan to fail to comply with Rule 16b-3(b)(3) of the
Exchange Act or any other applicable law or exchange requirements. No such
action shall materially and adversely affect any outstanding Options without
consent of the respective Participants.

Effective Date of the Supplemental Stock Option Plan. The Supplemental
Stock Option Plan is effective on January 1, 1999, provided that it is submitted
for approval by the holders of a majority of the outstanding shares of Common
Stock of the Company within 12 months thereafter. Options granted prior to such
stockholder approval shall become null and void if such stockholder approval is
not obtained.

Withholding Taxes. The Company may withhold, or allow a Participant to
remit to the Company, any federal, state or local taxes required by law to be
withheld with respect to any event giving rise to income tax liability with
respect to an Option. In order to satisfy all or any portion of such income tax
liability, a Participant may elect to surrender Common Stock that would
otherwise have been issued to the Participant pursuant to the exercise of an
Option, the number of shares of such withheld or surrendered Common Stock may be
sufficient to satisfy all or a portion of such income tax liability.

Other Tax Consequences. The foregoing discussion is intended to be a
general summary only of the federal income tax aspects of rights granted under
the Supplemental Stock Option Plan; tax consequences may vary depending on the
particular circumstances at hand. In addition, the administrative and judicial
interpretations of the application of the federal income tax laws are subject to
change. Furthermore, no information is given with respect to state or local
taxes that may be applicable.

RATIFICATION OF THE PROPOSAL
TO AMEND THE EMPLOYEE STOCK OPTION PLAN

(PROPOSAL 3)

The Board of Directors of the Company has adopted, and recommends to
stockholders for approval, the further amendment and restatement of the Employee
Stock Option Plan of APACHE Medical Systems, Inc. (the "Employee Option Plan")
to increase the number of shares reserved for issuance under the Employee Option
Plan by 500,000 from 2,200,000 to 2,700,000.

17
<PAGE> 21

The affirmative vote of a majority of the shares present in person or by
proxy and entitled to vote is required to approve the amendment and restatement
of the Employee Option Plan. An abstention will be counted as a vote against
approval since it is one less vote for approval. Broker non-votes will not
affect the outcome since they are not considered "shares present" for voting
purposes.

If the amendment and restatement of the Employee Option Plan is approved,
approximately 10,000 shares of Common Stock underlying an option previously
granted to Peter Gladkin, the Company's President and Chief Executive Officer,
will become available for issuance upon exercise of the option by Mr. Gladkin.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THIS PROPOSAL TO AMEND AND RESTATE THE EMPLOYEE OPTION PLAN.

THE EMPLOYEE OPTION PLAN

The following summary of the material provisions of the Employee Option
Plan reflects the amendment proposed for approval by the shareholders at the
Annual Meeting.

General. The Employee Option Plan as adopted by the Board of Directors of
the Company and approved by the Company's stockholders was originally effective
as of November 8, 1990 and amended and restated as of April 1, 1996, May 1, 1997
and February 23, 1998. The Employee Option Plan provides for the grant of stock
options to employees of the Company or its subsidiaries, including employees who
are officers and/or members of the Board, and to any non-employee (with the
exception of non-employee directors) who is a consultant or advisor to the
Company. Unless terminated sooner by the Board, the Employee Option Plan will
terminate on April 1, 2006.

Shares Subject to the Plan. Pursuant to the Employee Option Plan as
originally effective as of November 8, 1990, the Company reserved 1,700,000
shares of Common Stock for issuance under the Employee Option Plan. The Employee
Option Plan was amended as of May 1, 1997 to increase the number of reserved
shares to 2,200,000 shares of Common Stock. A description of the Board's
proposal to increase the number of reserved shares to 2,700,000 shares is
included below under the caption "Increase Number of Shares Reserved for
Issuance." As of December 31, 1998, options on 1,894,715 shares of Common Stock
were outstanding under the Employee Option Plan.

Plan Administration. The Employee Option Plan is administered by the
Compensation Committee of the Board. The Committee has the authority and
discretion, subject to the provisions of the Employee 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.

Terms and Conditions of 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
the stock option is granted. Stock options granted under the Employee 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
Employee Option Plan, all outstanding unvested options under the Employee Option
Plan immediately vest.

Nature of Options. Options granted under the Employee Option Plan may be
either "incentive stock options" ("ISOs"), as defined under the tax laws, or
non-qualified stock options. ISOs may be granted only to employees of the
Company and are subject to certain additional limitations relating to such
things as employment status, minimum exercise price, length of the exercise
period, maximum value of the stock underlying the options and a required holding
period for stock received upon exercise of an ISO.

Plan Amendment. Pursuant to the Employee Option Plan as originally
effective as of November 8, 1990, a majority of the Board of Directors of the
Company could, without further action of the stockholders, terminate, alter,
amend or suspend the Employee Option Plan, provided that the Board did not
materially increase participants' benefits or the number of shares issuable
under the Employee Option Plan, materially modify the eligibility requirements
for participation in the Employee Option Plan, or take any action that

18
<PAGE> 22

would cause the Employee Option Plan to fail to comply with certain applicable
federal tax or securities laws. In addition, any action taken by the Board could
not materially and adversely affect any options outstanding under the Employee
Option Plan without the consent of the participants.

Due to revised securities regulations that increased the ability of a
company's board of directors to amend employee benefit plans while maintaining
the exempt status of option grants under Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Employee Option Plan
was amended, effective May 1, 1997, to permit the Board of Directors of the
Company to materially increase benefits to participants and to materially modify
eligibility requirements without receiving stockholder consent, so long as the
amendments to the Employee Option Plan do not materially adversely affect any
outstanding options. Stockholder approval remains necessary to increase the
number of shares of Common Stock subject to the Employee Option Plan, and the
approval of the participants in the Employee Option Plan remains necessary to
amend the Employee Option Plan in any manner that would have a material adverse
effect on outstanding options.

In February 1998, the Employee Option Plan was further amended and restated
to make certain minor technical changes. None of these changes had a material
effect on the terms of the Employee Option Plan.

Tax Consequences. Certain federal income tax consequences are associated
with (i) the grant of a stock option under the Employee Option Plan, (ii) the
exercise of such option and (iii) the disposition of shares received upon the
exercise of an option. The following description of tax consequences is based
upon present federal tax laws and regulations, but does not purport to be a
complete description of the federal income tax consequences applicable to a
participant under the Employee Option Plan. Accordingly, information relating to
tax consequences is qualified in its entirety by reference to current tax laws.

Non-Qualified Stock Options. The grant of a non-qualified option
(including any option exceeding any additional limitations on ISOs) to a
participant will not be a taxable event so long as the option does not have a
readily ascertainable fair market value. Options granted pursuant to the
Employee Option Plan should not have a readily ascertainable fair market value
because they are not actively traded on an established securities market, are
not transferable, are not immediately exercisable in full upon grant and have
more than a nominal exercise price. Accordingly, the participant will not be
subject to any income tax consequences with respect to such option unless and
until the option is exercised.

Upon the exercise of a non-qualified stock option, the participant
generally must recognize ordinary compensation income equal to the "spread"
between the exercise price and the fair market value of the Common Stock on the
date of exercise. The amount and character of any gain or loss realized on a
subsequent disposition of Common Stock by the participant generally would depend
on, among other things, whether an election under the Internal Revenue Code of
1986, as amended (the "Code") Section 83(b) with respect to such shares had been
made and the length of time such shares had been held.

Incentive Stock Options. There are no federal income tax consequences
associated with the grant of an ISO to an employee. In contrast to the exercise
of a non-qualified stock option, the exercise of an ISO will not cause an
employee to recognize taxable income for regular income tax purposes (although
the employee could be subject to an alternative minimum tax liability as
described below). If the employee holds the shares acquired upon exercise of the
ISO for a minimum of two years from the date of the grant of the ISO, and for at
least one year after exercise, any gain realized by the participant on the
subsequent sale or exchange of such shares generally would be treated as
long-term capital gain. The amount of this gain generally will equal the
"spread" between the sales price and the exercise price of the Common Stock. If
the shares are sold or otherwise disposed of prior to the expiration of such
periods (a "disqualifying disposition"), then a portion of any gain recognized
by the employee that would otherwise be characterized as capital gain would
instead be taxable as ordinary compensation income. The amount of such gain that
would be characterized as ordinary income would not exceed an amount equal to
the excess of (i) the fair market value of such shares as of the date the option
was exercised over (ii) the amount paid for such shares. Any loss recognized
upon a taxable disposition of the shares generally would be characterized as a
capital loss.

19
<PAGE> 23

Upon exercise of an ISO by an employee, the alternative minimum taxable
income of such employee must be determined as if such ISO were a non-qualified
stock option. Accordingly, he or she will be required to include as alternative
minimum taxable income the excess (if any) of the value of the shares received
upon exercise as of the date such shares are vested over the amount paid for
such shares. He or she would then be required to pay the greater of his or her
regular or alternative minimum tax liability computed with respect to such year.

Withholding Taxes. The Company may condition the exercise of any option
under the Employee Option Plan on the receipt of an amount sufficient to pay,
and will deduct from the compensation of a holder of an option under the
Employee Option Plan, the amount of any tax required by any governmental
authority to be withheld and paid over by the Company to such governmental
authority for the account of the participant with respect to such options and
the exercise thereof.

Compensation Deduction. To the extent compensation income is recognized by
a participant in connection with the exercise of a non-qualified stock option or
a "disqualifying disposition" of stock obtained upon exercise of an ISO, the
Company generally will be entitled to a corresponding compensation deduction
(assuming the withholding requirements are satisfied).

Outstanding Options. The number of shares acquirable pursuant to stock
options that will be awarded to the Company's Chief Executive Officer and the
other four most highly compensated executive officers of the Company under the
Employee Option Plan is not currently determinable. As of December 31, 1998,
options to purchase an aggregate of 1,017,944 shares had been granted under the
Employee Option Plan to the Company's Chief Executive Officer and the other four
most highly compensated executive officers as follows: Mr. Gladkin, 500,000; Mr.
Elder, 80,000; Mr. Mason, 304,236; Mr. Seymour, 87,958; Ms. Shaffer, 45,750. As
of the same date, options to purchase 1,137,944 shares had been granted to all
current executive officers as a group. Also as of December 1998, options to
purchase 756,771 shares had been granted to plan participants, excluding the
Company's executive officers.

Increase Number of Shares Reserved for Issuance. As of December 31, 1998,
stock options covering 1,894,715 shares of Common Stock were outstanding under
the Employee Option Plan and 305,285 shares were available for future awards.
The Board of Directors has adopted, subject to shareholders approval, a proposal
that the Employee Option Plan be amended and restated to increase the aggregate
number of shares of Common Stock that may be issued under the Employee Option
Plan to 2,700,000, thereby assuring that sufficient shares are available for
future grants.

If the Board's proposal is approved by stockholders, the Employee Stock
Option Plan of APACHE Medical Systems, Inc. will be amended and restated
effective January 1, 1999.

RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC AUDITORS

(PROPOSAL 4)

INDEPENDENT ACCOUNTANTS FOR 1999

The Board of Directors, upon the recommendation of its Finance and Audit
Committee, has selected Ernst & Young LLP to audit the accounts of the Company
for the fiscal year ending December 31, 1999. Such firm has reported to the
Company that none of its members has any direct financial interest or material
indirect financial interest in the Company. Currently, the Company's Finance and
Audit Committee is composed of Messrs. Bisbee, Hodson, Lewin and Dessimoz and
has responsibility for recommending the selection of auditors.

The Company accepted the resignation of Arthur Andersen LLP ("AA") as the
Company's independent public accountant on October 29, 1998. AA did not include
an adverse opinion or a disclaimer of opinion in its report on the Company's
financial statements for the 1997 fiscal year. AA did not qualify or modify its
report as to uncertainty, audit scope or accounting principles. AA did not
disagree with the Company on accounting

20
<PAGE> 24

principles or practices, financial statement disclosure or auditing scope or
procedure during the 1997 fiscal year and the subsequent interim period from
January 1, 1998 to December 8, 1998 in a manner which, if not resolved to the
satisfaction of AA, would have caused AA to reference the disagreement in
conjunction with its report in the financial statements for the period. There
were no reportable events as described in Item 304 of Regulation S-K promulgated
under the Securities Act of 1933.

Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting of Stockholders. Such persons will have an opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR RATIFICATION OF THE APPOINTMENT OF INDEPENDENT PUBLIC AUDITORS.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The following persons serve as members of the Company's Compensation
Committee during the 1998 fiscal year: Edward J. Connors, Thomas W. Hodson, and
William A. Knaus, M.D. Mr. Connors served as Chairman of the Compensation
Committee.

From January 1, 1998 to July 1, 1998, Thomas W. Hodson, a member of the
Board of Directors, assumed the responsibilities of acting Chief Executive
Officer. In addition, a Management Committee comprised of Mr. Hodson, director
Edward J. Connors, Executive Vice President Scott A. Mason, and Vice President
of Operations Donna J. Myers was formed to oversee the day-to-day operations of
the Company pending the identification of a new Chief Executive Officer. In July
1998, the Management Committee was dissolved after Peter Gladkin was hired as
President and Chief Executive Officer. See "Information Concerning The Board of
Directors and Its Committees -- Director Compensation."

No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or the
Compensation Committee.

COMPANY PERFORMANCE

The following graph compares the cumulative total stockholder return on the
Common Stock of APACHE Medical Systems, Inc. from June 28, 1996 through December
31, 1998 with the cumulative total return on the Nasdaq Stock Market -- U.S. and
the cumulative total return on the stock of a group of public companies in the
healthcare information business (the "Peer Group"). The Peer Group, which was
selected by the Company, is comprised of: Celeris Corp., HCIA, Inc.; Impath
Laboratories, Inc.; Mecon, Inc.; Oacis Health Care Holdings Corp.; and Vitalcom,
Inc. The Company did not pay any dividends during this period. The Nasdaq Stock
Market -- U.S. and the stock prices of the companies in the Peer Group are
published daily.

The graph assumes an investment of $100 in each of APACHE Medical Systems,
Inc., the NASDAQ Stock Market -- U.S. and the Peer Group on June 28, 1996. The
comparison also assumes that all dividends are reinvested and that the Peer
Group Returns are weighted for market capitalization.

21
<PAGE> 25

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG APACHE MEDICAL SYSTEMS, INC.,
THE NASDAQ STOCK MARKET -- U.S. INDEX AND THE PEER GROUP

[GRAPH]

<TABLE>
<CAPTION>
APACHE MEDICAL SYSTEMS, NASDAQ STOCK
INC. MARKET--U.S. INDEX PEER GROUP
----------------------- ------------------ ----------
<S> <C> <C> <C>
June 28, 1996 $100.00 $100.00 $100.00
December 31, 1996 $87.24 $108.65 $46.75
December 31, 1997 $10.46 $133.61 $28.74
December 31, 1998 $ 3.06 $187.81 $19.77
</TABLE>

The comparisons in this table are required by the SEC and are not intended
to forecast or be indicative of possible future performance of the Company's
Common Stock. The stock price performance graph shall not be deemed to be
incorporated into any filing under the Securities Act or the Exchange Act,
notwithstanding any general statement contained in any such filing incorporating
this proxy statement by reference, except to the extent that the Company
specifically incorporates this information by reference.

SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires that the Company's executive
officers, directors and beneficial owners of 10% or more of the Company's stock
file initial reports of ownership and of changes of ownership with the SEC and
the NASDAQ Stock Market. Executive officers, directors and 10% beneficial owners
are required by securities regulations to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on a review of the copies of such
forms furnished to the Company and written representations from the Company's
executive officers and directors, the Company believes that all filing
requirements were met during fiscal year 1998.

DEADLINE FOR STOCKHOLDER PROPOSALS

Proposals of stockholders intended for inclusion in the Company's proxy
statement relating to the 2000 Annual Meeting must be received at the Company's
offices (addressed to the attention of the Secretary) not later than December
16, 1999. Any such proposal must comply with Rule 14a-8 of Regulation 14A of the

22
<PAGE> 26

proxy rules of the SEC. The submission by a stockholder of a proposal for
inclusion in the proxy statement does not guarantee that it will be included.
Any shareholder proposal not included in the proxy materials disseminated by the
Company for its 2000 annual meeting in accordance with Rule 14a-8 under the
Exchange Act will be considered untimely for the purposes of Rules 14a-4 and
14a-5 under the Exchange Act if notice of the proposal is received after
February 29, 2000. Management proxies will be authorized to exercise
discretionary authority with respect to any shareholder proposal not included in
the Company's proxy materials unless (a) the Company receives notice of such
proposal by February 29, 2000, and (b) the conditions set forth in Rule
14-4(c)(2)(i)-(iii) under the Exchange Act are met.

ADDITIONAL INFORMATION

The expenses in connection with the solicitation of proxies will be borne
by the Company. Solicitation will be made by mail, but may also be made by
telephone, personal interview, facsimile or personal calls by officers,
directors or employees of the Company who will not be specially compensated for
such solicitation. The Company may request brokerage houses and other nominees
or fiduciaries to forward copies of the Company's proxy statement and Annual
Report to Stockholders to beneficial owners of Common Stock held in their names,
and the Company may reimburse them for reasonable out-of-pocket expenses
incurred in doing so. The Company has retained Kissel-Blake Inc. to assist in
solicitation for a fee not to exceed $3,500, plus reasonable expenses.

By Order of the Board of Directors

/S/ SCOTT A. MASON

Scott A. Mason
Secretary and Executive Vice President
McLean, Virginia
April 14, 1999

23
<PAGE> 27

APPENDIX A

APACHE MEDICAL SYSTEMS, INC.
NON-EMPLOYEE DIRECTOR
SUPPLEMENTAL STOCK OPTION PLAN

(Adopted Effective January 1, 1999,
Subject to Shareholder Approval)
<PAGE> 28

APACHE MEDICAL SYSTEMS, INC.

NON-EMPLOYEE DIRECTOR
SUPPLEMENTAL STOCK OPTION PLAN

(ADOPTED EFFECTIVE JANUARY 1, 1999,
SUBJECT TO SHAREHOLDER APPROVAL)

SECTION 1. Purpose.

The purpose of the Plan, as hereinafter set forth, is to enable the Company
to attract, retain and reward qualified non-employee directors by offering them
an opportunity to have a greater proprietary interest in and a closer identity
with the Company and its financial success. By permitting Options to be granted
on a discretionary basis, the Plan gives the Company more flexibility to address
special situations than is possible under the existing APACHE Medical Systems,
Inc. Non-Employee Director Stock Option Plan. The Plan is intended to apply to
the supplemental grant of an Option to purchase 16,700 shares of Common Stock to
each non-employee director by the Board on January 26, 1999.

Options granted under this Plan shall be nonqualified stock options.

SECTION 2. Definitions

Board: The Board of Directors of the Company.

Change in Control: The purchase or other acquisition by any person, entity
or group of persons, within the meaning of section 13(d) or 14(d) of the
Exchange Act or any comparable successor provisions, of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or
more of either the outstanding shares of common stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally; the approval by the stockholders of the Company of a reorganization,
merger, or consolidation in each case, with respect to which persons who were
stockholders of the Company immediately prior to such reorganization, merger or
consolidation do not immediately thereafter, own more than 30% of the combined
voting power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated Company's then outstanding securities; a
liquidation or dissolution of the Company; or of the sale of all or
substantially all of the Company's assets.

Code: The Internal Revenue Code of 1986, as amended from time to time.

Committee: A committee composed of at least two Non-Employee Directors,
within the meaning of Rule 16b-3(b)(3) of the Securities and Exchange
Commission, who are responsible for the administration of the Plan in accordance
with Section 3. Members of the Committee shall be designated by the Chairman of
the Board and shall include the Chairman of the Board if that is consistent with
the preceding sentence.

Common Stock: The common stock, $0.01 par value, of the Company or such
other class of shares or other securities as may be applicable pursuant to the
provisions of Section 8.

Company: APACHE Medical Systems, Inc., a Delaware corporation, its
subsidiary or subsidiaries, and any successor thereto.

Disabled or Disability: Permanent and total disability, as defined in Code
Section 22(e)(3). A Participant shall not be considered Disabled unless the
Committee determines that the Disability arose prior to such Participant's
termination of membership on the Board.

Exchange Act: The Securities Exchange Act of 1934, as amended from time to
time.

Fair Market Value: The amount determined by the Committee from time to
time, using such good faith valuation methods as it deems appropriate, except
that as long as the Common Stock is traded on NASDAQ or a recognized stock
exchange, it shall mean the average of the highest and lowest quoted selling
prices for the shares on the relevant date, or, if there were no sales on such
date, the weighted average of the means between the highest and the lowest
quoted selling prices on the nearest day before and the nearest day after
<PAGE> 29

the relevant date, as prescribed by Treasury Regulation Section 20.2031-2(b)(2),
as reported in The Wall Street Journal or a similar publication selected by the
Committee.

Option: A nonqualified stock option to purchase shares of Common Stock
granted to a Participant pursuant to Section 6.

Participant: Any non-employee member of the Board.

Plan: The APACHE Medical Systems, Inc. Non-Employee Director Supplemental
Stock Option Plan, as amended from time to time.

SECTION 3. Administration.

(a) Committee. The Plan shall be administered by the Committee.

(b) Authority of the Committee. The Committee shall have the authority to
construe and interpret the Plan and to establish, amend or waive rules and
regulations for its administration. Subject to the limitations of the express
provisions of the Plan, Options may be subject to such provisions as the
Committee shall deem advisable, and may be amended by the Committee from time to
time; provided that no such amendment may adversely affect the rights of the
holder of an Option without such holder's consent.

(c) Powers of the Committee. The Committee may employ such legal counsel,
consultants and agents as it may deem desirable for the administration of the
Plan and may rely upon any opinion received from any such counsel or consultant
and any computation received from any such consultant or agent.

(d) Indemnification. No member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option awarded under it. To the maximum extent permitted by applicable law, each
member of the Committee shall be indemnified and held harmless by the Company
against any cost or expense (including legal fees) or liability (including any
sum paid in settlement of a claim with the approval of the Company) arising out
of any act or omission to act in connection with the Plan unless arising out of
such member's own fraud or bad faith. Such indemnification shall be in addition
to any rights of indemnification the members may have as members of the Board or
under the by-laws of the Company.

(e) Authority of the Board. In addition to the authority otherwise
expressly granted to the Board under the Plan, the Board at its discretion may
carry out any of the functions of the Committee as set forth in the Plan, in
which capacity the Board and the members thereof shall have all of the
authority, powers and rights of the Committee and the members thereof as set
forth in the Plan.

SECTION 4. Common Stock Subject to Plan.

The aggregate shares of Common Stock that may be issued under the Plan
shall not exceed 120,000, as adjusted in accordance with the provisions of
Section 8.

In the event of a lapse, expiration, termination, forfeiture or
cancellation of any Option granted under the Plan without the issuance of
shares, the Common Stock subject to or reserved for such Option may be used
again for new grants of Options hereunder; provided that in no event may the
number of shares of Common Stock issued hereunder exceed the total number of
shares reserved for issuance. Any shares of Common Stock withheld or surrendered
to pay withholding taxes pursuant to Section 11(e) or withheld or surrendered in
full or partial payment of the exercise price of an Option pursuant to Section
6(d) shall be added to the aggregate shares of Common Stock available for
issuance.

SECTION 5. Eligibility.

Options shall be granted under the Plan solely to individuals who are
non-employee members of the Board on the date of grant ("Participants").
<PAGE> 30

SECTION 6. Terms and Conditions of Options.

Each Option granted under the Plan shall be evidenced by an agreement, in a
form approved by the Committee, which shall be subject to the following terms
and conditions and to such other terms and conditions as the Committee may deem
appropriate that are not inconsistent with the provisions of the Plan:

(a) Timing of Option Grants and Number of Underlying Shares. Options
shall be granted to such Participants as the Committee may designate at
such time or times as the Committee may determine. Each Option agreement
shall designate the number of shares of common Stock to which they pertain.

(b) Exercise Price. The per share exercise price of each Option
granted under the Plan shall be 100% of the Fair Market Value per share of
Common Stock at the date the Option is granted.

(d) Option Period. Each Option agreement shall specify the period for
which the Option thereunder is granted and shall provide that the Option
shall expire at the end of such period.

(e) Payment. The exercise price of an Option shall be paid in full at
the time of exercise (i) in cash, (ii) through the surrender of
previously-acquired shares of Common Stock having a Fair Market Value equal
to the exercise price of the Option, (iii) through the withholding by the
Company (at the election of the Participant) of shares of Common Stock
having a Fair Market Value equal to the exercise price or (iv) by a
combination of (i), (ii) and (iii).

SECTION 7. Treatment of Options Upon Termination.

(a) Termination due to Disability or Death. Upon the termination of a
Participant's membership on the Board by reason of Disability or death, such
Participant's Options shall become or remain fully vested and shall be
exercisable by such Participant (or, in the case of death, by his or her estate)
for not later than the earlier of one year after the termination date or the
expiration of the term of the Options.

(b) Termination Other than for Cause. Upon the termination of a
Participant's membership on the Board or for any reason other than for Cause (as
defined in Section 7(c)), Disability or death, such Participant's Options (to
the extent vested prior to such termination) may be exercised by such
Participant during the three-month period commencing on the date of termination,
but not later than the expiration of the term of the Options. If a Participant
dies during such three month period, his or her estate may exercise the Options
(to the extent such Options were vested and exercisable prior to death), but not
later than the earlier of one year after the date or the expiration of the term
of the Options.

(c) Termination for Cause. Upon termination of a Participant's membership
on the Board for Cause (as defined below), the Participant's right to exercise
his or her Options shall terminate at the time notice of termination is given by
the Company to such Participant. For purposes of this provision, substantial
cause shall include:

(i) The commission of an action against or in derogation of the
interests of the Company which constitutes an act of fraud, dishonesty or
moral turpitude or which, if proven in a court of law, would constitute a
violation of a criminal code or similar law;

(ii) A material breach of any material duty or obligation imposed upon
the Participant by the Company;

(iii) Divulging the Company's information; or

(iv) The performance of any similar action that the Committee, in its
sole discretion, may deem to be sufficiently injurious to the interests of
the Company so as to constitute substantial cause for termination.
<PAGE> 31

SECTION 8. Adjustment Provisions.

In the event of a stock split, stock dividend, recapitalization,
reclassification or combination of shares, merger, sale of assets or similar
event, the Committee shall adjust equitably (a) the number and class of shares
or other securities that are reserved for issuance under the Plan, (b) the
number and class of shares or other securities that are subject to outstanding
Options, and (c) the appropriate Fair Market Value and other price
determinations applicable to Options. The Committee shall make all
determinations under this Section 8, and all such determinations shall be
conclusive and binding.

SECTION 9. Term of Plan.

The Plan shall continue until terminated by the Board or until no Common
Stock remains available for issuance under Section 4, whichever occurs first.

SECTION 10. Change in Control.

In the event of a Change in Control, all outstanding Options shall fully
vest in each Participant.

SECTION 11. General Provisions.

(a) Board Membership. Nothing in the Plan or in any related instrument
shall confer upon any Participant any right to continue as a member of the Board
or shall affect the right of the Company to terminate the Board membership of
any Participant with or without cause.

(b) Legality of Issuance of Shares. No Common Stock shall be issued
pursuant to the exercise of an Option unless and until all legal requirements
applicable to such issuances have been satisfied.

(c) Ownership of Common Stock Allocated to Plan. No Participant
(individually or as a member of a group), and no beneficiary or other person
claiming under or through such Participant, shall have any right, title or
interest in or to any Common Stock allocated or reserved for purposes of the
Plan or subject to any Option, except as to shares of Common Stock, if any, as
shall have been issued to such Participant or beneficiary.

(d) Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Virginia.

(e) Withholding of Taxes. The Company may withhold, or allow a Participant
to remit to the Company, any Federal, state or local taxes required by law to be
withheld with respect to any event giving rise to income tax liability with
respect to an Option. In order to satisfy all or any portion of such income tax
liability, a Participant may elect to surrender Common Stock that would
otherwise have been issued to the Participant pursuant to the exercise of an
Option, the number of shares of such withheld or surrendered Common Stock to be
sufficient to satisfy all or a portion of the income tax liability that arises
upon the event giving rise to income tax liability with respect to an Option.

(f) Nontransferability. During the lifetime of a Participant, any Option
granted to him or her shall be exercisable only by him or her by his or her
guardian or legal representative. No Option shall be assignable or transferable,
except by will or by laws of descent and distribution, and no option shall be
subjected to any encumbrance, pledge or charge of any nature.

SECTION 12. Amendment or Discontinuance of the Plan.

The Board, acting by a majority of its members, without further action on
the part of the stockholders, may from time to time alter, amend or suspend the
Plan or any Option granted hereunder or may at any time terminate the Plan;
provided, however, that the Board may not take any action that would cause the
Plan to fail to comply with Rule 16b-3(b)(3) of the Securities and Exchange
Commission or any other applicable law or any applicable exchange requirements;
and provided further that no such action shall materially and adversely affect
any outstanding Options without consent of the respective Participants.
<PAGE> 32

SECTION 13. Effective Date of Plan.

The Plan is effective on January 1, 1999; provided that it shall be
submitted for approval by the holders of a majority of the outstanding shares of
Common Stock of the Company within 12 months thereafter, and Options granted
prior to such stockholder approval shall become null and void if such
stockholder approval is not obtained. The Plan is intended to apply to the
supplemental grant of an Option to purchase 16,700 shares of Common Stock to
each non-employee director by the Board on January 26, 1999.
<PAGE> 33

FORM OF STOCK OPTION AGREEMENT

Participant Name: [insert full name of Participant]

APACHE Medical Systems, Inc.
Stock Option Agreement

You (the "Optionee") have been granted an option (the "Option") to purchase
shares of common stock of APACHE Medical Systems, Inc. under the APACHE Medical
Systems, Inc. Non-Employee Director Supplemental Stock Option Plan (the "Plan").
The Plan is subject to shareholder approval. The Option is subject to the terms
and conditions set forth below and in the Plan.

1. Number of Shares:

2. Date of Grant:

3. Exercise Price Per Share:

4. Vesting: vests ratably over five years plus provisions for
acceleration on change in control as set forth in the Plan

5. Termination Date: none other than as set forth in the Plan

6. Option Period: ten years

By signing this agreement, the Optionee accepts the Option subject to the
terms and conditions of the Plan and this Agreement.

<TABLE>
<S> <C>
OPTIONEE: WITNESS:

- --------------------------------------------- ---------------------------------------------
(Signature) (Signature)
</TABLE>

APACHE Medical Systems, Inc., by its duly-authorized officer agrees that
the Option, as hereby amended, is granted under the terms and conditions of the
Plan and this agreement.

<TABLE>
<S> <C>
ATTEST: APACHE MEDICAL SYSTEMS, INC.:

By: By:
------------------------------------------ ------------------------------------------
(Signature) (Signature)
</TABLE>
<PAGE> 34
PROXY

APACHE MEDICAL SYSTEMS, INC.

PROXY CARD

Proxy for the Annual Meeting of Stockholders to be held on May 12,
1999. This Proxy is Solicited on Behalf of the Board of Directors

The undersigned hereby constitutes and appoints Thomas W. Hodson and
Peter Gladkin, and each of them, true and lawful agents and proxies of the
undersigned, with full power of substitution, to represent the undersigned and
to vote all shares of stock that the undersigned is entitled to vote at the
Annual Meeting of Stockholders of APACHE Medical Systems, Inc. (the "Company")
to be held on May 12, 1999, and at any and all adjournments and postponements
thereof, on all matters before such meeting.

THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. HOWEVER, IF
NO VOTE IS SPECIFIED, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2, 3, AND 4;
ALL OF WHICH MATTERS ARE MORE FULLY DESCRIBED IN THE PROXY STATEMENT OF WHICH
THE UNDERSIGNED STOCKHOLDER ACKNOWLEDGES RECEIPT.

THIS PROXY GRANTS DISCRETIONARY AUTHORITY TO VOTE IN ACCORDANCE WITH
THE BEST JUDGMENT OF THE NAMED PROXIES ON OTHER MATTERS THAT MAY COME BEFORE THE
MEETING.

PLEASE VOTE, SIGN AND DATE THIS PROXY ON THE OTHER SIDE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE

HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?

SEE REVERSE
SIDE

/\ FOLD AND DETACH HERE /\
<PAGE> 35
[ X ] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH PROPOSAL.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL PROPOSALS.

<TABLE>
<CAPTION>
FOR WITHHELD FOR ALL EXCEPT
<S> <C> <C> <C>
1. Election of Directors [ ] [ ] [ ]

Nominees: Gerald E. Bisbee, Jr., Ph.D., Edward J. Connors, Richard Dessimoz,
Peter Gladkin, Thomas W. Hodson, William A. Knaus, M.D., Lawrence S. Lewin.

(Instruction: To withhold authority to vote for any individual nominee, check
the "FOR ALL EXCEPT" box above, and strike a line through the nominee's name
listed above.)

FOR AGAINST ABSTAIN

2. Ratification of the adoption by the Board of Directors of the [ ] [ ] [ ]
Non-Employee Director Supplemental Stock Option Plan.

FOR AGAINST ABSTAIN

3. Approval of Amendment to the Employee Stock Option Plan. [ ] [ ] [ ]

FOR AGAINST ABSTAIN

4. Ratification of the appointment of Ernst & Young LLP [ ] [ ] [ ]
as independent accountants.
</TABLE>

In the discretion of the proxies named herein, the proxies are
authorized to vote upon other matters as are properly brought before
the meeting

I plan to attend the meeting.

The signer hereby revokes all proxies heretofore given by the signer to vote at
said meeting or any other adjournments thereof.

Please sign exactly as your name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.

SIGNATURE(S)
DATE

/\ FOLD AND DETACH HERE /\