LIFERATE SYSTEMS INC, SB-2, 1998-02-27

LIFERATE SYSTEMS INC
SB-2, 1998-02-27
COMPUTER INTEGRATED SYSTEMS DESIGN

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As filed with the Securities and Exchange Commission on February 27, 1998.
Registration No. 333-
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

---------------------
LIFERATE SYSTEMS, INC.
(Name of small business issuer in its charter)
MINNESOTA 7373 41-1682994
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

7210 METRO BOULEVARD
MINNEAPOLIS, MINNESOTA 55439
(612) 844-0599
(Address and telephone number of principal executive offices
and principal place of business)

--------------------------------------
DAVID J. CHINSKY
President and Chief Executive Officer
7210 METRO BOULEVARD
MINNEAPOLIS, MINNESOTA 55439
(612) 844-0599
(Name, address and telephone number of agent for service)

---------------
COPIES TO:
THOMAS A. LETSCHER, ESQ.
OPPENHEIMER WOLFF & DONNELLY LLP
3400 PLAZA VII, 45 SOUTH SEVENTH STREET
MINNEAPOLIS, MN 55402
(612) 607-7443

---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.

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

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]

----------------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE MAXIMUM MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED(1) OFFERING PRICE AGGREGATE REGISTRATION FEE
PER SHARE(2) OFFERING PRICE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value............ 4,000,000 $0.6875 $2,750,000 $ 811.25
===============================================================================================================
Common Stock underlying Warrants...... 4,000,000 $0.6875 $2,750,000 $ 811.25
===============================================================================================================
Total................................. 8,000,000 $0.6875 $5,500,000 $1,622.50
===============================================================================================================
</TABLE>
(1) The amount to be registered hereunder consists of an aggregate of
8,000,000 total shares of Common Stock to be sold by certain selling
shareholders. Of the 8,000,000 shares of Common Stock, 4,000,000 are
currently outstanding and beneficially owned by such selling
shareholders and 4,000,000 shares are issuable upon the exercise of
certain warrants held by such selling shareholders.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, based upon the last sale of the Registrant's Common Stock on
February 23, 1998, as reported in the over-the-counter market.

-----------------------
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS
WHICH CONSTITUTES PART OF THIS REGISTRATION STATEMENT ALSO RELATES TO AN
AGGREGATE OF 8,788,000 SHARES OF THE REGISTRANT'S COMMON STOCK REGISTERED ON
FORM SB-2, REGISTRATION NO. 333-42155 AS FILED WITH THE COMMISSION ON DECEMBER
12, 1997 AND DECLARED EFFECTIVE ON DECEMBER 19, 1997, FOR WHICH A REGISTRATION
FEE OF $1,425.86 HAS BEEN PREVIOUSLY PAID..

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

<PAGE>

SUBJECT TO COMPLETION DATED FEBRUARY 27, 1998

PROSPECTUS

16,788,000 SHARES
LIFERATE SYSTEMS, INC.
COMMON STOCK

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

This Prospectus relates to 16,788,000 shares (the "Shares") of Common
Stock, no par value (the "Common Stock), of LifeRate Systems, Inc. (the
"Company"), that may be offered for sale for the account of certain shareholders
of the Company as stated herein under the heading "Selling Shareholders." The
Shares being offered by the Selling Shareholders hereunder consist of: (i)
8,394,000 outstanding shares of Common Stock issued in connection with a
Securities Purchase Agreement dated as of November 14, 1997 between the Company
and the Selling Shareholders (the "Purchase Agreement"), and (ii) 8,394,000
shares of Common Stock issuable upon the exercise of warrants (the "Warrants")
issued in connection with the Purchase Agreement. No period of time has been
fixed within which the Shares covered by this Prospectus may be offered or sold.

The Selling Shareholders have advised the Company that sales of the
Shares offered hereunder by them, or by their pledgees, donees, transferees or
other successors in interest, may be made from time to time in the
over-the-counter market, through negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices. The Shares may be
sold by one or more of the following methods: (i) a block trade in which the
broker or dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (ii) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; and (iii)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers. Sales may be made pursuant to this Prospectus to or through
broker-dealers who may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholders or the purchasers of
Shares for whom such broker-dealer may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). One or more supplemental prospectuses will
be filed pursuant to Rule 424 under the Securities Act of 1933, as amended (the
"Securities Act"), to describe any material arrangements for the sales of the
Shares offered hereunder when such arrangements are entered into by the Selling
Shareholders and any other broker-dealers that participate in the sale of the
Shares. In addition, any Shares that qualify for sale pursuant to Rule 144 under
the Securities Act may be sold under Rule 144 rather than pursuant to this
Prospectus.

The Selling Shareholders and any broker-dealers or other persons acting
on their behalf in connection with the sale of Shares hereunder may be deemed to
be "underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit realized by them on the resale of Shares as
principals may be deemed to be underwriting commissions under the Securities
Act. As of the date hereof, there are no special selling arrangements between
any broker-dealer or other person and any Selling Shareholder.

The Company will not receive any part of the proceeds of any sales of
Shares pursuant to this Prospectus. Pursuant to the terms of the Purchase
Agreement, the Company will pay all the expenses of registering the Shares,
except for selling expenses incurred by the Selling Shareholders in connection
with this offering, including any fees and commissions payable to broker-dealers
or other persons, which will be borne by the Selling Shareholders. In addition,
the Purchase Agreement provides for certain other usual and customary terms,
including indemnification by the Company of the Selling Shareholders against
certain liabilities arising under the Securities Act.

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE CERTAIN RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.

The Company's Common Stock is currently traded in the over-the-counter
market on the NASD "Electronic Bulletin Board" under the symbol "LRSI." As a
result, there

may be a limited market for the Shares which could have an adverse effect on the
future sales price and liquidity of the Shares. On February 23, 1998, the
closing bid price of the Common Stock in the over-the-counter market was $0.6875
per share.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

THE DATE OF THIS PROSPECTUS IS _________, 1998.

<PAGE>

No person has been authorized to give any information or to make any
representations not contained or incorporated by reference in this Prospectus in
connection with the offer described in this Prospectus and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Company or the Selling Shareholders. Neither the delivery of
this Prospectus nor any sale made under this Prospectus shall under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof or since the date of any documents
incorporated herein by reference. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities other than the
securities to which it relates, or an offer or solicitation in any state to any
person to whom it is unlawful to make such offer in such state.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company pursuant to the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the Commission's
Web site is http://www.sec.gov.

The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act. This Prospectus does not contain all of the
information, exhibits and undertakings set forth in the Registration Statement,
certain portions of which are omitted as permitted by the Rules and Regulations
of the Commission. Copies of the Registration Statement and the exhibits are on
file with the Commission and may be obtained, upon payment of the fee prescribed
by the Commission, or may be examined, without charge, at the offices of the
Commission set forth above. For further information, reference is made to the
Registration Statement and its exhibits.

<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN
THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER THE HEADING "RISK FACTORS."

THE COMPANY

LifeRate Systems, Inc. ("LifeRate" or the "Company") has developed and
is marketing a set of information products designed to enable healthcare
providers to evaluate and demonstrate the quality and cost-effectiveness of the
medical care they deliver. LifeRate tools allow physicians, nurses and other
allied healthcare professionals to capture relevant clinical data, allowing
quick and easy access to patient information and the ability to report on
clinical and patient outcomes. This information can be used by healthcare
providers to improve their medical decision-making process, and to enhance the
competitiveness and profitability of their business. LifeRate believes that as
healthcare purchasers and payors, both public and private, continue to demand
more appropriate and cost-effective medical care for their beneficiaries, the
market for clinical information tools enabling physicians and hospitals to more
effectively manage the care of their patients will expand.

The Company presently is focused on two medical specialties: cardiology
and asthma and allergy. The cardiovascular disease market is large and growing.
A number of large regional and national providers of cardiovascular-related
services are emerging that link cardiologists and seek to provide a range of
practice management services. These large networks increasingly are recognizing
the important role information can play in facilitating more efficient and
effective medical care for their patients. The Company's other market focus is
on asthma and allergy. An estimated fifteen million Americans have asthma
resulting in estimated cost of approximately $6.2 billion a year in missed work
and school, in medications and hospital visits. LifeRate's presence in both the
cardiology and the asthma and allergy specialties position the Company within
the largest market segments for both adult and pediatric medical care.

LifeRate released demonstration versions of its core system, along with
the Cardiovascular Outpatient module, in August 1995 and commercial versions in
December 1995. The Company accepted initial orders in the third quarter of 1995,
and began installation in the fourth quarter of 1995. During 1996, LifeRate
completed development of its core software system, including outpatient modules
for cardiovascular and asthma and allergy specialists. The software has been
released in three phases, Version 1.1 in February, 1996; Version 1.2 in October,
1996; and Version 1.3 in September, 1997. These releases added functionality to
the core software and increased its operational benefits. In 1998, LifeRate
plans to release a new suite of products focused on outcomes reporting and
analysis.

LifeRate's product suite comprises software-based, patient centered,
point-of-care clinical information tools and services that can be used to track
a patient throughout the continuum of care. Data collection tools are used to
populate a vast relational data repository that can be queried to analyze the
quality and effectiveness of patient care. Using analysis and report generation
tools, LifeRate and its customers are able to query the data repository on a
variety of parameters, such as drug utilization and effectiveness, repeat
procedures, functional status, etc. The Company believes its experienced
Integration Services team, which builds customized software links between
LifeRate and other clinical systems, represents a unique strength in the
healthcare information management marketplace.

The Company was incorporated in Minnesota in July, 1990. The Company's
principal executive offices are located at 7210 Metro Boulevard, Minneapolis,
Minnesota 55439, and its telephone number at that location is (612) 844-0599.

<PAGE>

RISK FACTORS

An investment in the Shares offered hereby is speculative and involves
a high degree of risk. See "Risk Factors."

THE OFFERING

<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Selling Shareholders............. 16,788,000 shares (including 8,394,000 shares
issuable pursuant to the exercise of Warrants
held by the Selling Shareholders)

Common Stock outstanding before the offering................. 12,485,000 shares (as of February 15, 1998)

Common Stock to be outstanding after the offering............ 20,879,000 shares based on all shares offered
under this Prospectus (assuming exercise of all
of the Warrants and no further issuances by the
Company)

Use of Proceeds.............................................. None of the proceeds of the sale of the shares
registered hereunder will accrue to the
Company. See "Use of Proceeds."
</TABLE>

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
----------------------------------- --------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Net revenues..................... $119,700 $263,300 $615,700 $308,500 $366,100
Operating expenses............... 990,800 5,883,300 10,564,400 4,797,100 3,753,900
Interest income.................. 0 97,000 261,900 228,300 26,000
Interest expense................. 1,400 29,300 6,300 5,000 185,300
Net loss......................... (872,500) (5,595,300) (9,873,500) (4,976,500) (4,055,500)
Net loss per share............... $(.89) $(2.66) $(2.61) $(1.27) $(1.06)

</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ------------------------
ACTUAL AS ADJUSTED(1)
------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:

Working capital
(deficit)............... $340,900 $6,759,700 $1,833,600 $3,546,300 $(1,747,600) $3,728,000
Total assets............ 893,700 8,403,700 3,076,300 5,279,600 926,300 4,757,100
Total liabilities....... 623,100 1,259,400 2,923,900 1,197,900 4,790,200 2,759,100
Shareholders' equity
(deficit)............... 270,600 7,144,300 152,400 4,081,700 (3,863,900) 1,998,000

</TABLE>

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

(1) Gives effect to the issuance of 8,394,000 shares of Common Stock pursuant to
the Purchase Agreement, net of offering expenses, 11,550 shares of Common Stock
upon conversion of a convertible promissory note in November, 1997, 250,000
shares of Common Stock upon conversion of $500,000 of convertible notes payable
in November, 1997, and 4,695 shares of Common Stock under the Company's Employee
Stock Purchase Plan and the effects of restructuring the remaining convertible
notes payable.

<PAGE>

RISK FACTORS

AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND MAY NOT BE APPROPRIATE FOR INVESTORS WHO CANNOT AFFORD TO LOSE THEIR
ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY SHOULD BE
FULLY AWARE OF THE FOLLOWING RISK FACTORS, AMONG OTHERS, AND SHOULD CAREFULLY
REVIEW THE INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS
PROSPECTUS.

THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS,
INCLUDING THOSE DESCRIBED BELOW.

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; GOING CONCERN
UNCERTAINTY. The Company was formed in July, 1990, and has had revenues of
approximately $1,810,600 to date. As of December 31, 1997, the Company had an
accumulated deficit of approximately $20,959,500. The Company believes that its
future success will be dependent on the successful marketing of its
Cardiovascular product suite and successful modification of its core software
system for certain other medical specialties, such as asthma and allergy. There
can be no assurance that the Company will generate sufficient sales to achieve
positive cash flow or profitable operations. The report of the Company's
independent auditors on the Company's financial statements for the year ended
December 31, 1996 contains an explanatory paragraph which states that the
Company's recurring losses and negative cash flow from operations raises
substantial doubt about its ability to continue as a going concern.

FUTURE CAPITAL NEEDS. On November 14, 1997, the Company entered into a
Securities Purchase Agreement (the "Purchase Agreement") with Special Situations
Private Equity Fund, L.P., Special Situations Cayman Fund, L.P., Special
Situations Fund III, L.P. (collectively, the "Funds") and the other purchasers
named in the Purchase Agreement (the Funds and such other purchasers are
collectively referred to herein as the "Purchasers"), pursuant to which the
Company agreed to sell for cash up to 9,000,000 shares of common stock, no par
value, of the Company at prices ranging from $.50 to $.56 per share and warrants
to purchase up to 9,000,000 shares of Common Stock, as well as an additional
104,000 Shares and warrants for cancellation of certain indebtedness. The
Company achieved all of the milestones that were a condition to the final
closing under the Purchase Agreement and completed the final closing on January
30, 1998. The Company has sold an aggregate of 8,394,000 shares of Common Stock
and issued 8,394,000 warrants under the Purchase Agreement for total gross cash
proceeds of $4,342,400.

With the proceeds received under the Purchase Agreement, the Company
currently estimates that it will have sufficient cash to continue operations
through August, 1998. Thereafter, the Company will likely require additional
capital to continue operations. The Company's working capital requirements may
vary substantially from those planned depending on numerous factors, including a
failure to significantly increase revenues, an unexpected increase in expenses,
growth of product sales beyond the Company's current plan and other unplanned
events. Required additional capital would be sought from a number of sources and
could include sales of additional shares of capital stock or other securities or
loans from banks or other sources. Any additional sales of capital stock would
likely be dilutive to shareholders. The Company's ability to obtain additional
capital will likely depend substantially on

<PAGE>

operating results in future periods, and there can be no assurance that the
Company will be able to obtain additional capital on satisfactory terms or at
all. The Company will be materially adversely affected if it is not able to
achieve positive cash flow or profitability or to obtain any necessary financing
on satisfactory terms.

EFFECTS OF DELISTING FROM NASDAQ SMALL CAP MARKET. Effective with the
close of business July 3, 1997, the Company's Common Stock was no longer quoted
on the Nasdaq Stock Market because the Company no longer met, and currently does
not meet, the minimum net tangible assets and capital and surplus requirements
for continued quotation. The Company's Common Stock is currently quoted in the
"over-the-counter" market and is eligible to trade on the OTC Bulletin Board.
The public trading market for the Company's Common Stock may have been, and may
continue to be, adversely affected by this development. In order for the
Company's Common Stock to be quoted on the Nasdaq Small Cap Market, the Company
will be required to meet initial listing criteria, which require the Company to
have at least three market makers in the Common Stock, total net tangible assets
of $4.0 million, a minimum bid price for the Common Stock of $4.00 per share,
300 holders of its Common Stock and 1,000,000 shares of its Common Stock held by
non-affiliates, having a market value of $5,000,000 or more. There can be no
assurance that the Company will be able to achieve the total net tangible assets
qualification standard, the minimum bid price standard or the market value
standard in the future. Consequently, the liquidity of the Company's Common
Stock may be further impaired, not only in the number of shares which may be
bought and sold, but also through delays in the timing of transactions and
reduction in security analysts' and the news media's coverage, if any, of the
Company.

APPLICABILITY OF "PENNY STOCK RULES." Federal regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") regulate the
trading of so-called "penny stocks" (the "Penny Stock Rules"), which are
generally defined as any security not listed on a national securities exchange
or the Nasdaq Stock Market, priced at less than $5.00 per share and offered by
an issuer with limited net tangible assets and revenues. Because the Company's
Common Stock trades below $5.00 per share and is not listed on the Nasdaq Stock
Market or any national securities exchange, trading, if any, of the Company's
Common Stock is subject to the full range of the Penny Stock Rules. Under these
rules, broker-dealers must take certain steps prior to selling a "penny stock,"
which steps include: (i) obtaining financial and investment information from the
investor; (ii) obtaining a written suitability questionnaire and purchase
agreement signed by the investor; and (iii) providing the investor a written
identification of the shares being offered and the quantity of the shares. If
the Penny Stock Rules are not followed by the broker-dealer, the investor has no
obligation to purchase the shares. The application of the comprehensive Penny
Stock Rules makes it more difficult for broker-dealers to sell the Company's
Common Stock and shareholders of the Company may have difficulty in selling
their shares in the future in the secondary trading market.

LIMITED OPPORTUNITY TO DEVELOP MARKET PRESENCE. The Company believes
that its ultimate success will be highly dependent on its ability to capitalize
on the currently existing market opportunity for computer-based, clinical
healthcare decision support systems, like LifeRate's system. The Company
believes that it has an opportunity to obtain a significant market presence in
this segment of the healthcare information industry if it is able to demonstrate
the value of its system to healthcare providers and payors and install a
significant number of systems in 1998. The Company does not believe that it will
be able to maintain its technical superiority over competing information systems
for an indefinite period of time and believes that it will need to obtain a
significant market presence in 1998 to achieve long-term success. Although the
Company's marketing personnel have experience in marketing new products and
services in the healthcare industry, LifeRate has only limited experience in
marketing its system. There can be no assurance that the Company's marketing
strategy will be successful.

<PAGE>

SUCCESS DEPENDENT ON MARKET ACCEPTANCE. The Company's success will also
depend in large part on its ability to gain acceptance by physicians of
sophisticated, computer-based, clinical healthcare decision support systems.
Certain physicians may perceive such computer-based systems to infringe on their
discretion in providing medical treatment and, accordingly, may be reluctant to
accept such computer-based systems. Furthermore, although LifeRate's system has
been designed to operate on standard personal computer-based hardware, physician
practice groups may be required to upgrade their current computer hardware to
operate LifeRate's system. Physician groups may be reluctant to invest the
financial resources necessary to acquire LifeRate's system or any hardware
upgrades necessary to operate LifeRate's system. In addition, payors with
significant investments in other hardware and software systems may be reluctant
to abandon those systems for LifeRate's system. The Company believes, however,
that the demands of payors and buyers of healthcare and various healthcare
legislation will ultimately lead to the wide-spread use of computer-based
systems, like LifeRate's system, that integrate clinical and patient outcome
data in a single database. There can be no assurance, however, that the Company
will be able to obtain sufficient acceptance by providers and payors of its
system to achieve profitable operations.

COMPETITION. The healthcare information industry, of which the Company
is a part, is characterized by intense competition. A number of companies
provide computer-based healthcare information systems that provide partial
solutions to some or all of the types of healthcare information needs that
LifeRate's system addresses. In addition, the Company anticipates that new
competitors will attempt to enter the market and that existing or new
competitors will develop information systems in the future that duplicate or
improve on LifeRate's system. Some of the Company's competitors are well
established, better known and significantly larger with substantially greater
technical, marketing and financial resources than the Company. The Company's
ultimate ability to compete in the market will depend upon a number of factors,
including its success in generating market acceptance of LifeRate's system and
the success of its marketing efforts.

DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent on its key
management personnel, particularly David J. Chinsky, who became the Company's
President and Chief Executive Officer in August, 1997. The Company's future
success will also depend in part upon its ability to attract and retain highly
qualified management, technical, marketing and sales personnel. During 1997, a
number of personnel left the Company. The Company competes for such personnel
with other companies, and there can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The loss of key personnel
or the inability to hire or retain qualified personnel could have a material
adverse effect on the Company. The Company does not maintain key-man insurance
on any of its employees. "See Management."

LIMITED HISTORY OF MARKETING AND SALES. The Company began marketing its
Cardiovascular Outpatient product in the third quarter of 1995, and, to date,
the Company has installed or entered into agreements to install its
Cardiovascular Outpatient product at ten sites and its asthma and allergy
product at four sites. During 1995, the Company revised its marketing strategy
to focus on cardiology physician practice groups which the Company believes will
provide significant opportunities for sales of its system. During 1996, the
Company established internal sales, marketing, clinical support and quality
assurance functions. Prior to 1996, the Company relied, to a significant degree,
on an independent marketing firm to coordinate and conduct its marketing to
physician groups, rather than exclusively on its own employees. There can be no
assurance that the Company's revised marketing strategy, or its choice of
cardiology and asthma and allergy practice groups as initial target markets,
will be successful.

<PAGE>

TECHNICAL OBSOLESCENCE. Computer-based technology in all industries is
undergoing, and is expected to continue to undergo, rapid and significant
technical advances. While LifeRate believes that its system is currently
technically superior to other computer-based healthcare information systems,
LifeRate expects future technology to be superior to the technology currently
used in its system. Although LifeRate's system has been designed to assimilate
future technical advancements, there can be no assurance that any such future
advancements or the development of new or competitive products by others will
not render LifeRate's system less competitive or obsolete. The greater financial
as well as other resources of many of the Company's present and potential
competitors may permit such competitors to respond more rapidly than the Company
to changes in the product needs and servicing requirements of healthcare
providers and payors.

LIMITED PROPRIETARY PROTECTION. The Company currently relies solely on
common law copyrights and trade secrets for proprietary protection of its
system. LifeRate does not currently have patent protection with respect to any
aspect of its system, although it has filed one U.S. patent application covering
certain aspects of its system and plans to file additional patent applications
in the future. There can be no assurance that the Company's measures to protect
its proprietary information will be successful, that it will be granted any
patents, or that any patents that may be granted will be of value to the
Company. In the absence of meaningful intellectual property protection, the
Company may be vulnerable to competitors who could lawfully attempt to copy the
Company's products. Moreover, there can be no assurance that other competitors
may not independently develop the same or similar technology. Similarly, while
LifeRate believes that it has all rights necessary to market and sell its system
without infringement of intellectual property rights held by others, the Company
has not conducted a formal infringement search, and there can be no assurance
that such conflicting rights do not exist.

UNDESIGNATED PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Board of
Directors of the Company is authorized to issue undesignated preferred stock
("Undesignated Stock") in one or more series, and to determine the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms or conditions of redemption of each series
without any vote or action of the shareholders of the Company. No shares of
Undesignated Stock or other senior equity securities have been established or
issued, and there is no plan to establish or issue any such securities in the
foreseeable future. However, the issuance of Undesignated Stock with
preferential rights could adversely affect the voting power and other rights of
the holders of Common Stock. The Company is subject to certain provisions of the
Minnesota Business Corporation Act which limit the voting rights of shares
acquired in "control share acquisitions" and restrict certain "business
combinations." Additionally, pursuant to the Purchase Agreement, so long as the
Purchasers own or have the right to acquire an aggregate of 20% or more of the
then outstanding shares of Common Stock, the Company shall not, without the
prior written consent of the Funds and Miller, Johnson & Kuehn, Incorporated
enter into certain business combinations. The ability to issue Undesignated
Stock, the foregoing provisions of the Minnesota Business Corporation Act and
certain provisions in the Purchase Agreement could, in certain circumstances,
have the effect of delaying or preventing a change in control of the Company.

CONTROL BY CERTAIN PERSONS. The Funds and Medtronic, Inc. currently
beneficially own (within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) approximately 57% and 6% of the Company's outstanding
Common Stock, respectively. The Funds and Medtronic each have a designee who
serves on the Board of Directors. In addition, Miller, Johnson & Kuehn
Incorporated has the right to designate a person to serve on the Board of
Directors. Accordingly, these shareholders, individually and as a group, will be
able to influence the outcome of shareholder votes,

<PAGE>

including votes concerning election of directors, the adoption or amendment of
provisions in the Company's Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws and the approval of certain mergers or other similar
transactions. Such control by existing shareholders could have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Principal Shareholders and Beneficial Ownership of Management."

<PAGE>

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

From January 1, 1996 to July 3, 1997, the Common Stock was traded on
The Nasdaq Small Cap Market. See "Risk Factors -- Effects of Delisting from
Nasdaq Small Cap Market." The Common Stock currently trades in the
over-the-counter market on the NASD "Electronic Bulletin Board" under the symbol
"LRSI." The following table shows the high and low bid and asked prices of the
Common Stock for the periods indicated as reported by Nasdaq from January 1,
1996 through July 3, 1997 and by the OTC Bulletin Board, thereafter. These
quotations reflect inter-dealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.

HIGH: LOW:

1996:

First quarter $11 7/8 $ 9 5/8

Second quarter $10 1/4 $ 7 15/32

Third quarter $ 8 $ 3 7/8

Fourth quarter $ 5 1/8 $ 1 3/4

1997:

First quarter $ 3 5/8 $ 2 1/2

Second quarter $ 2 5/8 $ 3/4

Third quarter $ 2 $ 3/8

Fourth quarter $ 1 3/16 $ 3/8

1998:

First quarter (through February 15, 1998) 3/4 17/32

As of February 15, 1998, there were approximately 138 record holders of
the Company's Common Stock.

The Company has never paid cash dividends on the Common Stock and
currently intends to retain all future earnings, if any, for the continued
growth and development of its business and has no plans to pay cash dividends in
the future.

<PAGE>

USE OF PROCEEDS

None of the proceeds from the sale of the Shares of Common Stock
registered hereunder will accrue to the Company.

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 (1)
----------------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
Long-term obligations: $ 2,616,000 $ 2,229,700

Shareholders' equity:

Preferred Stock, no par value; 1,000,000 shares --- ---
authorized; no shares issued and outstanding

Common Stock, no par value, 20,000,000 shares 17,299,900 21,750,700
authorized 3,824,755 shares issued and outstanding;
3,824,755 actual and 12,485,000 as adjusted

Accumulated deficit (21,163,800) (19,752,700)
----------- -----------

Total shareholders' equity (deficit) (3,863,900) 1,998,000
----------- -----------
Total long-term obligation and
shareholders' equity (deficits): $(1,247,900) $ 4,227,700
=========== ===========

</TABLE>

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

(1) Does not include an aggregate of 11,377,618 shares of Common Stock issuable
upon exercise of options, warrants or conversion of convertible promissory notes
outstanding as of February 15, 1998.

(2) Gives effect to the issuance of 8,394,000 shares of Common Stock pursuant to
the Purchase Agreement, net of offering expenses, 11,550 shares of Common Stock
upon conversion of a convertible promissory note in November, 1997, 250,000
shares of Common Stock upon conversion of $500,000 of convertible notes payable
in November 1997, and 4,695 shares of Common Stock under the Company's Employee
Stock Purchase Plan and the effects of restructuring the remaining convertible
notes payable.

<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this Prospectus. The statement of operations data set forth below for the years
ended December 31, 1994, 1995 and 1996 and the balance sheet data at December
31, 1995 and 1996 are derived from the financial statements audited by Ernst &
Young LLP included elsewhere in this Prospectus. The balance sheet data set
forth below at December 31, 1994 are derived from audited financial statements
not included in this Prospectus. The selected financial data as of and for the
nine months ended September 30, 1996 and 1997 have been derived from unaudited
financial statements of the Company which, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of such data. The results of operation for the nine months
ended September 30, 1997 are not necessarily indicative of the results of
operations to be expected for the entire year ending December 31, 1997.

NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Net Revenues..................... $119,700 $263,300 $615,700 $308,500 $366,100

Operating expenses:
Sales and marketing........... 167,800 2,525,800 2,568,800 1,268,800 1,020,600
Research and development...... 215,800 2,104,500 5,309,900 1,617,200 1,038,000
General and administrative.... 607,200 1,253,000 2,685,700 1,911,100 1,695,300

Interest income.................. 0 97,000 261,900 228,300 26,000
Interest expense................. 1,400 29,300 6,300 5,000 185,300
----- ------ ----- ----- -------
Net loss......................... (872,500) (5,595,300) (9,873,500) (4,976,500) (4,055,500)
========= =========== =========== =========== ===========

Net loss per share............... (.89) (2.66) (2.61) (1.27) (1.06)
===== ====== ====== ====== ======

Weighted average number of
shares of common stock
outstanding...................... 982,456 2,105,811 3,783,931 3,931,561 3,821,390
======= ========= ========= ========= =========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ------------------------
ACTUAL AS ADJUSTED(1)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:

Current assets....... $829,700 $7,915,900 $2,337,100 $4,405,400 $ 426,600 $4,257,400
Total assets......... 893,700 8,403,700 3,076,300 5,279,600 926,300 4,757,100
Current liabilities.. 488,800 1,156,200 503,500 859,100 2,174,200 529,400
Total liabilities.... 623,100 1,259,400 2,923,900 1,197,900 4,790,200 2,759,100
Shareholders' equity
(deficit)............... 270,600 7,144,300 152,400 4,081,700 (3,863,900) 1,998,000

</TABLE>

- -------------------------
(1) Gives effect to the issuance of 8,394,000 shares of Common Stock pursuant to
the Purchase Agreement, net of offering expenses, 11,550 shares of Common Stock
upon conversion of a convertible promissory note in November, 1997, 250,000
shares of Common Stock upon conversion of $500,000 of convertible notes payable
in November 1997, and 4,695 shares of Common Stock under the Company's Employee
Stock Purchase Plan and the effects of restructuring the remaining convertible
notes payable.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

The Company generated revenues of $366,100 for the nine months ended
September 30, 1997. Revenues consisted of $217,500 of development fees,
installation fees of $25,000 and $123,600 of recurring license fees. This
compares to $308,500 in revenues for the nine months ended September 30, 1996,
which consisted of $220,500 of development fees, $50,000 of installation fees
and $38,000 of recurring license fees. Revenues from recurring license fees have
increased during 1997 as the Company has increased the number of installations
of its system.

Costs of revenues were $508,400 and $611,400 for the nine months ended
September 30, 1997 and 1996, respectively. Amortization of capitalized software
costs was $50,500 for the nine months ended September 30, 1997 and $75,600 for
the same period in 1996. The balance of the cost of revenues reflect the costs
of customer support and royalty expense. Customer support expenses have declined
from a year ago due to lower payroll and travel expenses. During 1996, customer
support personnel and expenses increased in anticipation of revenue growth that
was not achieved and in 1997 customer support personnel was reduced from 1996
levels. During the first quarter of 1997, the Company incurred royalty expense,
which is included in cost of revenues, of $14,900 under an agreement with
Anthony Furnary, M.D., a former director of the Company. In March, 1997, the
Company and Dr. Furnary modified this agreement, which provided for LifeRate to
pay Dr. Furnary royalties at 3% of all gross revenues beginning in 1999. No
royalty expense was recorded in the second and third quarters of 1997 or for the
comparable periods of 1996.

Sales and marketing expenses were $1,020,600 for the nine months ended
September 30, 1997, compared to $1,268,800 for the nine months ended September
30, 1996. During 1995, Clinical Sales & Service ("CSSI") provided substantially
all of the Company's sales, marketing and clinical support functions. During the
first quarter of 1996, the employees of CSSI became employees of the Company.
Expenses for the nine months ended September 30, 1997 are lower than those in
the comparable period of 1996 due to lower payroll expense in 1997 as a result
of fewer employees and one time costs associated with the integration of CSSI in
1996. The Company also implemented a cost containment program in the first
quarter of 1997, which has decreased sales and marketing expenses.

Research and development expenses for the nine months ended September
30, 1997 were $1,038,000, a decrease of $579,200, or 35.8%, from the nine months
ended September 30, 1996. This decrease reflects lower payroll expense in 1997
as a result of fewer employees, results of a cost containment program
implemented in the first quarter of 1997 and a number of one time expenses
incurred in 1996 related to the recruitment and relocation of key staff members.
The Company plans to continue to invest the resources needed to develop the
product capabilities being demanded by its customer base.

General and administrative expenses decreased from $1,911,100 for the
nine months ended September 30, 1996 to $1,695,300 for the nine months ended
September 30, 1997. The nine months ended September 30, 1996 included
non-recurring expenses of $190,000 to settle a lawsuit brought by a

<PAGE>

former officer of the Company and lease cancellation charges of $181,000. The
nine months ended September 30, 1997 include increased depreciation expense of
$171,000 related to equipment purchased in 1996, accrual for a $100,000
milestone payment to Dr. Furnary, and increased legal expenses of $93,900
related to the renegotiated agreements with Dr. Furnary and the Atlanta
Cardiology Group P.C. ("ACG"). These increases were offset by lower payroll
expense resulting from the change in management that occurred in the second
quarter of 1996 and expense reductions due to the cost containment program
implemented in the first quarter of 1997. Dr. Furnary waived his right to
receive the $100,000 milestone payment in connection with the Company's
November, 1997 equity financing. See "Certain Transactions."

Interest income decreased from $228,300 in the nine months ended
September 30, 1996 to $26,000 for the same period in 1997. This decrease
reflects the lower overall cash position in 1997 compared to 1996.

Prior to the second quarter of 1997, interest expense had not been a
significant expense to the Company. However, the Company incurred interest
expense of $185,300 in the nine month period ended September 30, 1997 under the
instruments described below. In April, 1997, interest began to accrue on a
$2,250,000 convertible subordinated note payable. This note was issued in
connection with the cancellation of a royalty agreement with ACG. As originally
issued, this note bore interest at 10% which was paid at a rate of 5%, with the
remaining 5% accruing until the end of the note term in 2002. In addition, the
Company issued convertible promissory notes in the aggregate amounts of
$1,000,000 in May, 1997 and $500,000 in July, 1997. As originally issued, these
notes bore interest at the prime rate and are described in more detail below
under the heading "Liquidity and Capital Resources." In connection with the
Company's November, 1997 equity financing described below, the Company is no
longer required to make interest payments on the above notes, and the
convertible promissory notes issued in July, 1997 were converted into shares of
Common Stock. The Company will continue to incur interest expense in future
periods due to amortization of discount on the ACG note and the convertible
promissory note for $1,000,000.

The net loss for the nine months ended September 30, 1997 and 1996 was
$4,055,500 and $4,976,500, respectively. Net losses have declined in 1997 due to
lower payroll expense as a result of fewer employees, the cost containment
program implemented in the first quarter of 1997 and the one time charges in
1996 related to the lawsuit settlement, the lease cancellation and the
integration of CSSI employees into LifeRate.

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Revenues for 1996 were $615,700, a $352,400 increase from 1995.
Revenues of $343,800, or 55.8% of total revenue, were generated from National
Allergy and Asthma System, an asthma specialty disease and physician management
services company. Revenues of $68,200, or 11.1% of total revenue, were generated
from two Pfizer related Cardiovascular Outpatient product installations and two
Pfizer evaluation sites. The Company recognized $25,000, or 4.1% of total
revenue, in 1996 from National Jewish Medical & Research Center. The remaining
$141,600 of 1996 revenues are related to the installation and monthly license
fees generated from the Company's Cardiovascular Outpatient product at five
sites and other developmental work.

Revenues in 1995 were $263,300, a $143,600 increase from 1994. The 1995
revenues consisted of $57,500 generated from the beta site installation of
LifeRate's Cardiovascular Outpatient product, $31,000 from evaluation sites of
the Cardiovascular Outpatient product and $30,000 from Pfizer-related

<PAGE>

Cardiovascular Outpatient installations. The remaining $144,800 in 1995 revenue
represent contract fees for other development work. Revenues of $119,700 in 1994
primarily reflect contract work related to the definition of system
requirements.

Cost of revenues in 1996 was $180,400, a $137,400 increase from 1995.
No cost of revenue expense was recorded in 1994. The expense in 1996 consists of
$100,800 in amortization of software development costs, $46,100 in royalty
expenses, with the remainder in travel and other expenses directly related to
product installation at customer sites. In 1995, no royalty expense or software
development amortization costs were incurred.

Sales and marketing expense in 1996 was $2,568,800, a $43,000, or 1.7%
increase from 1995 expense of $2,525,800. Sales and marketing expenses increased
$2,358,000 in 1995 from 1994. Prior to 1995, the Company did not have an
established sales, marketing or product support infrastructure. The Company's
sales and marketing expenses were modest in 1994 as the commercial release of
LifeRate's system did not occur until 1995. With the release of demonstration
versions of the Cardiovascular Outpatient product in August, 1995, the Company
began to develop the internal structure needed to support product installation,
training, and customer support needed for licensing revenues, as well as an
on-going direct sales effort. This effort continued into 1996 and expanded to
support the beta releases of the Asthma and Allergy Outpatient product and the
Guidelines product.

Research and development activities in 1996 were focused on completion
of LifeRate's core software system and Outpatient Modules for Cardiovascular and
Asthma and Allergy specialists. Additional functionality was added to the core
system in 1996 to increase the operational benefit of using the system. The
Company also added a Quality Assurance Department in 1996. Research and
development expenses in 1996 were $5,309,900, an increase of $3,205,400, or
152.3%, from 1995. The 1996 increase mainly reflects the costs to cancel a
royalty agreement with ACG and to modify a royalty agreement with Dr. Furnary.
The Company issued a $2,250,000 convertible subordinated note to ACG in exchange
for canceling the ACG agreement and in consideration for the prior development
and implementation work provided by ACG. In connection with the modification to
the royalty agreement with Dr. Furnary, the Company granted Dr. Furnary options
to purchase 550,000 shares of Common Stock at an exercise price of $2.625 for
services previously rendered. The fair value of these options at the date of
grant using a Black-Scholes option pricing model was $924,000. These two
transactions resulted in additional research and development expenses of
$3,174,000 in 1996. In 1995, research and development efforts focused on
developing the Company's core software product which was designed to be
adaptable to various medical specialties. In 1994 research and development
expenditures were $215,800. The nature and scope of activity in 1994 was limited
to data repository design, which is now a component of the overall system. The
Company plans to continue dedicating significant resources to research and
development activities in 1997.

The Company capitalizes software development costs in accordance with
the provisions of FASB Statement No. 86. These costs are included in research
and development expenses. In the second quarter of 1995, the Company began
capitalizing software development costs after achieving technological
feasibility on the core LifeRate system. A total of $751,000 of development
costs was capitalized during 1995. The Company recorded a writedown of
approximately $600,000 in the fourth quarter of 1995 due to a decrease in the
net realizable value of the capitalized costs because of significant
enhancements to the core system planned in 1996. These enhancements have been
released in 1996 as part of ongoing product maintenance. No software development
costs were capitalized in 1996, as the efforts were on enhancements released to
customers when technological feasibility was obtained.

<PAGE>

General and administrative expenses were $2,685,700 in 1996, an
increase of $1,432,700, or 114.3%, from 1995 expenses of $1,253,000. The 1996
increase reflects the overall higher activity level of the Company plus several
one time expenses. One time expenses incurred in 1996 include $181,000 for the
cancellation penalty on a lease for new office space, $190,000 to settle a
lawsuit brought by a former officer of the Company and $50,000 to settle a
lawsuit brought by a former employee. The Company also incurred $133,100 in
additional legal fees in 1996. These legal expenses were incurred primarily in
connection with the management change completed in the second quarter of 1996
and the above mentioned lease cancellation and lawsuit settlements. Other
increases in general and administrative expenses in 1996 from 1995 which are of
a recurring nature were $177,500 in depreciation due to the fixed asset
additions made in 1996, $65,000 in insurance premiums due to increased insurance
coverage, and $443,700 in increased payroll and related expenses. General and
administrative expenses in 1997 are expected to approximate 1996 levels with the
exception of the one time expenses mentioned above. In 1995 the Company incurred
$1,253,000 in general and administrative expense, a $645,800 increase over 1994.
This increase reflects an overall higher activity level in 1995 compared to 1994
as LifeRate's product had been completed for commercial release and the added
costs associated with becoming a public entity.

In 1996, $261,900 in interest income was generated on cash funds raised
during a private equity placement in December, 1995 and January, 1996. Interest
income of $97,000 was earned in 1995 on funds raised in March, 1995 in the
Company's initial public offering. There was no interest income in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily
through private and public placement of Common Stock. In May, 1997, the Company
issued a convertible promissory note in the principal amount of $1,000,000 to
Medtronic, Inc., a principal shareholder of the Company with a representative
that serves on the Company's Board of Directors. As originally issued, this note
bore interest at the prime rate. The Company also granted Medtronic a warrant to
purchase a number of shares of Common Stock equal to 10% of the principal amount
of the note. In connection with the November, 1997 equity financing described
below: the note became non-interest bearing and is payable in 2002; the
conversion price on the convertible note was changed to $1.50 per share; and the
warrant exercise price was changed to $.50 per share. In July, 1997, the Company
issued additional notes in the aggregate principal amount of $500,000 and
warrants to certain private investors. In connection with the November, 1997
equity financing: these notes were converted into Common Stock at a price of
$2.00 per share; interest under the notes was waived; and the warrant exercise
price was changed to $2.00 per share. In September, October and November, 1997,
bridge loans totaling $304,200 were obtained to fund operations while the
Company attempted to complete an equity offering. An aggregate of $246,425 of
these bridge loans were repaid from proceeds from the November, 1997 equity
financing, an aggregate of $52,000 was canceled in exchange for shares of Common
Stock and warrants issued in the November, 1997 equity financing described
below, and the balance was converted into shares of Common Stock at a price of
$.50 per share.

At September 30, 1997, the Company had $81,200 in cash and cash
equivalents, a $1,990,800 decrease from December 31, 1996. The primary use of
this cash was to fund operations. The Company does not have significant capital
equipment purchase commitments but does plan to continue to fund software
development efforts.

<PAGE>

In October, 1997, eight of the Company's non-employee directors loaned
the Company an aggregate of $46,200 in order for the Company to continue
operations pending completion of the November, 1997 equity financing. A total of
$40,425 was repaid, without interest, to seven of these non-employee directors
from the proceeds of the first closing under the Purchase Agreement, and the
balance of $5,775 was converted into 11,550 shares of Common Stock at a price of
$.50 per share.

In October and November, 1997, Miller, Johnson & Kuehn, Incorporated
("MJK") and principals of MJK loaned the Company an aggregate of $258,000 in
order for the Company to continue operations pending completion of the November,
1997 equity financing. A total of $206,000 was repaid, without interest, to MJK
from the proceeds of the first closing under the Purchase Agreement, and the
balance of $52,000 was converted into 104,000 shares of Common Stock and
warrants to purchase 104,000 shares of Common Stock in the first closing at a
price of $.50 per share.

The Company has completed all of the closings under the Purchase
Agreement and has sold an aggregate of 8,394,000 shares of Common Stock and
issued warrants to purchase an aggregate of 8,394,000 shares of Common Stock
under the Purchase Agreement for total gross cash proceeds of $4,342,400 and the
cancellation of $52,000 of indebtedness. The Company estimates that it will have
sufficient cash to continue operations through August, 1998. See "Risk Factors
- -- Future Capital Needs" and "Certain Transactions -- November, 1997 Equity
Financing."

RECENT FINANCIAL RESULTS

The Company expects to report for the year ended December 31, 1997, revenues of
approximately $620,000 and a net loss of approximately $3,850,000, or
approximately $.86 to $.89 per share. The loss for the year ended December 31,
1997 has been reduced by an extraordinary item of approximately $1,300,000, or
$.30 per share, related to the restructuring of the Company's debt which was
completed as a condition to the November 1997 equity financing. The foregoing
financial results are preliminary and based on partial information and
management assumptions. Actual results for 1997 may differ depending on a number
of factors, including accounting adjustments made during the course of the
Company's annual audit. The Company plans to announce its complete results for
1997 following its annual audit.

<PAGE>

BUSINESS

INTRODUCTION

MARKET OVERVIEW

Propelled by the rapid transition to managed care, the Health Care
Information Systems ("HCIS") market is estimated to be approximately $10 billion
today, and is expected to be $20 billion by the year 2000. An emphasis on
controlling costs, which began in the 1980's, has led to a consolidation of
healthcare purchasers and providers in the 1990's, as well as a stronger need
for improved computer-based communications and information systems. Payors soon
realized, however, that healthcare decisions could not be made solely based on
cost. The focus began shifting from simply controlling costs, to delivering
quality medical care cost-effectively.

The Company presently is focused on two medical specialties: cardiology
and asthma and allergy. The cardiovascular disease market is large and growing.
Each year more money is spent on the treatment of heart disease than on any
other disease. While it is estimated that nearly three-fourths of the roughly
16,000 cardiologists in the U.S. today practice alone or in groups of two or
three physicians, a growing number of cardiologists are organizing themselves
into larger clinics and networks. A number of large regional and national
providers of cardiovascular-related services are emerging that link
cardiologists and seek to provide a range of practice management services. These
large networks increasingly are recognizing the important role information can
play in facilitating more efficient and effective medical care for their
patients. Included among this growing network of cardiology practice management
companies are MedCath, Raytel Medical Corporation, Cardiovascular Provider
Resources, CORDA Medical Care, Inc. and InteCardia.

The Company's other market focus is on asthma and allergy. An estimated
fifteen million Americans have asthma at an estimated cost of approximately $6.2
billion a year in missed work and school, in medications and hospital visits.
Asthma has become the most common chronic disease of childhood and the number
one cause of hospitalization and absenteeism. LifeRate's presence in both the
cardiology and the asthma and allergy specialties position the Company within
the largest market segments for both adult and pediatric medical care.

COMPANY MISSION AND EVOLUTION

The Company was founded in 1990 to develop a computer system that could
help physicians respond to the fee discount demands from managed care
organizations. As development ensued and the

<PAGE>

market need for patient-centered data grew, the Company's mission was formed: to
be the acknowledged leader in developing software-based solutions and clinical
tools that allow healthcare providers to demonstrate quality and
cost-effectiveness of the medical care they deliver. This mission is based on
the belief that the most formidable barrier to consistent excellence in American
medicine is the failure by well-intentioned and competent physicians to
carefully examine what works best and then integrate those findings into routine
use. LifeRate is committed to providing its customers with products and related
services that improve and increase the overall effectiveness and quality of care
delivered by healthcare providers, by identifying patterns of medical care and
treatment that work better than others, and by helping healthcare providers
document their own best practice experience in order to increase their
profitability when negotiating with managed care and other payor organizations.

At the core of the LifeRate solution is a powerful clinical data
repository which includes thousands of data points. LifeRate released
demonstration versions of its core system, along with the Cardiovascular
Outpatient module, in August 1995 and commercial versions in December 1995. The
Company accepted initial orders in the third quarter of 1995, and began
installation in the fourth quarter of 1995. During 1996, LifeRate continued its
development activities, focusing on releasing two Cardiovascular Outpatient
product enhancements and an Asthma and Allergy Outpatient module. LifeRate made
important investments in technical support, customer service and field sales as
it internalized these functions. Marketing and software quality assurance
functions were also established.

A strong emphasis on sales in 1996 and 1997 has yielded positive
results. To date, LifeRate has installed or entered into agreements to install
its Cardiovascular Outpatient System at ten cardiovascular practice groups and
its Asthma and Allergy Outpatient System at four asthma and allergy practice
groups. Development of LifeRate's newest product, LifeRate CLE, an entry level
product for the cardiac catherization laboratory, has been completed and is now
available for sale.

The Company has also entered into several agreements with key strategic
partners.

* In December 1995, LifeRate entered into Investment and
Development Agreements with Medtronic, Inc., a worldwide leader
in clinical devices.

* In January 1996, LifeRate and Pfizer, Inc., an established
international leader in drug manufacturing, entered into a
three-year pilot program for LifeRate to install outpatient
cardiology systems at five cardiology practice groups and explore
ways to capture and report clinical data.

* In February 1996, LifeRate entered into a preliminary agreement
with the National Asthma and Allergy System ("NAAS"), a
partnership of leading asthma and allergy group practices, to
install allergy and asthma outpatient systems at up to eight
asthma and allergy practice groups. NAAS was also appointed as
LifeRate's exclusive distributor of the asthma and allergy
outpatient system. The parties signed a final development
agreement in August 1997.

* In January 1997, National Jewish Medical and Research Center, a
renowned center of respiratory medicine and immunology
excellence, signed an agreement with LifeRate to develop
computerized extensions of their disease management program.

* In June 1997, Washington Heart, a worldwide leader in
cardiovascular medicine, contracted with LifeRate to utilize its
clinical data repository to capture and report clinical
information from disparate data servers.

<PAGE>

The Company's plans for 1998 call for building revenues from existing
and new products, and leveraging the strengths of its key partners.

PRODUCTS

During 1996, LifeRate completed development of its core software
system, including outpatient modules for cardiovascular and asthma and allergy
specialists. The software has been released in three phases, Version 1.1 in
February, 1996; Version 1.2 in October, 1996; and Version 1.3 in September,
1997. These releases added functionality to the core software and increased its
operational benefits. In 1998, LifeRate plans to release a new suite of products
tailored to the outcomes reporting and analysis needs of its customers.

LifeRate also plans to continue to enhance the existing cardiovascular
and allergy and asthma outpatient products with special attention to the growing
market need for actionable outcomes information. The Company believes that tools
that directly report how providers treat clinical conditions will provide the
best economic value and respond most directly to the emerging clinical decision
support requirements of the market.

MARKETING STRATEGY

The Company's customer focus is on healthcare providers seeking
information systems solutions which allow them to maintain leadership and market
position. LifeRate targets those organizations which are:

* Thought leaders in their specialty

* Progressively responding to managed care trends (e.g., taking
risk contracts)

* High volume and procedurally oriented

* Committed to demonstrating they deliver quality medicine on a
cost-effective basis within their practices

LifeRate plans to continue to align itself with national partners
committed to providing information to ensure more efficient and effective
medical care. Specifically in 1998, LifeRate plans to expand its target market
to include the growing number of physician practice management organizations
serving the cardiology and asthma and allergy medical specialties.

<PAGE>

COMPETITION

The HCIS market originated by satisfying the need for computer-based
systems focused largely on practice management (e.g., billing, accounting,
scheduling and purchasing) and electronic medical records ("EMR") documentation.
As the HCIS market evolved, some vendors added the ability to capture limited
clinical data to their practice management and EMR systems.

LifeRate's product has been designed specifically as a clinically
oriented, out-comes-based information system that generates outcomes reports
targeted at demonstrating quality of care. LifeRate's tools and services provide
the following competitive advantages:

* In-depth clinical data collection tools for the specialties of
cardiology and asthma and allergy

* A comprehensive clinical data repository representing thousands
of clinical data points

* Real-time, on-line access to individual patient clinical data

* The creation of comparable outcomes through a consistent yet
flexible data repository structure

* The ability to successfully integrate data from clinical systems
and other diverse software applications

* A robust technical architecture that includes a patient-centered,
problem-oriented relational database and offers growth and open
access to industry-standard tools

* A collection of tools and services that comprise a total solution
for providers incorporating information systems into their
patient care activities

The following products, while not directly competing on a per-product
capability basis or across segments within specialty areas, are potential
competitors: Summit Medical Systems' VISTA and CRESCENDO products, Seattle
Systems' APOLLO, Apache's HEART CARE SERIES CARDIOCOMPASS and SURVEYOR+, Health
Point's HEALTH POINT ACS, Medical Logic's LOGICIAN, and Cerner and Clinitec's
NEXT GEN. These products are generally considered to be electronic medical
record systems, meaning they capture limited clinical data and cannot support
detailed outcomes reports.

In addition to the foregoing competitors, the Company anticipates that
new competitors will attempt to enter the market and that existing or new
competitors will develop information systems in the future that duplicate or
improve on LifeRate's system. Many of the Company's competitors are well
established, better known and significantly larger with substantially greater
technical, marketing and financial resources than the Company. The Company's
ultimate ability to compete in the market will depend upon a number of factors,
including its success in generating market acceptance of LifeRate's system and
the success of its marketing efforts.

RESEARCH AND DEVELOPMENT

The Company has in the past, and plans to continue in the future, to
dedicate significant resources to research and development activities. These
research and development activities consist primarily of developing and
releasing enhancements and new versions to its core software system. During
1996, LifeRate completed development of its core system, including outpatient
modules for cardiovascular and asthma and allergy specialists. The software has
been released in three phases, Version 1.1 in February, 1996; Version 1.2 in
October, 1996 and Version 1.3 in September, 1997. In

<PAGE>

addition, in January, 1998, the Company released an entry level product for use
in the cardiac catheterization laboratory. LifeRate plans to continue to enhance
the existing cardiovascular and allergy and asthma out patient products with
special attention to the growing market need for actionable outcomes
information. The Company spent $5,309,900, $2,104,500 and $215,800,
respectively, on research and development in the years ended December 31, 1996,
1995 and 1994.

PROPRIETARY PROTECTION

The Company currently relies solely on common law copyrights and trade
secrets for proprietary protection of its system. LifeRate does not currently
have patent protection with respect to any aspect of its system, although it has
filed one U.S. patent application covering certain aspects of its system and
plans to file additional patent applications in the future. There can be no
assurance that the Company's measures to protect its proprietary information
will be successful, that it will be granted any patents, or that any patents
that may be granted will be of value to the Company. In the absence of
meaningful intellectual property protection, the Company may be vulnerable to
competitors who could lawfully attempt to copy the Company's products. Moreover,
there can be no assurance that other competitors may not independently develop
the same or similar technology. Similarly, while LifeRate believes that it has
all rights necessary to market and sell its system without infringement of
intellectual property rights held by others, the Company has not conducted a
formal infringement search, and there can be no assurance that such conflicting
rights do not exist.

EMPLOYEES

As of January 31, 1998, the Company had one part-time employee and 27
full-time employees, including five in management and administration, 12 in
software development, six in sales and marketing and five in customer support.

FACILITIES

The Company's facilities are currently located at 7210 Metro Boulevard,
Edina, Minnesota 55439, and consist of approximately 10,368 square feet of
office space. The Company leases this space pursuant to a lease which provides
for rent of approximately $14,000 per month (including operating expenses and
real estate taxes) and expires on September 30, 2001.

LEGAL PROCEEDINGS

The Company is not currently involved in any material legal
proceedings.

<PAGE>

MANAGEMENT

The directors and executive officers of the Company as of February 15,
1998 are as follows:

NAME AGE POSITION
---- --- --------

David J. Chinsky 43 President and Chief Executive Officer and
Director
Mark W. Sheffert 50 Director and Chairman of the Board
Daniel A. Pelak 46 Director

DAVID J. CHINSKY. Mr. Chinsky joined the Company in August, 1997 as
President and Chief Executive Officer and a director. Prior to joining LifeRate,
Mr. Chinsky was employed for more than nine years in a variety of positions by
The MEDSTAT Group, an information services and consulting firm serving the
healthcare industry, most recently as Executive Vice President. Mr. Chinsky
received his undergraduate degree form the University of Michigan, his Masters
of Business Administration from Keller Graduate School of Management, his
Masters of Science in Public Health from the University of Illinois and his
Doctorate of Public Health from the University of Michigan.

MARK W. SHEFFERT. Mr. Sheffert became a director and Chairman of the
Board of the Company in January, 1998. Mr. Sheffert has over 25 years of
financing and financial services experience. He is the founder of Manchester
Companies, Inc. ("MCI") whose business is investment banking, corporate
restructuring, management consulting and commercial finance. Before founding
MCI, Mr. Sheffert was a senior executive with First Bank System, a $28 billion
bank holding company where he served in various high-level management capacities
and was eventually named one of two President's of First Bank System. Before
joining First Bank System, Mr. Sheffert was Chief Operating Officer and Director
of North Central Life Insurance Company. Mr. Sheffert serves and has served on
the Board of Directors of several public companies, including Telident, Inc. and
Medical Graphics Corp, privately held corporations, and community organizations.
Mr. Sheffert is the designee of the Funds elected to the Board, as required by
the Purchase Agreement.

DANIEL A. PELAK. Mr. Pelak has been a director of the Company since
January, 1996. Mr. Pelak is currently a Vice President of Medtronic, Inc., a
multi-national medical device manufacturer. He has been with Medtronic, Inc.
since 1976 and has held several key managerial positions. Mr. Pelak served as
the Vice President and General Manager of the Nortech Division of Medtronic from
1988 to 1992, and he is currently Vice President of Cardiovascular Marketing at
Medtronic. Mr. Pelak was elected to the Board as the designee of Medtronic. See
"Certain Transactions."

ADDITIONAL INFORMATION ABOUT THE BOARD OF DIRECTORS

In November, 1997, as a condition to the closing of an equity financing
transaction, the Company's Board of Directors was reduced from ten directors to
five directors, and all of the non-employee directors of the Company, other than
Daniel A. Pelak and Kevin L. Roberg, resigned from the Board. In connection with
the November, 1997 equity financing, the Company also agreed, so long as the
Purchasers under the Purchase Agreement, own or have the right to acquire at
least 20% of the then outstanding shares of Common Stock, that (a) the Company
shall maintain the number of directors who constitute the Board of Directors at
five; (b) so long as the Funds own at least 2.5% of the then outstanding shares
of Common Stock, the Company shall maintain on the Board one director nominee to

<PAGE>

be designated by the Funds; and (c) for a period of three years from the date of
the Purchase Agreement, the Company shall maintain on the Board of Directors one
director nominee to be designated by MJK, which nominee is to be mutually
acceptable to the Company and MJK. The Funds designated Mark W. Sheffert as
their director under the Purchase Agreement. MJK has not designated its director
as of the date hereof. See "Certain Transactions -- November, 1997 Equity
Financing."

Kevin L. Roberg resigned from the Board in December, 1997.

DIRECTOR COMPENSATION

The Company does not pay fees to directors of the Company. The Company
generally reimburses directors of the Company for out-of-pocket expenses
incurred while attending Board or committee meetings.

Prior to March, 1997, the Company generally granted options to
directors to purchase 13,333 shares of Common Stock upon their initial election
to the Board. In March, 1997, the Company granted to each director options to
purchase 2,500 shares of Common Stock, exercisable at $3.00 per share, the Fair
Market Value (as defined under the Company's 1993 Stock Option Plan), and
vesting in one third increments on each of the three anniversaries following the
March 1997 grant date. See "Report on Repricing of Options."

In November, 1997, as a condition to the closing of the November, 1997
equity financing, all of the non-employee directors of the Company agreed to
cancel all options and warrants to purchase shares of Common Stock held by them
(except for certain options to purchase an aggregate of 236,333 shares held by
APF, LLC and Dr. Anthony P. Furnary and options to purchase 10,000 shares,
exercisable at $1.00 per share held by each of William W. Chorske and William D.
Knopf, M.D.). See "Certain Transactions -- November, 1997 Equity Financing."

Mr. Chorske received $47,850 for acting as Chairman of the Board of the
Company during the period from May to November of 1997.

<PAGE>

COMPENSATION AND OTHER BENEFITS

The following table sets forth the total compensation for each of the
last three fiscal years awarded to or earned by the Chief Executive Officer of
the Company and each of the Company's four most highly compensated executive
officers whose total compensation exceeded $100,000 in 1997 (the "Named
Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS (2)
- --------------------------- ---- ------ ----- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
David J. Chinsky (3) 1997 $78,750 $108,000 $11,258 650,000 --
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

William W. Chorske (4) 1997 $88,636 $150,000(5) $47,850 54,917(6) --
FORMER PRESIDENT AND CHIEF 1996 $166,667 -- $20,000 75,000 --
EXECUTIVE OFFICER AND FORMER
CHAIRMAN

John R. Goodrich (6) 1997 $77,000 -- -- -- --
FORMER INTERIM PRESIDENT AND
CHIEF EXECUTIVE OFFICER

Paul D. Benson (7) 1997 $95,000 $7,754 -- 8,000 $2,450
FORMER SENIOR VICE PRESIDENT, 1996 $95,000 $20,000 -- -- --
STRATEGIC BUSINESS DEVELOPMENT 1995 $75,000 $20,000 -- -- --

</TABLE>

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

(1) "Other Annual Compensation" paid to Mr. Chinsky is comprised of an
apartment and travel allowance. "Other Annual Compensation" paid to Mr.
Chorske in 1997 was in connection with his services as Chairman of the
Board of the Company.

(2) "All Other Compensation" paid to Mr. Benson is comprised entirely of
matching contributions to the Company's 401(k) plan.

(3) David J. Chinsky became President and Chief Executive Officer in
August, 1997.

(4) William W. Chorske served as President and Chief Executive Officer from
May, 1996 through April, 1997. Mr. Chorske became Chairman of the Board
in May, 1997 and resigned such position on November 14, 1997. See
"Certain Transactions -- November, 1997 Equity Financing."

(5) The $150,000 bonus for 1997 became payable under Mr. Chorske's
employment agreement upon termination of his employment, but has not
yet been paid. See "Compensation and Other Benefits -- Employment
Agreements, Chorske Employment Agreement."

(6) In March, 1997, the Company granted Mr. Chorske options to purchase
2,500 and 52,417 shares of Common Stock each at an exercise price of
$3.00 per share and expiring five years from the date of grant, and
cancelled Mr. Chorske's prior options covering 61,667 shares
exercisable at

<PAGE>

$9.375 per share. In November, 1997, in connection with the November
1997 equity financing Mr. Chorske agreed to cancel all outstanding
options except that he retained options to purchase 10,000 shares at an
exercise price of $1.00 per share. See "Report on Repricing of Options"
below.

(7) John R. Goodrich served as interim President and Chief Executive
Officer from May, 1997 to August, 1997.

(8) Paul D. Benson resigned from the Company in February, 1998.

OPTION GRANTS AND EXERCISES IN 1997

The following tables provide information for the year ended December
31, 1997 as to individual grants and exercises of options to purchase shares of
the Company's Common Stock by each of the Named Executive Officers of the
Company.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO EXERCISE OR MARKET PRICE
UNDERLYING OPTIONS EMPLOYEES IN FISCAL BASE PRICE ON DATE EXPIRATION
NAME GRANTED (#)(1) YEAR ($/Sh) OF GRANT DATE
- ---- -------------------- ------------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
David J. Chinsky 650,000(2) 77.0% $0.50 $1.125 8/26/05
William W. Chorske 52,417(3) 6.2% $3.00 $3.00 3/7/02
2,500(3) 0.3% $3.00 $3.00 3/7/02
Paul D. Benson 8,000(4) 0.9% $3.00 $3.00 3/7/02

</TABLE>

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

(1) Upon a defined "Change in Control" of the Company, all outstanding
options become immediately exercisable in full and will remain
exercisable for the remainder of their terms regardless of whether the
holder remains in the employ or service of the Company or any
subsidiary. A "Change in Control" of the Company for purposes of the
1993 Stock Option Plan includes (i) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Company to a
corporation that is not controlled by the Company, (ii) the approval by
the Company's shareholders of any plan or proposal for the liquidation
or dissolution of the Company, (iii) the acquisition by any person,
directly or indirectly, of 50% of more of the Company's Common Stock,
excluding shares acquired by Special Situation Fund (see "Certain
Transactions - November, 1997 Equity Financing") or (iv) any change in
control of the Company of a nature that would be required to be
reported pursuant to Section 13 or 15(d) of the Exchange Act, whether
or not the Company is then subject to such reporting requirements.

(2) Such options to Mr. Chinsky were not granted under any formal stock
option plan of the Company. Such options vest at the rate of one-third
of the shares covered by such options on the first anniversary of the
date Mr. Chinsky began his employment with the Company and each of the
first two anniversaries of the such date, provided that Mr. Chinsky
continues to provide services to the Company.

<PAGE>

(3) In March, 1997, the Company granted Mr. Chorske options to purchase
2,500 and 52,417 shares of Common Stock each at an exercise price of
$3.00 per share and expiring five years from the date of grant, and
cancelled Mr. Chorske's prior options covering 61,667 shares
exercisable at $9.375 per share. In November, 1997, in connection with
the November 1997 equity financing Mr. Chorske agreed to cancel all
outstanding options except that he retained options to purchase 10,000
shares at an exercise price of $1.00 per share. See "Report on
Repricing of Options" below.

(4) Such options to Mr. Benson were granted under the Company's 1993 Stock
Option Plan and are subject to the terms of such plan.

AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FY-END(#)(1) MONEY OPTIONS AT FY-END($)(2)
------------------------- -----------------------------
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
--------------------------- -----------------------------
<S> <C> <C>
David J. Chinsky 0/650,000 $0/$81,250
William W. Chorske 10,000/0 0/0
Paul D. Benson 0/8,000 0/0

</TABLE>

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

(1) The exercise price may be paid in cash or, in the Stock Option
Committee's discretion, in shares of the Company's Common Stock valued
at fair market value on the date of exercise.

(2) Based on the closing bid price on December 31, 1997 of $.625, as
reported by the OTC Bulletin Board.

REPORT ON REPRICING OF OPTIONS

On March 7, 1997, the Stock Option Committee of the Board of Directors
granted new options to all employees of the Company, including William W.
Chorske, the Company's President and Chief Executive Officer at that time, at an
exercise price of $3.00 per share, the Fair Market Value (as defined in the
Company's 1993 Stock Option Plan) on such date, and cancelled all previously
granted options. Prior to March 7, 1997, the exercise price of all options held
by employees ranged from $4.50 to $10.625 per share. In addition, the number of
shares covered by the new options granted to employees was reduced by 15% from
the number of shares covered by the cancelled options. The vesting of the new
options was also extended so as to preserve a continuing equity incentive for
all employees to remain with the Company over the next several years. The new
options vested in one third increments on each of three anniversaries following
the March 7, 1997 grant. The Stock Option Committee granted these options
because it concluded that the grant was necessary to maintain an appropriate
future equity incentive for the employees and directors of the Company.

<PAGE>

EMPLOYMENT AGREEMENTS

CHINSKY EMPLOYMENT AGREEMENT. In August, 1997, the Company and David J.
Chinsky entered into an employment agreement, which provides for the employment
of Mr. Chinsky as the Company's President and Chief Executive Officer. The
agreement has an initial term of one year and will automatically renew for
additional one-year periods, unless terminated by one of the parties. The
agreement provides for an annual base salary of $225,000 with an annual
performance bonus of up to $100,000 per year if to be agreed upon performance
criteria are met. The Company has guaranteed payment of a first year bonus of
$100,000. The Company has also agreed to pay Mr. Chinsky $108,000 in February,
1998 for a bonus that Mr. Chinsky would have otherwise received from previous
employment, provided that the Company successfully completes an equity
financing. In addition, the Company has granted Mr. Chinsky options to purchase
an aggregate of 300,000 shares of Common Stock at an exercise price of $.50 per
share, which vest over a period of three years. The Company has also agreed to
grant Mr. Chinsky options to purchase additional shares of Common Stock such
that after any equity financings completed within Mr. Chinsky's first year of
employment he will have been granted options covering a total number of shares
of Common Stock equal to 7.84% of the number of outstanding shares of Common
Stock. In the event that Mr. Chinsky terminates the agreement for "good reason"
following a change of control of the Company, Mr. Chinsky is entitled to receive
his base salary for the remaining term of the agreement and the bonus that would
otherwise be payable. The agreement also requires Mr. Chinsky to assign to the
Company any inventions related to the Company's business and to keep the
Company's proprietary information confidential. Mr. Chinsky is also prohibited
from competing with the Company for a period of two years following termination
of his employment with the Company.

In connection with the closing of the November, 1997 equity financing,
Mr. Chinsky's employment agreement was amended to provide that: (a) the
transactions contemplated by the November, 1997 equity financing did not
constitute a "change in control," as defined in the employment agreement; (b)
bonuses payable to Mr. Chinsky will be payable, at the option of the Company, in
cash or shares of Common Stock; (c) the payment of a certain bonus in the amount
of $108,000 was accelerated and paid in November, 1997, (d) all prior stock
options granted to Mr. Chinsky were canceled and Mr. Chinsky was granted a
replacement option to purchase 650,000 shares of Common Stock at an exercise
price of $.50 per share, and (e) Mr. Chinsky waived his right to receive any
additional options upon completion of the November, 1997 equity financing. See
"Certain Transactions."

CHORSKE EMPLOYMENT AGREEMENT. Effective May 1, 1996, the Company and
William W. Chorske entered into a one-year employment agreement, which provided
for the employment of Mr. Chorske as the Company's President and Chief Executive
Officer. The agreement provided for an annual base salary of $250,000. In
addition, the Company granted Mr. Chorske an option (not under any formal plan
of the Company) to purchase 61,667 shares of Common Stock at a price of $9.375
per share, which became exercisable in full upon completion of one year of
employment. In March 1997, this option was replaced with an option covering
52,417 shares exercisable at $3.00 per share. Mr. Chorske is also entitled to
receive a bonus under the agreement equal to $150,000 because the exercise price
of the options was greater than the market value of the Company's Common Stock
at the time of termination of his employment. In consideration for his service
as a director, the Company also granted Mr. Chorske an option under the
Company's 1993 Stock Option Plan to purchase 13,333 shares of Common Stock at
price of $9.375, exercisable with respect to one-third of such shares and will
become exercisable with respect to one-third of such shares on each of the first
two anniversaries of his election as a director, provided that Mr. Chorske
remains a director of the Company. The agreement also required Mr. Chorske to
assign to the Company any inventions related to the Company's business and to
keep the Company's

<PAGE>

proprietary information confidential. Mr. Chorske was also prohibited from
competing with the Company for a period of two years following termination of
his employment with the Company. Mr. Chorske's employment and positions as
President and Chief Executive Officer ended April 30, 1997, and he resigned as a
director in November 1997. In connection with the November 1997 equity financing
Mr. Chorske agreed to cancel all outstanding options except that he retained
options to purchase 10,000 shares at $1.00 per share.

CERTAIN TRANSACTIONS

NOVEMBER 1997 EQUITY FINANCING

On November 14, 1997, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with Special Situations Private Equity
Fund, L.P., Special Situations Cayman Fund, L.P., Special Situations Fund III,
L.P. (collectively, the "Funds") and the other purchasers named in the Purchase
Agreement (the Funds and such other purchasers are collectively referred to
herein as the "Purchasers"), pursuant to which the Company agreed to sell up to
9,000,000 shares of Common Stock of the Company at prices ranging from $.50 to
$.56 per share and warrants to purchase up to 9,000,000 shares of Common Stock,
as well as an additional 104,000 shares of Common Stock and warrants to purchase
104,000 shares of Common Stock for cancellation of certain indebtedness. The
warrants are exercisable for a period of ten years at a price of $1.50 per
share, subject to adjustment as provided in the warrants. The first closing
under the Purchase Agreement was held on November 14, 1997, at which the Company
sold an aggregate of 2,500,000 shares of Common Stock at a price of $.50 per
share and issued warrants to purchase an aggregate of 2,500,000 shares of Common
Stock to the Funds for an aggregate purchase price of $1,250,000 and an
aggregate of 104,000 shares of Common Stock and warrants to purchase an
aggregate of 104,000 shares of Common Stock for the cancellation of $52,000 of
indebtedness (the "First Closing"). The interim closing was held on November 21,
1997 (the "Interim Closing"), at which the Company sold an additional 1,790,000
shares of Common Stock at a price of $.56 per share and issued warrants to
purchase an aggregate of 1,790,000 shares of Common Stock to purchasers other
than the Funds for an aggregate purchase price of $1,002,400.

The Purchase Agreement also provided that, in the event the Company
fulfilled certain conditions by January 15, 1998 (the "Second Closing
Conditions"), the Company would issue up to an additional 4,500,000 shares of
Common Stock and warrants to purchase 4,500,000 shares of Common Stock at a
purchase price of between $.50 and $.56 per share on or before January 31, 1998
(the "Second Closing"). The Second Closing Conditions included (a) the approval
by the shareholders of the Company of an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the total number of authorized
shares of Common Stock to an aggregate of 75,000,000 and (b) the attainment by
the Company no later than January 15, 1998, of the following milestones: (i) the
Company's net revenues derived from the sale of existing or new systems during
the period from October 1, 1997 through January 15, 1998, shall be at least
$200,000; (ii) the Company shall have executed letters of intent and/or sales
contracts, each with a minimum value of $5,000, with at least five new
(excluding current or previous) customers for the sale of any existing or new
systems during the period from October 1, 1997 through January 15, 1998; and
(iii) the Company shall have made generally available for sale a commercially
marketable entry level cardiac cath lab product designed to support the data
requirements of the American College of Cardiology, with a sales price range of
$5,000 to $15,000.

The Company satisfied these Second Closing Conditions and a second
closing was held on January 30, 1998 (the "Second Closing"), at which the
Company sold an aggregate of 2,500,000 shares

<PAGE>

of Common Stock at a price of $.50 per share and issued warrants to purchase an
aggregate of 2,500,000 shares of Common Stock to the Funds for an aggregate
purchase price of $1,250,000 and sold an aggregate of 1,500,000 shares of Common
Stock at a price of $.56 per share and issued warrants to purchase an aggregate
of 1,500,000 shares of Common Stock to purchasers other than the Funds for an
aggregate purchase price of $840,000. The Shares and Warrants acquired by the
Funds constitute "beneficial ownership" (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) approximately 57% of the
Company's Common Stock immediately following the Second Closing.

As a condition to the First Closing, the Company's Board of Directors
was reduced from ten directors to five directors, and all of the non-employee
directors of the Company, other than Daniel A. Pelak and Kevin L. Roberg,
resigned from the Board. In addition, all of the non-employee directors of the
Company agreed to cancel all options or warrants to purchase shares of Common
Stock held by them (except for certain options to purchase an aggregate of
236,333 shares held by APF, LLC ("APF") and Dr. Furnary and options to purchase
10,000 shares, exercisable at $1.00 per share held by each of William W. Chorske
and William D. Knopf, M.D.). Under the Purchase Agreement, the Company has also
agreed, so long as the Purchasers own or have the right to acquire at least 20%
of the then outstanding shares of Common Stock, that (a) the Company shall
maintain the number of directors who constitute the Board of Directors at five;
(b) so long as the Funds own at least 2.5% of the then outstanding shares of
Common Stock, the Company shall maintain on the Board of Directors one director
nominee to be designated by the Funds; and (c) for a period of three years form
the date of the Purchase Agreement, the company shall maintain on the Board of
Directors one director nominee to be designated by Miller Johnson & Kuehn,
Incorporated ("MJK"), which nominee is to be mutually acceptable to the company
and MJK (the "MJK Director"). The Funds have designated Mr. Mark W. Sheffert as
their nominee to the Board. MJK has not designated its nominee to the Board as
of the date hereof.

The Company agreed to a number of covenants under the Purchase
Agreement. So long as the Purchasers own or have the right to acquire at least
20% of the outstanding shares of Common Stock, the Company has agreed not to do
any of the following without the consent of the Funds and the MJK Director: (a)
sell Common Stock or any rights or securities convertible into or exercisable or
exchangeable for Common Stock at a purchase, exercise or conversion price, as
the case may be, of less than $1.00 per share of Common Stock for a period of
three years from the date of the Purchase Agreement; (b) issue any securities
senior to the common Stock; (c) effect any reclassification, capital
reorganization or other change of outstanding shares of capital stock of the
Company; (d) merge, consolidate or enter into any other business combination of
the company with or into another entity (other than a merger of a wholly owned
subsidiary, in which merger the Company shall be the surviving entity); (e)
sell, lease or otherwise dispose of all or substantially all of its assets; or
(f) liquidate, dissolve or wind-up the Company.

As further conditions to the First Closing, the Company amended certain
agreements between the Company and certain officers, directors and affiliated
entities. These amendments are described below and under the heading "Management
- -- Employment Agreements."

NON-EMPLOYEE DIRECTOR LOANS

In October 1997, eight of the Company's then non-employee directors
loaned the Company $5,775 and an aggregate of $46,200 in order for the Company
to continue operations pending completion of the November 1997 equity financing.
The Company repaid a total of $40,425, without interest, to

<PAGE>

seven of these non-employee directors from the proceeds of the November 1997
equity financing, and the balance of $5,775 owed to Mr. Wegmiller was converted
into 11,550 shares of Common Stock at a price of $.50 per share.

AGREEMENTS WITH MEDTRONIC, INC.

In May 1997, the Company issued a convertible promissory note in the
principal amount of $1,000,000 to Medtronic, Inc. (the "Medtronic Note"), a
principal shareholder of the Company with a representative that serves on the
Company's Board of Directors. As originally issued, the Medtronic Note accrued
interest at the prime rate. Under its original terms, the Medtronic Note would
have become due upon the earlier of the completion by the Company of an equity
financing raising gross proceeds of at least $5,000,000 or November 30, 1997,
and was convertible, at the option of the holder, into Common Stock at a
conversion price equal to the lower of $2.00 or the average per share price in
one or more rounds of equity financing raising gross proceeds to the Company of
at least $5,000,000 (including proceeds from this offering). At the time of
issuance of the original Medtronic Note, the Company granted Medtronic a warrant
to purchase 100,000 shares of Common Stock, exercisable at the same price as the
conversion price of the Medtronic Note (the "Medtronic Warrant"). Under the
original terms of the Medtronic Note, the Company would have been obligated to
grant an additional warrant to purchase a number of shares of Common Stock equal
to 5% of the principal amount of the Medtronic Note if the note was not paid by
November 30, 1997 and an additional warrant to purchase a number of shares of
Common Stock equal to 5% of the principal amount of the Medtronic Note if the
note was not paid by February 28, 1998. In connection with the November 1997
equity financing, the Medtronic Note was amended to provide that: (a) no
interest will accrue thereunder and accrued interest will be forfeited; (b)
principal will not become due until May 12, 2002; (c) the conversion price of
the Medtronic Note is $1.50 per share; and (d) the Company will not be obligated
to issue any additional warrants to Medtronic under the Medtronic Note. The
Medtronic Warrant was also amended to provide that the exercise price is $.50
per share and that there was no other adjustment to the exercise price or the
number of shares covered by the Medtronic Warrant as a result of the November
1997 equity financing.

On December 26, 1995, the Company entered into an Investment Agreement
and a License and Development Agreement with Medtronic, Inc. ("Medtronic") and a
Shareholder Voting Agreement with Medtronic and certain shareholders of the
Company. Pursuant to the Investment Agreement, the Company privately sold to
Medtronic 600,000 shares of Common Stock at a price of $8.00 per share for a
total price of $4.8 million. The Company granted to Medtronic certain rights of
first refusal to purchase capital stock and assets of the Company and to develop
or commercialize the Company's technology in one or more fields other than the
cardiovascular and neurological fields, certain rights to have shares of the
Company held by Medtronic and certain assignees of Medtronic registered for sale
to the public and the right to designate one person to be nominated and elected
to the Board of Directors of the Company. Daniel A. Pelak, a Vice President of
Medtronic, was elected to the Company's Board in January 1996 as Medtronic's
designee under this agreement. Pursuant to the License and Development
Agreement, the Company granted to Medtronic a 30-year world-wide, fully paid,
royalty free license granting Medtronic certain rights relating to the sale and
use of the Company's system in the cardiovascular and neurological fields. In
addition, the Company agreed to install the Company's system at certain clinical
sites specified by Medtronic on a preferred pricing basis, to install the system
at one site specified by Medtronic at no cost to Medtronic and to engage with
Medtronic in certain joint development of products and systems. Under the
Shareholder Voting Agreement, officers of the Company who are parties to the
agreement, including Paul D. Benson, agreed to vote their shares of Common Stock
of the Company for the person designated by Medtronic to be a member of the
Board of Directors of the Company. In connection with the November 1997 equity
financing, Medtronic waived

<PAGE>

the restrictions on registration rights contained in Section 8.4 of the
Investment Agreement, waived its right of first refusal to purchase securities
in the November 1997 equity financing, agreed not to exercise and to otherwise
waive any of its registration rights until January 1, 2000, waived its superior
position with respect to an underwriter's cutback of piggyback registration
rights and waived its right of first refusal on the sale of the Company in
certain circumstances.

AGREEMENTS WITH FURNARY AND APF, LLC

In July 1995, the Company entered into an agreement with Anthony P.
Furnary, M.D., an advisor to the Company at the time, and APF, an entity owned
by Dr. Furnary under which the Company acquired certain software developed by
Dr. Furnary and agreed to pay royalties to Dr. Furnary initially equal to 7.5%
of gross revenues. Dr. Furnary also received an option to purchase 26,000 shares
of Common Stock at an exercise price of $4.50 per share. In 1995, the Company
accrued approximately $19,000 in royalties under this agreement, which amount
was recently paid to Dr. Furnary. In 1996, the Company accrued $46,169 in
royalties, of which amount $10,000 was paid to Dr. Furnary. In March 1997, the
Company and Dr. Furnary entered into a agreement modifying the July 1995
agreement. Under the terms of the modified agreement, beginning in 1999 (or
sooner if the Company reaches $20,000,000 of cumulative revenues) the Company
will pay royalties in the amount of 3% on all gross revenues (as defined in the
agreement) up to $100,000,000, and thereafter, 3.6% on all gross revenues. The
existing royalty rate of 7.5% of gross revenues remained in place through March
31, 1997. In addition, among other things, under the modification the Company
agreed (i) to make certain milestone payments totaling $450,000 when the Company
reaches certain revenue levels; (ii) to issue options to APF, for services
previously rendered to the Company, to purchase 550,000 shares of Common Stock
at an exercise price of $2.625 per share and to reprice outstanding options to
purchase 36,333 shares held by Dr. Furnary to $2.625 per share (which represents
the closing price of the Company's Common Stock on the date the Company and Dr.
Furnary reached agreement in principle on the modification agreement); (iii) to
enter into a consulting agreement with Dr. Furnary; and (iv) to appoint Dr.
Furnary to the Company's Board of Directors within 90 days. The consulting
agreement, which has an initial term of five years, with two-year renewal rights
upon mutual agreement, provides that Dr. Furnary will provide consulting
services to the Company in the area of system design and development as the
Senior Advisor and System Architect for an annual fee of $100,000.

In connection with the November 1997 equity financing, the Consulting
Agreement, between the Company and Dr. Furnary was terminated, and the Company's
obligation to make milestone royalty payments of $450,000 under the modified
agreement was terminated. The 550,000 share stock option agreement was amended
to reduce the number of shares to 200,000 and the exercise price to $1.00 per
share. APF and Furnary also agreed (a) not to exercise and to otherwise waive
any of their registration rights under the foregoing option or the other options
held by them to purchase an aggregate of an additional 36,333 shares until
January 1, 2000; (b) not to sell or otherwise transfer any shares of Common
Stock purchased upon exercise of any of such options prior to January 1, 2000;
and (c) that there was no other adjustment to the exercise price of such options
or the number of shares issuable upon exercise of the foregoing options thereof
as a result of the November 1997 equity financing. Furnary also waived his right
to be appointed to the Company's Board of Directors and agreed that his observer
status is only exercisable by him personally.

AGREEMENTS WITH THE ATLANTA CARDIOLOGY GROUP, P.C.

In September 1994, The Atlanta Cardiology Group, P.C. ("ACG") and the
Company entered into an agreement for the joint development of practice
guidelines and clinical outcomes for cardiology,

<PAGE>

under which ACG agreed to pay the Company a fee for system design and
implementation and ACG was to receive royalties on sales of the cardiology
system over the next ten years. During 1995, the Company paid (or accrued)
$150,000 for all services rendered by ACG and the Company received $50,000 in
revenues from the sale of products and services to ACG. In early 1996, the
Company and ACG agreed to restructure their relationship. Among other things,
the Company agreed to pay ACG a royalty equal to 10% of gross sales of the
Company's cardiology system and a 2% royalty on all database sales. In 1996, the
Company received no revenues from ACG and accrued $60,052 in fees to ACG for all
services rendered in 1996, including royalties under the prior agreement. In
March 1997, the Company entered into an agreement with ACG to replace the prior
agreements. Under the revised agreement, the Company issued a convertible
subordinated note to ACG in the principal amount of $2,250,000, maturing on
April 1, 2002 (the "ACG Note"). The note accrues interest at a rate of 10% per
annum, and interest is payable at the rate of 5% per year, with the balance of
accrued interest payable at the maturity date. Up to $2,000,000 of the principal
amount of the note is convertible by ACG into shares of Common Stock at the rate
of $3.32 per share. As long as the note is outstanding, ACG has the right to
designate an individual to attend all board meetings. William D. Knopf, M.D., a
practicing cardiologist and partner in ACG, is a director of the Company. In
connection with the November 1997 equity financing, the ACG Note was amended to
provide that no interest will accrue thereunder and that any accrued interest
shall be forfeited. In addition, ACG agreed that there was no adjustment to the
conversion price of the ACG Note or the number of shares issuable upon
conversion of the ACG Note as a result of the November 1997 equity financing.
ACG also agreed not to exercise and to otherwise waive any of its registration
rights prior to January 1, 2000 and waived its right to designate a person to
attend meetings of the Board.

KNOPF AGREEMENT

In September 1996, the Company entered into an agreement with William
D. Knopf, M.D., a former director of the Company, relating to the termination of
Dr. Knopf's employment by the Company. Pursuant to this agreement, the Company
entered into a consulting agreement with Dr. Knopf, under which Dr. Knopf has
agreed to provide certain consulting and advisory services to the Company and
will receive an annual consulting fee of $60,000. The consulting agreement also
includes a non-competition covenant for 12 months following the expiration of
the term of the consulting agreement, which expired by its terms on September 1,
1997. In addition, Dr. Knopf received an option to purchase 50,000 shares at an
exercise price equal to the fair market value on the date of grant, which was
$6.625 per share. This option was exercisable with respect to one-third of such
shares on the date of grant and will become exercisable with respect to
one-third of such shares on each of the first two anniversaries of the date of
grant. The option is exercisable for a period of ten years from the date of
grant. The Company and Dr. Knopf also executed mutual releases of any and all
claims relating to Dr. Knopf's employment by the Company or the termination of
his employment.

EDMONDS AGREEMENT

In September 1996, the Company entered into an agreement with Donna J.
Edmonds, a former director and executive officer of the Company, whose
employment with the Company terminated effective April 24, 1996. Pursuant to
such agreement, the Company agreed to pay Ms. Edmonds an aggregate of $190,000
and granted Ms. Edmonds an option to purchase 80,000 shares of the Company's
Common Stock, at an exercise price of $5.00 per share, which was the closing bid
price on September 12, 1996. This option is exercisable for a period of ten
years following the date of grant. The Company and Ms. Edmonds also agreed to
execute a stipulation of dismissal with prejudice to resolve the then pending
litigation brought by Ms. Edmonds against the Company. The Company and Ms.
Edmonds also

<PAGE>

executed mutual releases of any and all other claims relating to Ms. Edmonds'
employment by the Company or the termination of her employment.

HASKIN AGREEMENT

In June 1996, the Company entered into an agreement with David W.
Haskin, a former director and Chief Executive Officer of the Company, whose
employment with the Company terminated effective April 24, 1996. Pursuant to the
terms of this agreement, the Company agreed to pay or reimburse Mr. Haskin up to
$10,000 per year for premiums on health insurance coverage for himself and his
spouse until Mr. Haskin reaches age 65. In addition, the Company agreed to use
its reasonable efforts to cause the release of shares owned by Mr. Haskin from
the "cheap stock" escrow with the Commissioner of Commerce for the State of
Minnesota and certain lock-up arrangements with MJK and granted Mr. Haskin
certain registration rights with respect to certain shares of the Company's
Common Stock. The Company and Mr. Haskin also executed mutual releases of any
and all claims relating to Mr. Haskin's employment by the Company or the
termination of his employment.

COMER AGREEMENT

In June 1996, the Company entered into an agreement with Jeffrey B.
Comer, a former executive officer of the Company, whose employment with the
Company terminated effective April 24, 1996. Pursuant to the terms of this
agreement, the Company entered into a consulting agreement with Mr. Comer,
pursuant to which Mr. Comer provided consulting services for a period of six
months and received an aggregate of $160,000 for such consulting services. The
consulting agreement also included a non-competition covenant for 12 months
following the expiration of the term of the consulting agreement, which occurred
on December 1, 1996. In addition, Mr. Comer received an option to purchase
51,000 shares of the Company's Common Stock for an exercise price per share
equal to the fair market value per share on the date of such grant, which was
$8.625 per share, and the Company granted him certain registration rights with
respect to certain shares owned or subject to options held by Mr. Comer. The
Company and Mr. Comer also executed mutual releases of any and all claims
relating to Mr. Comer's employment by the Company or the termination of his
employment.

<PAGE>

PRINCIPAL SHAREHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of February 15, 1998, unless
otherwise indicated, by (a) each shareholder who is known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (b) each director,
(c) each of the Named Executive Officers and (d) all directors and executive
officers of the Company as a group.

SHARES OF COMMON STOCK
NAME BENEFICIALLY OWNED(1)
- -------------------------------- --------------------------------------
AMOUNT PERCENT OF CLASS(2)
------ -------------------

Special Situations Funds (3) 10,000,000(3) 57.2%

John R. Albers 1,288,333(4) 9.8%

Aaron Boxer Rev. Trust 885,000(5) 6.9%

Medtronic Inc. 700,000(6) 5.6%

David J. Chinsky 0 0

Daniel A. Pelak 0(7) 0

Mark W. Sheffert 0 0

Paul D. Benson 97,667 *

William W. Chorske 10,000(8) *

John R. Goodrich 0 0

All directors and executive
officers as a group (3 persons) 0(7) 0

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

* Less than 1% of the outstanding shares

(1) Unless otherwise noted, all of the shares are held by individuals
possessing sole voting and dispositive power with respect to the shares
shown. Shares not outstanding, but deemed beneficially owned by virtue
of the right of a person or member of a group to acquire them within 60
days, are treated as outstanding only when determining the amount and
percent owned by such person or group.

(2) Based upon 12,485,000 outstanding shares of Common Stock as of February
15, 1998.

(3) As set forth in a Schedule 13D filed with the Securities and Exchange
Commission on February 15, 1998, this amount consists of: (i) 2,000,000
shares of Common Stock held by Special

<PAGE>

Situations Private Equity Fund, L.P.; (ii) 2,000,000 shares of Common
Stock issuable to Special Situations Private Equity Fund, L.P. pursuant
to outstanding warrants; (iii) 2,200,000 shares of Common Stock held by
Special Situations Fund III, L.P.; (iv) 2,200,000 shares of Common
Stock issuable to Special Situations Fund III, L.P. pursuant to
outstanding warrants; (v) 800,000 shares of Common Stock held by
Special Situations Cayman Fund, L.P.; and (vi) 800,000 shares of Common
Stock issuable to Special Situations Cayman Fund, L.P. pursuant to
outstanding warrants. Austin W. Marxe and David M. Greenhouse,
principals of the investment advisors to the Funds, are deemed to
beneficially own the securities held by the Funds as reported herein
The address of Special Situations Funds is 153 East 53rd Street, 51st
Floor, New York, New York 10022.

(4) Includes 638,333 shares that Mr. Albers has the right to acquire within
60 days pursuant to the exercise of warrants. Mr. Albers' address is
3825 Gillon Avenue, Dallas, Texas 75205.

(5) Includes 427,500 shares that the Aaron Boxer Rev. Trust has the right
to acquire within 60 days pursuant to the exercise of warrants. The
address of the Aaron Boxer Rev. Trust is 7287 Sidonia Court, Boca
Raton, Florida 33433.

(6) Includes 100,000 shares that Medtronic, Inc. has the right to acquire
within 60 days pursuant to the exercise of warrants. The address of
Medtronic, Inc. is 7000 Central Avenue, N.E., Minneapolis, Minnesota
55432.

(7) Does not include any shares beneficially owned by Medtronic, Inc. Mr.
Pelak is an employee of Medtronic and its designee for election to the
Board of Directors.

(8) Includes 10,000 shares that Mr. Chorske has the right to acquire within
60 days pursuant to the exercise of stock options.

<PAGE>

SELLING SHAREHOLDERS

This Prospectus relates to the offering of 16,788,000 shares of Common
Stock of the Company by the Selling Shareholders named below. The shares being
offered by the Selling Shareholders hereunder include: (i) 8,394,000 currently
outstanding shares of Common Stock issued to the Selling Shareholders in a
private transaction pursuant to the Purchase Agreement, and (ii) 8,394,000
shares of Common Stock issuable pursuant to the exercise of warrants held by the
Selling Shareholders. The Company agreed to provide registration rights pursuant
to the Purchase Agreement, which required the Company to register the 8,394,000
shares of Common Stock issued to the Selling Shareholders and the 8,394,000
shares of Common Stock issuable to the Selling Shareholders upon the exercise of
warrants. The 16,788,000 shares of Common Stock have been registered hereunder
pursuant to such registration rights. The following table sets forth certain
information, as of February 15, 1998, and as adjusted to reflect the sale of the
shares offered hereby, with respect to the beneficial ownership of the Common
Stock by the Selling Shareholders. Unless otherwise indicated, the Selling
Shareholders possess sole voting and investment power with respect to the shares
shown.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
SHARES OF COMMON NUMBER OF COMPLETION OF
STOCK BENEFICIALLY SHARES THE OFFERING(2)
OWNED PRIOR TO THE BEING ------------------------
SELLING SHAREHOLDER OFFERING(1) OFFERED NUMBER % OF CLASS(3)
- ------------------- ----------- ------- ------ -------------
<S> <C> <C> <C> <C>
Special Situations Fund III, L.P.(4) 4,400,000 (5) 4,400,000 0 0
Special Situations Private Equity 4,000,000 (5) 4,000,000 0 0
Fund, L.P.(4)
Special Situations Cayman 1,600,000 (5) 1,600,000 0 0
Fund, L.P.(4)
John R. Albers 1,288,333 (6) 1,200,000 88,333 *
Aaron Boxer Rev. Trust 885,000 (7) 790,000 95,000 *
June Lawrence 4th RGI Trust 400,000 (5) 400,000 0 0
James N. Owens Rev. Trust 400,000 (5) 400,000 0 0
David B. Johnson Family Foundation 400,000 (8) 400,000 0 0
Kenneth Cheng 353,077 (9) 300,000 53,077 *
Lee Wesley 350,000 (5) 350,000 0 0
Betty Johnson 210,000(10) 200,000 10,000 *
Lawrence A. Laukka IRA 200,000 (5) 200,000 0 0
Mary J. Laukka IRA 200,000 (5) 200,000 0 0
Steve Romanek 200,000 (5) 200,000 0 0
Kenneth M. Viste 200,000 (5) 200,000 0 0
John O. Hanson 163,500(11) 100,000 63,500 *
Thomas Petters 160,000 (5) 160,000 0 0
Wallace S. Wells 160,000 (5) 160,000 0 0
David B. Johnson(12) 138,090(13) 62,400 75,690 *
Paul R. Kuehn(12) 138,090(14) 62,400 75,690 *
Jeff Dobbs 138,000(15) 90,000 48,000 *
Robert W. Clark Self-Declared Trust 103,000(16) 100,000 3,000 *
Mike J. Brings 100,000 (5) 100,000 0 0
Isadore J. Goldstein Rev. Living Trust 100,000 (5) 100,000 0 0
Judy Peterson 100,000 (5) 100,000 0 0
VBS General Partnership 100,000 (5) 100,000 0 0
John L. Von Gunten and Jeanette Von 100,000 (5) 100,000 0 0

<PAGE>

Gunten Trust dated 10/18/91
Ila M. Waseka Rev. Living Trust 100,000 (5) 100,000 0 0
Eldon C. Miller(12) 87,630(17) 62,400 25,230 *
Kenneth G. Benson 50,000 (5) 50,000 0 0
Alton B. Meyer, Jr. Rev. Trust 50,000 (5) 50,000 0 0
Linda Kintzel 50,000 (5) 50,000 0 0
John S. and David B. Rydberg 50,000 (5) 50,000 0 0
Donal C. Thomas Trust 50,000 (5) 50,000 0 0
Leola J. Vidger 50,000 (5) 50,000 0 0
Frank E. Walton 50,000 (5) 50,000 0 0
Michael W. Wright 1993 Irrev. GST 50,000 (5) 50,000 0 0
Family Trust
First Trust NA As TTEE for the Dorsey & 50,000 (5) 50,000 0 0
Whitney Master Investment Trust-Wright
Stanley D. Rahm(12) 46,031(18) 20,800 25,231 *
Jeffrey D. Rahm & Susan Rahm Jt/Ten 30,000 (5) 30,000 0 0
Claude Tihon & Berengere Tihon Jt/Ten 30,000 (5) 30,000 0 0
David Heytman & Hazeldell Heytman Jt/Ten 20,000 (5) 20,000 0 0

</TABLE>

- --------------------------------------
* Less than one percent (1%)

(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated as
outstanding only when determining the amount and percentage owned by such person
or group.

(2) This assumes all shares being offered and registered hereunder are sold,
although the Selling Shareholders are not obligated to sell any shares.

(3) Based upon 12,485,000 shares of Common Stock outstanding as of February 15,
1998.

(4) Pursuant to the Purchase Agreement, so long as Special Situations Private
Equity Fund, L.P., Special Situations Fund III, L.P. and Special Situations
Cayman Fund, L.P. (collectively, the "Funds"), individually or in the aggregate,
own 2.5% of the then outstanding shares of Common Stock of the Company, the
Funds have the right to nominate one director on the Board of Directors of the
Company.

(5) One-half of all shares of Common Stock beneficially owned by such Selling
Shareholder is issuable upon the exercise of outstanding warrants.

(6) Includes 638,333 shares issuable to Mr. Albers within 60 days upon the
exercise of warrants.

(7) Includes 427,500 shares issuable to the Aaron Boxer Rev. Trust within 60
days upon the exercise of warrants.

(8) Includes 200,000 shares issuable to the David B. Johnson Family Foundation
within 60 days upon the exercise of warrants. Excludes 138,090 shares
beneficially owned by David B. Johnson.

<PAGE>

(9) Includes 150,000 shares issuable to Mr. Cheng within 60 days upon the
exercise of warrants.

(10) Includes 50,000 shares issuable to Ms. Johnson within 60 days upon the
exercise of warrants.

(11) Includes 3,800 shares held by the John O. Hanson IRA and 70,000 shares
issuable to Mr. Hanson within 60 days upon the exercise of warrants.

(12) Such individual is a principal of Miller, Johnson & Kuehn, Incorporated
("MJK"), which has acted as the Company's placement agent in connection with
private sales of the Company's Common Stock. MJK also makes a market in the
Company's Common Stock. Pursuant to the Purchase Agreement, MJK has the right to
nominate one director on the Board of Directors of the Company, which nominee is
to be mutually acceptable to the Company and MJK, for a period of three years
from the date of the Purchase Agreement.

(13) Includes 106,890 shares issuable to Mr. Johnson within 60 days upon the
exercise of warrants. Excludes 400,000 shares beneficially owned by the David B.
Johnson Family Foundation.

(14) Includes 106,890 shares issuable to Mr. Kuehn within 60 days upon the
exercise of warrants.

(15) Includes 58,000 shares issuable to Mr. Dobbs within 60 days upon the
exercise of warrants.

(16) Includes 3,000 shares held by the Robert W. Clark Trust and 50,000 shares
issuable to the Robert W. Clark Self-Declared Trust within 60 days upon the
exercise of warrants. Mr. Robert W. Clark is trustee for both such trusts.

(17) Includes 56,430 shares issuable to Mr. Miller within 60 days upon the
exercise of warrants.

(18) Includes 35,631 shares issuable to Mr. Rahm within 60 days upon the
exercise of warrants.

<PAGE>

DESCRIPTION OF SECURITIES

The authorized capital stock of the Company consists of 75,000,000
shares of Common Stock (the "Common Stock"), and 1,000,000 shares of
undesignated preferred stock (the "Undesignated Stock"). As of February 15,
1998, there were 12,485,000 shares of Common Stock issued and outstanding, held
by approximately 138 holders of record, and no shares of Undesignated Stock
issued and outstanding. In addition, 11,958,661 shares of Common Stock were
reserved for issuance under the Company's 1993 Stock Option Plan, Employee Stock
Purchase Plan and outstanding options, warrants and convertible securities as of
February 15, 1998.

COMMON STOCK

All outstanding shares of Common Stock, including the Shares offered
hereby, are fully paid and nonassessable. Each share of the outstanding Common
Stock is entitled to participate equally in dividends as and when declared by
the Board of Directors and is entitled to participate equally in any
distribution of net assets made to the shareholders upon liquidation of the
Company. There are no redemption, sinking fund, conversion or preemptive rights
with respect to the shares of Common Stock. All shares of Common Stock have
equal rights and preferences. The holders of Common Stock are entitled to one
vote for each share held of record on all matters voted upon by shareholders and
may not cumulate votes for the election of directors. Accordingly, the owners of
a majority of the shares of Common Stock outstanding may elect all of the
directors if they choose to do so, subject to the rights of the Funds and MJK to
designate directors to be nominated under the Purchase Agreement, and the owners
of the balance of such shares would not be able to elect any directors.

UNDESIGNATED STOCK

Under applicable Minnesota law, no action by the Company's shareholders
is necessary, and only action of the Board of Directors is required, to
authorize the issuance of any Undesignated Stock. The Board of Directors is
empowered to establish, and to designate the name of, each class or series of
the shares of Undesignated Stock and to set the terms of such shares (including
terms with respect to redemption, sinking fund, dividend, liquidation,
preemptive, conversion and voting rights and preferences). The Board of
Directors can issue shares of such class or series to, among other individuals,
the holders of another class or series of preferred stock or to the holders of
Common Stock. Accordingly, the Board of Directors, without shareholder approval,
can issue preferred stock with voting or conversion rights which could adversely
affect the voting power of the holders of the Common Stock. The Undesignated
Stock may have the effect of discouraging an attempt, through acquisition of a
substantial number of shares of Common Stock, to acquire control of the Company
with a view to effecting a merger, sale or exchange of assets or a similar
transaction. For example, the Board of Directors could issue such shares as a
dividend to holders of Common Stock or place such shares privately with
purchasers who may side with the Board of Directors in opposing a takeover bid.

OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES

As of February 15, 1998, the Company had reserved 750,000 shares of
Common Stock under the 1993 Stock Option Plan. As of February 15, 1998, the
Company had outstanding options to purchase an aggregate of 251,147 shares under
the plan and options to purchase an aggregate of 956,000 shares that were not
issued under any formal plan. The weighted average exercise price of outstanding
options is $1.64. As of February 15, 1998, the Company also had warrants to
purchase an aggregate of 8,901,395

<PAGE>

shares of Common Stock at a weighted average exercise price of $1.64 per share,
which are exercisable at various times, the earliest of which expire in December
1999 and the latest of which expire in January, 2008. The outstanding options
and warrants provide for anti-dilution adjustments in the event of certain
mergers, consolidations, reorganizations, recapitalizations, stock dividends,
stock splits or other changes in the corporate structure of the Company. In
addition, options to purchase an aggregate of 200,000 shares are subject to a
weighted-average anti-dilution adjustment for issuances of Common Stock
(including options, warrants and other rights to acquire Common Stock) at a
price of less than $2.52 per share. Holders of the outstanding warrants have
certain demand and incidental registration rights with respect to the shares
issuable upon exercise of the warrants. See "Description of Capital Stock --
Registration Rights."

The Company also has outstanding a subordinated convertible promissory
note in the principal amount of $2,250,000. Up to $2,000,000 principal amount of
this note is convertible, at the option of the holder, into shares of Common
Stock at a conversion price of $3.32 per share. The conversion price of this
note is subject to a weighted-average anti-dilution adjustment for issuances of
Common Stock (including options, warrants and other rights to acquire Common
Stock) at a price of less than $3.32 per share. Additionally, the Company has
outstanding a convertible promissory bridge note in the principal amount of
$1,000,000 that is convertible, at the option of the holder, into shares of
Common Stock at a conversion price of $1.50 per share.

REGISTRATION RIGHTS

All of the shares of Common Stock issuable upon exercise of options
granted or to be granted under the Company's 1993 Stock Option Plan and Employee
Stock Purchase Plan have been registered under the Securities Act. The Company
has filed a Registration Statement on Form S-3 under the Securities Act, which
is currently effective, covering the resale of an aggregate of 1,405,815 shares
of Common Stock and warrants to purchase an aggregate of 332,396 shares of
Common Stock. This registration statement will remain effective until the
Company files its Annual Report on Form 10-KSB for the year ending December 31,
1997, at which time it will lapse. The Company has filed this Registration
Statement covering the resale of an aggregate of 8,394,000 shares of Common
Stock and warrants to purchase an aggregate of 8,394,000 shares of Common Stock
issued in connection with the Company's November, 1997 equity financing. In
addition, holders of certain options, warrants and convertible promissory notes
have certain demand and incidental registration rights with respect to the
shares issuable upon exercise of such options and warrants and conversion of
such notes. In connection with the Company's November, 1997 equity financing,
the holders of substantially all of these securities agreed not to exercise and
to otherwise waive their registration rights until January 1, 2000.

LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION

The Company's Amended and Restated Articles of Incorporation provide
the Company's Board of Directors with the power and authority to limit the
liability of its directors to the fullest extent permitted by the Minnesota
Business Corporation Act. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except liability for (i) any breach of the duty of loyalty to the
Company or its shareholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) dividends or
other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions, (iv) violations of certain Minnesota
securities laws, or (v) any transaction from which the director derives an
improper personal benefit. Liability under federal securities law is not limited
by the Amended and Restated Articles of Incorporation or action by the Company's
Board of Directors.

<PAGE>

The Minnesota Business Corporation Act requires that the Company
indemnify any director, officer or employee made or threatened to be made a
party to a proceeding, by reason of the former or present official capacity of
the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed civil,
criminal, administrative, arbitration or investigative proceeding, including a
derivative action in the name of the Company. Reference is made to the detailed
terms of Section 302A.521 of the Minnesota Business Corporation Act for a
complete statement of such indemnification rights. The Company's Bylaws also
require the Company to provide indemnification to the fullest extent of the
Minnesota Business Corporation Act.

The Company maintains directors' and officers' liability insurance,
including a reimbursement policy in favor of the Company.

Pursuant to the Purchase Agreement, the directors and officers of the
Company are indemnified against certain civil liabilities that they may incur
under the Securities Act in connection with this Prospectus and the related
Registration Statement.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company is aware that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.

CERTAIN ANTI-TAKEOVER PROVISIONS

The Company is subject to the provisions of Sections 302A.671 and
302A.673 of the Minnesota Business Corporation Act. These anti-takeover
provisions may eventually operate to deny shareholders the receipt of a premium
on their Common Stock and may also have a depressive effect on the market price
of the Company's Common Stock. In general, Section 302A.671 provides that the
shares of a corporation acquired in a "control share acquisition" have no voting
rights unless voting rights are approved by the shareholders in a prescribed
manner. A "control share acquisition" is defined as an acquisition of beneficial
ownership of shares that would, when added to all other shares beneficially
owned by the acquiring person, entitle the acquiring person to have voting power
of 20% or more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner, of 10% or more of the
corporation's voting stock. Reference is made to the detailed terms of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.

Pursuant to the Purchase Agreement, so long as the Selling Shareholders
own or have the right to acquire an aggregate of 20% or more of the then
outstanding shares of Common Stock, the Company shall not, without the prior
written consent of the Funds and MJK, (i) effect any reclassification, capital
reorganization or other change of outstanding shares of capital stock of the
Company, (ii) merge, consolidate or enter into any business combination of the
Company with or into another entity (other than a merger of a wholly owned
subsidiary, in which merger the Company shall be the surviving entity), (iii)
sell, lease or otherwise dispose of all or substantially all of its assets or
(iv) liquidate, dissolve or wind-up the Company.

<PAGE>

TRANSFER AGENT

The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, N.A.

VALIDITY OF SHARES

Certain legal matters with respect to the Shares offered hereby will be
passed upon for the Company by Oppenheimer Wolff & Donnelly LLP, Minneapolis,
Minnesota.

EXPERTS

The financial statements of LifeRate Systems, Inc. as of December 31,
1996, 1995 and 1994, included in this prospectus and in the Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

<PAGE>

INDEX TO FINANCIAL STATEMENTS

The following Financial Statements and Independent Auditors' Report
thereon are included herein on the pages indicated:

Report of Independent Auditors F-1

Balance Sheets as of December 31, 1996 and 1995 F-2 - F-3

Statements of Operations for the years ended December 31, 1996, 1995 F-4
and 1994

Statements of Changes in Shareholders' Equity for the years ended F-5 - F-7
December 31, 1996, 1995 and 1994

Statements of Cash Flows for the years ended December 31, 1996, 1995 F-8
and 1994

Notes to Financial Statements F-9 - F-21

Balance Sheets as of September 30, 1997 and December 31, 1996 F-22

Statements of Operations for the nine months ended September 30,
1997 and 1996 F-23

Statements of Cash Flows for the nine months ended September 30,
1997 and 1996 F-24

Notes to Financial Statements F-25

<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
LifeRate Systems, Inc.

We have audited the accompanying balance sheets of LifeRate Systems, Inc. (a
development stage company) as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996, and for the period from July
18, 1990 (inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LifeRate Systems, Inc. (a
development stage company) at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the period from July 18, 1990 (inception) to December
31, 1996, in conformity with generally accepted accounting principles.

As discussed in Note 2 to the financial statements, the Company's recurring
losses and negative cash flow from operations raise substantial doubt about its
ability to continue as a going concern. Management's plans as to these matters
are also described in Note 2. The 1996 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 13, 1997, except for Note 9,
as to which the date is April 1, 1997

F-1

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Balance Sheets

<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,072,000 $7,750,500
Accounts receivable, less allowance of $60,350 in
1996 and $7,500 in 1995 142,400 104,400
Prepaid expenses and other current assets 122,700 61,000
---------- ----------
Total current assets 2,337,100 7,915,900

Furniture and fixtures 177,400 56,200
Computer equipment 837,200 355,800
---------- ----------
1,014,600 412,000
Less accumulated depreciation 325,900 87,300
---------- ----------
688,700 324,700
Software development costs net of amortization of
$100,800 in 1996 50,500 151,300
Other assets -- 11,800

---------- ----------
Total assets $3,076,300 $8,403,700
========== ==========
</TABLE>

F-2

<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 251,700 $ 499,400
Accrued compensation 43,900 244,800
Accrued consulting fees 86,100 382,600
Accrued royalties 36,100 --
Other current liabilities 73,900 1,500
Current portion of notes payable - related parties -- 6,500
Current portion of notes payable 10,800 9,900
Current portion of capitalized lease obligations 1,000 11,500
------------ ------------
Total current liabilities 503,500 1,156,200

Convertible subordinated note 2,250,000 --
Notes payable 1,800 12,600
Capitalized lease obligation -- 1,000
Deferred rent 16,800 28,700
Deferred revenue 151,800 60,900
Shareholders' equity
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares - none in 1996
and 1995
Common stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 3,811,639 in 1996
and 3,474,428 in 1995 17,260,700 14,384,100
Deficit accumulated during the development stage (17,108,300) (7,234,800)
------------ ------------
152,400 7,149,300

Less stock subscriptions receivable -- 5,000
------------ ------------
Total shareholders' equity 152,400 7,144,300
------------ ------------
Total liabilities and shareholders' equity $ 3,076,300 $ 8,403,700
============ ============
</TABLE>

SEE ACCOMPANYING NOTES.

F-3

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Operations

<TABLE>
<CAPTION>
PERIOD FROM
JULY 18, 1990
(DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1996 1995 1994 1996
------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 615,700 $ 263,300 $ 119,700 $ 1,190,300
Cost of revenues 180,400 43,000 -- 223,400
------------ ----------- --------- ------------
Gross profit 435,300 220,300 119,700 966,900

Operating expenses:
Sales and marketing 2,568,800 2,525,800 167,800 5,480,600
Research and development 5,309,900 2,104,500 215,800 8,011,600
General and administrative 2,685,700 1,253,000 607,200 4,904,900
------------ ----------- --------- ------------
Loss from operations (10,129,100) (5,663,000) (871,100) (17,430,200)
Interest income 261,900 97,000 -- 358,900
Interest expense 6,300 29,300 1,400 37,000
------------ ----------- --------- ------------
Net loss $ (9,873,500) $(5,595,300) $(872,500) $(17,108,300)
============ =========== ========= ============

Net loss per share $ (2.61) $ (2.66) $ (.89)
============ =========== =========

Weighted average number of common
shares outstanding 3,783,931 2,105,811 982,456
============ =========== =========
</TABLE>

SEE ACCOMPANYING NOTES.

F-4

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Shareholders' Equity

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
-------------------- DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Founder's common stock issued during July 1990 444,400 $ 1,000 $ -- $ -- $ 1,000
------- --------- --------- -------- ---------
Net loss for the period -- -- (200) -- (200)
------- --------- --------- -------- ---------
Balance December 31, 1990 444,400 1,000 (200) -- 800
Net loss -- -- (3,400) -- (3,400)
------- --------- --------- -------- ---------
Balance December 31, 1991 444,400 1,000 (3,600) -- (2,600)
Common stock issued 392,254 29,400 -- (14,400) 15,000
Net loss -- -- (188,600) -- (188,600)
------- --------- --------- -------- ---------
Balance December 31, 1992 836,654 30,400 (192,200) (14,400) (176,200)
Sale of common stock 32,000 2,400 -- (1,900) 500
Private placement of common stock, net of offering
costs of $30,700 99,999 269,400 -- (25,000) 244,400
Conversion of debt into common stock 25,000 75,000 -- -- 75,000
Repurchase of common stock (17,733) (1,300) -- -- (1,300)
Canceled stock subscriptions (140,000) (10,500) -- 10,500 --
Payments on stock subscription -- -- -- 2,600 2,600
Net loss -- -- (574,800) -- (574,800)
------- --------- --------- -------- ---------
Balance December 31, 1993 (carried forward) 835,920 365,400 (767,000) (28,200) (429,800)

</TABLE>

F-5

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Shareholders' Equity (continued)

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
-------------------------- DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993 (brought forward) 835,920 $ 365,400 $ (767,000) $ (28,200) $ (429,800)
--------- ------------ ----------- --------- ------------
Private placement of common stock, net of offering costs
of $30,700 71,557 183,900 -- -- 183,900
Payments on stock subscriptions -- -- -- 26,000 26,000
Common stock issued for services 19,331 58,000 -- -- 58,000
Canceled stock subscriptions (1,600) (100) -- 100 --
Common stock issued in connection with bridge financing 155,555 700,000 -- -- 700,000
Conversion of accrued salaries into common stock 66,664 300,000 -- -- 300,000
Conversion of notes payable and other indebtedness to
related parties into common stock 26,652 120,000 -- -- 120,000
Sale of common stock 79,997 310,000 -- (125,000) 185,000
Net loss -- -- (872,500) -- (872,500)
--------- ------------ ----------- --------- ------------
Balance December 31, 1994 1,254,076 2,037,200 (1,639,500) (127,100) 270,600
Sale of common stock, net of offering costs of $1,393,744 2,209,353 12,297,400 -- -- 12,297,400
Common stock issued for services 17,665 79,500 -- -- 79,500
Stock subscription canceled as consideration for services
provided -- -- -- 50,000 50,000
Stock subscription canceled (6,666) (30,000) -- 30,000 --
Payments on stock subscriptions -- -- -- 42,100 42,100
Net loss -- -- (5,595,300) -- (5,595,300)
--------- ------------ ----------- --------- ------------
Balance December 31, 1995 (carried forward) 3,474,428 14,384,100 (7,234,800) (5,000) 7,144,300

</TABLE>

F-6

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Shareholders' Equity (continued)

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
------------------------ DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 (brought forward) 3,474,428 $14,384,100 $ (7,234,800) $(5,000) $ 7,144,300
--------- ----------- ------------ ------- -----------
Private placement of common stock, net of offering costs
of $253,846 295,546 1,667,200 -- -- 1,667,200
Payments on stock subscriptions -- -- -- 5,000 5,000
Stock options exercised 41,665 235,400 -- -- 235,400
Value of stock options granted for services rendered -- 974,000 -- -- 974,000
Net loss -- -- (9,873,500) -- (9,873,500)
--------- ----------- ------------ ------- -----------
Balance December 31, 1996 3,811,639 $17,260,700 $(17,108,300) $ -- $ 152,400
========= =========== ============ === ===========
</TABLE>

F-7

SEE ACCOMPANYING NOTES.

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Cash Flows

<TABLE>
<CAPTION>
PERIOD FROM
JULY 18, 1990
(DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1996 1995 1994 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(9,873,500) $ (5,595,300) $ (872,500) $(17,108,300)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 238,600 61,100 18,500 326,500
Amortization 100,800 -- -- 100,800
Value of stock options granted for services rendered 974,000 -- -- 974,000
Convertible subordinated note issued for services
rendered 2,250,000 -- -- 2,250,000
Writedown of software development costs to net
realizable value -- 599,600 -- 599,600
Stock issued for services -- 129,500 58,000 187,500
Changes in operating assets and liabilities:
Accounts receivable (38,000) (80,900) (23,500) (142,400)
Advances to agent -- 108,000 (108,000) --
Prepaids and other current assets (61,700) (61,000) -- (122,700)
Other assets 11,800 (1,200) (10,600) --
Accounts payable (247,700) 381,400 82,500 276,500
Accrued compensation (200,900) (34,700) 225,400 343,900
Accrued consulting fees (296,500) 333,400 8,900 86,100
Accrued royalties 36,100 -- -- 36,100
Other current liabilities 72,400 (1,500) 6,800 84,900
Deferred revenue 90,900 (29,600) 90,500 151,800
Deferred rent (11,900) (8,600) 15,200 16,800
----------- ------------ ----------- ------------
Net cash used in operating activities (6,955,600) (4,199,800) (508,800) (11,938,900)

INVESTING ACTIVITIES
Software development costs -- (750,900) -- (750,900)
Purchase of furniture and equipment (602,600) (332,400) (36,300) (972,400)
----------- ------------ ----------- ------------
Net cash used in investing activities (602,600) (1,083,300) (36,300) (1,723,300)

FINANCING ACTIVITIES
Payments on notes payable and capital lease obligations (27,900) (55,900) (65,100) (161,400)
Stock subscriptions received 5,000 -- -- 5,000
Proceeds from issuance of notes payable -- 51,800 -- 290,200
Proceeds from issuance of common stock 1,902,600 12,424,500 1,009,800 15,600,400
----------- ------------ ----------- ------------
Net cash provided by financing activities 1,879,700 12,420,400 944,700 15,734,200
----------- ------------ ----------- ------------
(Decrease) increase in cash and cash equivalents (5,678,500) 7,137,300 399,600 2,072,000
Cash and cash equivalents at beginning of period 7,750,500 613,200 213,600 --
----------- ------------ ----------- ------------
Cash and cash equivalents at end of period $ 2,072,000 $ 7,750,500 $ 613,200 $ 2,072,000
=========== ============ =========== ============
</TABLE>

SEE ACCOMPANYING NOTES.

F-8

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND DESCRIPTION OF BUSINESS

LifeRate Systems, Inc. (the Company) is a development stage enterprise engaged
in marketing a proprietary software operating system to healthcare providers and
payors throughout the United States to produce information to measure and
quantify the quality and cost of healthcare.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The fair value of the cash
equivalents approximates costs, and these securities are available-for-sale.

FURNITURE AND EQUIPMENT

Furniture and equipment, principally computer equipment, is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets ranging from 3 to 7 years.

NET LOSS PER SHARE

Net loss per share is based on the weighted average number of common shares
outstanding during the period. Common share equivalents, including warrants and
stock options, have not been considered because the impact is antidilutive.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. The Company utilizes the cash basis for income tax filing requirements.

F-9

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes software development costs in accordance with the
provisions of FASB Statement No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software
development costs, including significant product enhancements, begins upon the
establishment of technological feasibility for the product and concludes when
the product is available for release to customers. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in software and hardware
technology. During 1995, the Company recorded write-downs to the net realizable
value of software development costs totaling $599,600 due to pending product
upgrades.

REVENUE RECOGNITION

The Company records revenue on a percentage of completion basis relating to its
services for configuring and assisting in defining the requirements of the
customer's particular system. The Company also recognizes revenue from recurring
monthly transaction fees that vary from customer to customer based upon the
number of providers and patients who are the subjects of the collected and
reported data.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.

F-10

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," but
applies Accounting Principles Board Opinion No. 25 (APB) 25) and related
interpretations in accounting for its plans. Under APB 25, when the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

2. CONTINUED EXISTENCE

The Company has incurred losses since inception and has an accumulated deficit
of $17,108,300 at December 31, 1996. The Company's ability to continue as a
going concern and the realization of its assets and orderly satisfaction of its
liabilities are dependent on obtaining additional funds from outside sources and
generating sufficient working capital from operations. The Company is currently
exploring financing alternatives and anticipates completing a financing
transaction in 1997. The Company believes that the successful completion of a
financing transaction will satisfy its cash requirements at least through the
end of 1997. However, there can be no assurance that the Company will be
successful in completing a financing transaction.

3. DEBT

NOTES PAYABLE - RELATED PARTY

The Company entered into a settlement agreement with a former employee and
director to remit unpaid compensation amounting to $6,500, which was paid in
full during 1996.

F-11

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

3. DEBT (CONTINUED)

NOTES PAYABLE - OTHER

In 1995, the Company entered into a note with a bank that bears interest at the
bank's reference rate plus 1%. The balance on this note was $12,600 and $22,500
at December 31, 1996 and 1995, respectively. The note requires monthly payments
of $970, including interest. The note is secured by the Company's assets. Future
minimum payments on this note are as follows:

1997 $10,800
1998 1,800
-------
$12,600
=======

The carrying value of the notes payable in the balance sheet approximates fair
value.

4. COMMON STOCK

In December 1994, the Company raised $700,000 through the sale of 155,555 shares
of common stock. Each investor that participated in this stock issue was issued
a warrant to purchase one share of common stock at a price of $4.50 per share
for each share purchased. The warrants expire in December 1999.

In December 1994, three of the Company's employees converted $300,000 of accrued
salaries, net of accrued payroll taxes of $175,000, into 66,664 shares of common
stock at a conversion price of $4.50 per share. In addition, two of the
employees converted amounts owed to them by the Company plus accrued interest
totaling $120,000 into 26,652 shares of common stock.

On December 9, 1994, the Company's Board of Directors approved a 1-for-7.5
reverse stock split, which was approved by the Company's shareholders on
December 29, 1994. Accordingly, all per share, weighted average share, and stock
option information has been restated to reflect the split.

F-12

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

4. COMMON STOCK (CONTINUED)

In March 1995, the Company sold 1,046,500 shares of common stock in an initial
public offering. The offering resulted in net proceeds to the Company of
$4,294,700. In connection with the public offering the Company granted the
underwriter warrants to purchase 91,000 shares of common stock at $6.00 per
share. The warrants may be exercised over a four year period beginning March 16,
1996.

In December 1995, the Company sold 600,000 shares of common stock to Medtronic,
Inc., resulting in net proceeds to the Company of $4,782,400. In connection with
the sale of common stock, the Company entered into a license and development
agreement with Medtronic (see Note 10).

Also in December 1995, the Company sold 562,853 shares of common stock in a
private placement. The sale resulted in net proceeds to the Company of
$3,220,300.

In January 1996, the Company sold an additional 295,546 shares of common stock
resulting in net proceeds to the Company of $1,667,200. In connection with the
sale, the Company has agreed to grant the underwriter warrants to purchase
shares equal to 10% of the total shares sold in the private placement. The
warrants are exercisable at a price of $6.50 and remain outstanding for a period
of ten years.

5. STOCK OPTIONS

On December 3, 1993, the Company adopted the LifeRate Systems, Inc. 1993 Stock
Option Plan (the "Plan"). The Company has reserved 750,000 shares for issuance
to employees and consultants as either incentive based options or non-qualified
options. Under the Plan, incentive stock options may be granted at prices not
less than the fair market value of the Company's common stock at the grant date.
The grant price of non-qualified options is determined by the Board Committee
administering the Plan, but the grant price must be at least 85% of the fair
market value of the common stock as of the grant date. Options are exercisable
based on terms set by the Board Committee administering the Plan, and the option
term may not exceed ten years from the date of grant.

F-13

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

5. STOCK OPTIONS (CONTINUED)

Option activity is summarized as follows:

WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
-------------------------------

Balance December 31, 1993 44,443 $3.00
Granted 39,999 3.75
----------
Balance December 31, 1994 84,442 3.36
Granted 271,665 5.77
Canceled (80,000) 5.875
----------
Balance December 31, 1995 276,107 5.00
Granted 354,333 8.02
Exercised (41,665) 5.66
Canceled 73,333 7.35
----------
Balance December 31, 1996 515,442 6.69
==========

The following table summarizes information about stock options outstanding at
December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 LIFE EXERCISE PRICE 1996 EXERCISE PRICE
- ----------------------- --------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
$3.00 to $4.50 114,442 7 Years $ 3.66 104,439 $3.58
$5.1875 to $8.625 251,667 8 Years 6.38 203,004 6.36
$9.375 to $10.625 149,333 9 Years 11.42 90,889 9.46
--------- ---------
515,442 6.69 398,332 6.34
========= =========
</TABLE>

The weighted-average fair value of options granted during the years ended
December 31, 1996 and 1995 was $4.69 and $3.27, respectively.

F-14

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

5. STOCK OPTIONS (CONTINUED)

Exercise prices for options outstanding as of December 31, 1996 ranged from
$3.00 to $10.625. The number of options exercisable as of December 31, 1996,
1995 and 1994 was 398,332, 176,111 and 31,108, respectively, at weighted average
exercise prices of $6.34, $3.93 and $3.00 per share, respectively.

Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for both
1996 and 1996: risk-free interest rate of 6%; dividend yield of 0%; volatility
factor of the expected market price of the Company's common stock of .642; and a
weighted-average expected life of the option of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

F-15

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

5. STOCK OPTIONS (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

1996 1995
------------------------------

Pro forma net loss $(7,930,700) $(5,931,700)
Pro forma loss per share $(2.10) $(2.82)

Note: The pro forma effect on the net loss for 1996 and 1995 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.

6. INCOME TAXES

The tax effects of significant components of the Company's deferred tax assets
and liabilities are as follows:

1996 1995
-----------------------------
Deferred tax assets:
Net operating loss carryforwards $6,704,000 $2,579,900
Deferred rent 6,700 11,500
Deferred revenue 60,700 24,400
Accrued salaries 17,200 91,600
Accrued consulting fees 34,400 153,000

Deferred tax liabilities:
Depreciation 56,300 8,000
-----------------------------
Net deferred tax assets 6,766,700 2,852,400
Valuation allowance 6,766,700 2,852,400
-----------------------------
$ - $ -
=============================

F-16

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

6. INCOME TAXES (CONTINUED)

At December 31, 1996, the Company had net operating loss carryforwards of
approximately $16,760,000 that expire at various times through the year 2011.
The Company's ability to utilize these carryforwards to offset future taxable
income is subject to certain restrictions under Section 382 of the Internal
Revenue Code in the event of certain changes in the equity ownership of the
Company. The Company experienced ownership changes in 1993 and 1995. However,
the Company does not believe that such changes will significantly limit its
ability to use the existing net operating loss carryforwards.

7. COMMITMENTS

LEASES

The Company leases its office facilities under an operating lease that expires
September 30, 2001. Operating expenses including maintenance, utilities, real
estate taxes and insurance are paid by the Company. Total rent expense under the
operating lease was $107,104 and $72,300 for the years ended December 31, 1996
and 1995, respectively. Subsequent to December 31, 1996, the Company leased
office equipment under operating leases that expire December 31, 1999. Future
minimum rental payments required under the leases are as follows:

Year ending December 31:
1997 $ 243,131
1998 237,644
1999 277,191
2000 217,307
2001 139,329
------------
$1,114,602
============

F-17

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

8. MARKETING AGREEMENTS

In November 1994, the Company entered into a marketing arrangement with Clinical
Sales and Services, Inc. (CSSI), pursuant to which CSSI agreed to assist the
Company in coordinating and conducting marketing of the Company's system to
healthcare providers and payors. The agreement had an initial term of three
years and was renewable on an annual basis thereafter. Under this agreement, the
Company issued CSSI 10,666 shares of common stock for services rendered during
1994. Beginning November 1, 1994, the Company agreed to pay a 20% commission on
sales to healthcare payors, with a 15% commission on revenues from maintenance
and support relating to such sales. The Company paid CSSI a monthly draw of
$30,000 to be credited against future commissions. At December 31, 1994, total
payments of $108,000 had been made to CSSI under this arrangement.

Under this agreement, the Company also granted CSSI options to purchase 33,332
shares of common stock at an exercise price of $3.00 per share. The options were
granted outside of the Company's 1993 Stock Option Plan. CSSI exercised 6,666
options in July 1994 and the remaining 26,666 options in December 1994. The
proceeds from the December 1994 option exercise were received on January 27,
1995.

In September 1995, the Company entered into a new sales and marketing agreement
with CSSI. The agreement called for monthly business development fees of $30,000
to be offset by commissions earned by CSSI on product sales. The amount of
business development fees paid per month is subject to adjustment by the
parties. In addition, the Company granted certain individuals affiliated with
CSSI options to purchase 100,000 shares of the Company's common stock. The
options are exercisable at a price of $5.875 and remain outstanding for ten
years from the date of grant.

F-18

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

8. MARKETING AGREEMENTS (CONTINUED)

In December 1995, the Company's Board of Directors approved the direct
employment of CSSI personnel by the Company and the termination of the September
1995 sales and marketing agreement. In connection with this resolution, the
Company granted options for the purchase of 299,000 shares of the Company's
common stock to certain CSSI individuals. These options were granted at exercise
prices ranging from $7.13 to $9.00 per share. During 1996, these options were
subsequently canceled.

Expenses incurred in 1996 and 1995 by the Company related to CSSI business
development fees and other costs amounted to $-0- and $1,650,000, respectively.

9. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS

In 1995, the Company entered into an agreement with a physician group, of which
a doctor in the group is a member of the Company's Board of Directors. The
agreement called for the physician group to assist in the development and
implementation of practice guidelines and clinical outcomes associated with the
Company's software products. In 1995 the Company incurred expense of $150,000
related to assistance provided by the physician group and recorded $50,000 of
revenue for system design work and implementation. In addition, the agreement
called for the Company to issue the physician group shares of common stock if
certain product sales levels were attained and pay royalties on sales of the
cardiovascular system and sales of the Company's database. In March 1997, this
agreement was terminated. The Company issued the physician group a $2,250,000
convertible subordinated note for services previously rendered by the physician
group. The note matures on April 1, 2002 and bears interest at 10% per year. Of
the interest incurred, 50% will be payable each year, with the remainder due
upon maturity of the note. The physician group may convert up to $2,000,000 of
the convertible subordinated note into common stock at a conversion rate of
$3.60 per share, subject to certain antidilution provisions.

F-19

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

9. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS (CONTINUED)

In July 1995, the Company entered into a license agreement with an advisor to
the Company. The agreement called for the Company to grant to the advisor a
license to utilize software developed by the advisor at one healthcare facility.
In addition, the Company has agreed to pay to the advisor a royalty of 7.5%
through December 31, 1998, and 5% thereafter on certain products sales. In 1996,
the Company incurred royalty expense of $46,200, under the agreement. No
royalties were incurred under the agreement in 1995. In connection with the
agreement, the Company granted the advisor options to purchase 26,000 shares of
the Company's common stock at an exercise price of $4.50 per share. In March
1997, this agreement was modified. Under the terms of the modified agreement,
after March 31, 1997, no royalties will be due until the sooner of the Company
reaching $20,000,000 of cumulative revenue or January 1, 1999, at which time the
Company will pay royalties of 3% of gross sales to the physician. The Company
will pay the physician royalties of 3.6% on all gross revenues once the Company
has reached $100,000,000 of gross revenues. In addition, the Company has agreed
to make certain milestone payments aggregating $450,000 based upon the Company
reaching certain revenue goals and has agreed to pay the physician $100,000 per
year for the next five years under a consulting agreement. Also, the Company
granted the physician an option to purchase 550,000 shares of common stock at
$2.625 per share for assistance with the development of the Company's system.
The fair value of these options at the date of grant was $924,000.

10. MEDTRONIC AGREEMENT

In December 1995, the Company entered into a license and development agreement
with Medtronic, Inc. Under the agreement, the Company granted Medtronic a
30-year world-wide, royalty free license relating to the sale and use of the
Company's systems sold by Medtronic under the agreement. The Company has agreed
to pay a commission to Medtronic relating to any assessment, installation,
training, data conversion and monthly service fees. In addition, the Company has
agreed to install its system in certain clinical sites specified by Medtronic on
a preferred pricing basis, to install its system at one site specified by
Medtronic at no cost and to engage with Medtronic in joint development of
products and services.

F-20

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements

December 31, 1996

11. SUPPLEMENTAL CASH FLOW INFORMATION

The Company entered into the following non-cash transactions:

<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Stock subscription receivable canceled as
consideration for services provided $ - $50,000 $ -
Conversion of accounts and notes payable into
common stock - - 300,000
Note payable issued for contribution of
furniture and equipment - - 120,000

</TABLE>

12. SUBSEQUENT EVENTS

In January 1997, the Company issued a standby letter of credit in the amount of
$50,000, expiring December 31, 2001, which is being maintained to support the
installation of software. The agreement provides for a reduction of the letter
of credit by $10,000 each at October 1, 1997, October 1, 1998, October 1, 1999
and October 1, 2000. Partial draws are not permitted.

13. MAJOR CUSTOMERS

In 1996, the Company had two customers that accounted for 55.8% and 11.1% of
revenue, respectively. In 1995, one customer accounted for 19.0% of revenue.

14. SUBSEQUENT EVENTS (unaudited)

In November 1997, the Company sold 4,290,000 shares of common stock
resulting in net proceeds of $1,964,400. In addition, the Company converted
approximately $558,000 of convertible notes payable into 365,550 shares of
common stock. The Company also amended its remaining convertible debt
obligations which provide that no interest would accrue under the terms of the
notes and that any accrued interest would be forfeited. In January 1998, the
Company sold an additional 4,000,000 shares of common stock resulting in net
proceeds to the Company of $1,958,000.

Effective December 15, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128 (Statement 128). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the Statement 128
requirements. Diluted earnings per share is not presented as the effect of
outstanding options and warrants are antidilutive.

F-21

<PAGE>

LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1997 1996
------------ ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 81,200 $ 2,072,000
Accounts receivable, less allowance of $22,900 at September 30,
1997 and $60,400 at December 31, 1996 193,700 142,400
Prepaid expenses and other current assets 151,700 122,700
------------ ------------
Total current assets 426,600 2,337,100

Furniture and fixtures 206,100 177,400
Computer equipment 840,600 837,200
------------ ------------
1,046,700 1,014,600
Less accumulated depreciation 547,000 325,900
------------ ------------
499,700 688,700
Software development costs, net of amortization of $151,300 at
September 30, 1997 and $100,800 at December 31, 1996 -- 50,500
------------ ------------
Total Assets $ 926,300 $ 3,076,300
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 485,200 $ 417,800
Accrued interest 56,200 --
Other current liabilities 15,600 73,900
Current portion of convertible notes payable-related parties 1,104,000 --
Current portion of notes payable 504,500 10,800
Current portion of capitalized lease obligations 8,700 1,000
------------ ------------
Total current liabilities 2,174,200 503,500

Convertible subordinated note 2,250,000 2,250,000
Accrued interest 104,600 --
Notes payable -- 1,800
Capitalized lease obligation 5,000 --
Deferred rent 7,900 16,800
Deferred revenue 248,500 151,800
Shareholders' equity (deficit):
Preferred stock, no par value: Authorized shares - 1,000,000
Issued and outstanding shares-none in 1997 and 1996
Common stock, no par value: Authorized shares - 20,000,000
Issued and outstanding shares - 3,824,755 at September 30, 1997
and 3,811,639 at December 31, 1996 17,299,900 17,260,700
Deficit accumulated during the development stage (21,163,800) (17,108,300)
------------ ------------
Total shareholders' equity (deficit) (3,863,900) 152,400
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 926,300 $ 3,076,300
============ ============
</TABLE>

Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.

F-22

<PAGE>

LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
Three Months Nine Months July 18, 1990
Ended September 30 Ended September 30 (Date of
--------------------------- --------------------------- Inception) to
1997 1996 1997 1996 September 30 1997
----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 122,500 $ 49,200 $ 366,100 $ 308,500 $ 1,556,400
Cost of revenues 134,600 220,000 508,400 711,200 1,562,000
----------- ----------- ----------- ----------- ------------
Gross profit (12,100) (170,800) (142,300) (402,700) (5,600)

Operating expenses:
Sales and marketing 281,600 443,500 1,020,600 1,268,800 5,671,000
Research and development 244,500 564,900 1,038,000 1,617,200 9,049,600
General and administrative 432,700 700,200 1,695,300 1,911,100 6,600,200
----------- ----------- ----------- ----------- ------------
Loss from operations (970,900) (1,879,400) (3,896,200) (5,199,800) (21,326,400)
Interest income 4,100 60,200 26,000 228,300 384,900
Interest expense 113,600 2,300 185,300 5,000 222,300
----------- ----------- ----------- ----------- ------------

Net loss $(1,080,400) $(1,821,500) $(4,055,500) $(4,976,500) $(21,163,800)
=========== =========== =========== =========== ============

Net loss per share $ (0.28) $ (0.48) $ (1.06) $ (1.27)
=========== =========== =========== ===========

Weighted average number of common
shares outstanding 3,824,755 3,811,639 3,821,390 3,931,561
=========== =========== =========== ===========
</TABLE>

See accompanying notes

F-23

<PAGE>

LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
NINE MONTHS ENDED INCEPTION) TO
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1997 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,055,500) $(4,976,500) $(21,163,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 292,900 125,700 720,200
Writedown of software development costs to net realizable value -- -- 599,600
Stock issued for services -- -- 187,500
Value of stock options granted for services rendered 8,300 -- 982,300
Convertible subordinated note issued for services rendered -- -- 2,250,000
Changes in operating assets and liabilities:
Accounts receivable (51,300) (72,600) (193,700)
Prepaid and other current assets 16,300 (53,100) (106,400)
Other assets -- 11,800 --
Accounts payable and other accrued liabilities 9,100 (288,500) 836,600
Accrued interest 160,800 -- 160,800
Deferred revenue 96,700 258,100 248,500
Deferred rent (8,900) (8,900) 7,900
----------- ----------- ------------
Net cash used in operating activities (3,531,600) (5,004,000) (15,470,500)

INVESTING ACTIVITIES
Software development costs -- -- (750,900)
Purchase of furniture and equipment (32,100) (523,900) (1,004,500)
----------- ----------- ------------
Net cash used in investing activities (32,100) (523,900) (1,755,400)

FINANCING ACTIVITIES
Payments on notes payable and capital lease obligations (12,900) (22,200) (174,300)
Stock subscription received -- 5,000 5,000
Proceeds from issuance of notes payable and capital lease obligations 1,554,900 -- 1,845,100
Proceeds from issuance of common stock 30,900 1,908,900 15,631,300
----------- ----------- ------------
Net cash provided by financing activities 1,572,900 1,891,700 17,307,100
----------- ----------- ------------

Increase (Decrease) in cash and cash equivalents (1,990,800) (3,636,200) 81,200
Cash and cash equivalents at beginning of period 2,072,000 7,750,500 --
----------- ----------- ------------
Cash and cash equivalents at end of period $ 81,200 $ 4,114,300 $ 81,200
=========== =========== ============

</TABLE>

See accompanying notes

F-24

<PAGE>

LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 1997

1. Organization and Description of Business

LifeRate Systems, Inc. is a development stage enterprise engaged in
marketing proprietary clinical software systems to health care
providers to produce information to measure and quantify the quality
and cost of health care.

2. Basis of Presentation

The financial information presented as of September 30, 1997 and 1996
has been prepared from the books and records without audit. Financial
information as of December 31, 1996 is based on audited financial
statements of LifeRate Systems, Inc. but does not include all
disclosures required by generally accepted accounting principles. In
the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the
financial information for the periods indicated have been included. For
further information regarding the Company's accounting policies, refer
to the financial statements and attached notes included in the
Company's Form 10-KSB for the fiscal year ended December 31, 1996 as
filed with the Securities and Exchange Commission.

3. Net Loss Per Share

Effective December 15, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128 (Statement 128). Statement 128
replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary,
restated to conform to the Statement 128 requirements. Diluted earnings
per share is not presented as the effect of outstanding options and
warrants are antidilutive.

4. Reclassified

Prior year amounts have been reclassified to match the current year
presentation.

5. Subsequent Events

In November 1997, the Company sold 4,290,000 shares of common stock
resulting in net proceeds of $1,964,400. In addition, the Company
converted approximately $558,000 of convertible notes payable into
365,550 shares of common stock. The Company also amended its remaining
convertible debt obligations which provide that no interest would
accrue under the terms of the notes and that any accrued interest would
be forfeited. In January 1998, the Company sold an additional 4,000,000
shares of common stock resulting in net proceeds to the Company of
$1,958,000.

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article IX of the Company's Amended and Restated Articles of
Incorporation provides the Company's Board of Directors with the power and
authority to limit the liability of its directors to the fullest extent
permitted by the Minnesota Business Corporation Act. Specifically, directors of
the Company will not be personally liable for monetary damages for breach of
fiduciary duty as directors, except liability for (i) any breach of the duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law,
(iii) dividends or other distributions of corporate assets that are in
contravention of certain statutory or contractual restrictions, (iv) violations
of certain Minnesota securities laws, or (v) any transaction from which the
director derives an improper personal benefit. Liability under federal
securities law is not limited by the Amended and Restated Articles of
Incorporation or action by the Company's Board of Directors.

The Company maintains directors' and officers' liability insurance,
including a reimbursement policy in favor of the Company.

<PAGE>

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth estimated expenses incurred by the
Company in connection with the issuance and distribution of the Shares being
registered. All such expenses are estimated except for the SEC registration fee.

SEC registration fee........................................ $1,622.50
Printing expenses........................................... 2,500
Fees and expenses of counsel for the Company................ 10,000
Fees and expenses of accountants for Company................ 4,000
Blue sky fees and expenses.................................. 1,000
Miscellaneous............................................... 5,877.50
---------

*Total............................................. $ 25,000

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

* None of the expenses listed above will be borne by the Selling
Shareholders.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

Since February 15, 1995, the Company has issued the following
securities without registration under the Securities Act:

1. In December, 1995, the Company issued to Medtronic, Inc. 600,000 shares
of Common Stock at a price of $8.00 per share for a total purchase
price of $4,800,000.

2. In December, 1995, the Company issued an aggregate of 562,853 shares of
Common Stock to accredited investors at a price of $6.50 per share for
a total purchase price of approximately $3,658,545. In connection
therewith, the Company issued to a selling agent a warrant to purchase
56,286 shares of Common Stock.

3. In January, 1996, the Company issued an aggregate of 295,546 shares of
Common Stock to accredited investors at a price of $6.50 per share for
a total purchase price of $1,921,049. In connection therewith, the
Company issued to a selling agent a warrant to purchase 29,555 shares
of Common Stock.

4. In March, 1997, the Company issued a convertible subordinated
promissory note to The Atlanta Cardiology Group, P.C. ("ACG") in the
principal amount of $2,250,000, maturing on April 1, 2002. As
originally issued, the note accrued interest at the rate of 10% per
year and interest was payable at the rate of 5% per year, with the
remainder payable at the maturity date. Up to $2,000,000 of the
principal amount of the note is convertible by ACG into Common Stock at
the rate of $3.32 per share, subject to adjustment in certain cases to
protect ACG from certain dilutive events. This note was issued in
exchange for the cancellation of a royalty agreement with ACG. In
connection with the November, 1997 equity financing, this note was
amended to be non-interest bearing.

5. In May, 1997, the Company issued to Medtronic, Inc. a convertible
promissory note in the principal amount of $1,000,000 and a warrant to
purchase 100,000 shares of Common Stock at

<PAGE>

an exercise price of the lower of $2.00 per share or the average price
per share of Common Stock paid by all purchasers of Common Stock in the
Company's next equity financing. In connection with the November, 1997
equity financing, the warrant was amended to reflect an exercise price
of $.50 per share. As originally issued, the note was convertible, at
the option of Medtronic, Inc., into Common Stock at a conversion price
of $2.00 per share and bore interest at the prime rate. In connection
with the November, 1997 equity financing, the note was amended to
reflect a conversion rate of $1.50 per share and to be non-interest
bearing.

6. In July, 1997, the Company issued to accredited investors warrants to
purchase an aggregate of 50,000 shares of Common Stock exercisable at a
price of $2.00 per share and convertible promissory notes in an
aggregate principal amount of $500,000. In connection therewith, the
Company issued to a selling agent a warrant to purchase 25,000 shares
of Common Stock. In November, 1997, these notes were converted into an
aggregate of 250,000 shares of Common Stock a conversion rate of $2.00
per share.

7. In October, 1997, the Company issued a convertible promissory note to
each of the Company's then non-employee directors in the principal
amount of $5,775 and in the aggregate of $46,200. The Company repaid a
total of $40,425, without interest, to seven of these non-employee
directors from the proceeds of the November, 1997 equity financing, and
the balance of $5,775 owed to one director was converted into 11,550
shares of Common Stock at a price of $.50 per share.

8. In November, 1997, the Company issued an aggregate of 4,394,000 shares
of Common Stock to accredited investors. An aggregate of 2,500,000
shares were sold at a price of $.50 per share, an aggregate of
1,790,000 shares were sold for $.56 per share, and an aggregate of
104,000 shares were issued upon cancellation of promissory notes at
$.50 per share. In addition, each investor was issued a warrant to
purchase one share of Common Stock at a price of $1.50 per share for
each share purchased.

9. In January, 1998, the Company issued an aggregate of 4,000,000 shares
of Common Stock to accredited investors. An aggregate of 2,500,000
shares were sold at a price of $.50 per share and an aggregate of
1,500,000 shares were sold for $.56 per share. In addition, each
investor was issued a warrant to purchase one share of Common Stock at
a price of $1.50 per share for each share purchased.

No underwriting commissions or discounts were paid with respect to the
sales of the unregistered securities described above. In addition, all of the
above sales were made in reliance on either Section 4(2) of the Securities Act
as transactions by an issuer not involving any public offering or Regulation D
of the Securities Act. In all such transactions, certain inquiries were made by
the Company to establish that such sales qualified for such exemption from the
registration requirements. In particular, the Company confirmed that with
respect to the exemption claimed under Section 4(2) of the Securities Act (i)
all offers of sales and sales were made by personal contact from officers and
directors of the Company or other persons closely associated with the Company,
(ii) each investor made representations that he or she was sophisticated in
relation to this investment (and the Company has no reason to believe that such
representations were incorrect), (iii) each purchaser gave assurance of
investment intent and the certificates for the shares bear a legend accordingly,
and (iv) offers and sales within any offering were made to a limited number of
persons.

<PAGE>

ITEM 27. EXHIBITS.

EXHIBIT
NO. DESCRIPTION
- --- -----------

3.1 Amended and Restated Articles of Incorporation.

3.2 Amended and Restated Bylaws, as amended.

4.1 Form of the Company's Common Stock Certificate.

4.2 Amended and Restated Articles of Incorporation (filed as Exhibit 3.1).

4.3 Amended and Restated Bylaws, as amended (filed as Exhibit 3.2).

4.4 Form of Warrant dated December, 1994 to purchase shares of Common Stock
issued to investors in connection with the Company's December, 1994
Private Placement.

4.5 Form of Warrant dated March, 1995 to purchase 91,000 shares of Common
Stock issued to Principals of Miller Johnson & Kuehn in connection with
the Company's Initial Public Offering.

4.6 Form of Warrant dated December, 1995 to purchase 56,286 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn in
connection with the Company's December, 1995 Private Placement.

4.7 Form of Warrant dated January, 1996 to purchase 29,555 shares of Common
Stock issued to Principals of Miller Johnson & Kuehn in connection with
the Company's January, 1996 Private Placement.

4.8 Warrant dated May 12, 1997 to purchase 100,000 shares of Common Stock
issued to Medtronic, Inc.

4.9 Form of Warrant to purchase shares of Common Stock of the Company
issued to investors in connection with the July, 1997 Bridge Financing.

4.10 Form of Warrant dated July 21, 1997 to purchase 29,555 shares of Common
Stock to Principals of Miller Johnson & Kuehn in connection with the
Company's July, 1997 Bridge Financing.

4.11 Form of Warrant to Purchase Common Stock of the Company issued in
connection with the November, 1997 Equity Financing.

5.1 Opinion and Consent of Oppenheimer Wolff & Donnelly LLP.

10.1 1993 Stock Option Plan, as amended.

10.2 Form Incentive Stock Option Agreement for Employees.

<PAGE>

EXHIBIT
NO. DESCRIPTION
- --- -----------

10.3 Form Non-Statutory Stock Option Agreement for Non-Employees.

10.4 Employee Stock Purchase Plan, as amended.

10.5 Form of Employment Agreement.

10.6 Lease Agreement with Alpha Associates, Inc. dated April 30, 1993.

10.7 Agreement with Clinical Sales and Service, Inc., dated July 1, 1994.

10.8 Letter Agreement with The Atlanta Cardiology Group, dated September 28,
1994 (confidential portions have been omitted and filed with the
Secretary of the Commission).

10.9 Agreement with Clinical Sales and Service, Inc., dated November 1,
1994.

10.10 Amendment to Marketing Agreement with Clinical Sales and Service, Inc.,
dated December 31, 1994.

10.11 Promissory Note, dated January 24, 1995, from Paul Benson to the
Company.

10.12 Computer Software Purchase Agreement, dated July 2, 1995, between the
Company, Anthony Furnary, M.D. and APF, LLC.

10.13 Sales and Marketing Services Agreement, dated as of September 18, 1995,
between the Company and Clinical Sales and Services, Inc.

10.14 Investment Agreement, dated as of December 26, 1995 between the Company
and Medtronic, Inc.

10.15 License and Development Agreement, dated as of December 26, 1995
between the Company and Medtronic, Inc.

10.16 Shareholder Voting Agreement, dated as of December 26, 1995 by and
among the Company, Medtronic, Inc., Donna J. Edmonds, Jeffrey B. Comer,
David W. Haskin and Paul D. Benson.

10.17 Stock Option Agreement, dated April 29, 1996, between the Company and
William W. Chorske.

10.18 Agreement, dated June 4, 1996, between the Company and Jeffrey B.
Comer.

10.19 Non-Statutory Stock Option Agreement, dated June 6, 1995, between the
Company and Jeffrey B. Comer.

10.20 Agreement, dated June 5, 1996, between the Company and David W. Haskin.

<PAGE>

EXHIBIT
NO. DESCRIPTION
- --- -----------

10.21 Agreement, dated September 1, 1996, between the Company and William
Knopf, M.D.

10.22 Non-Statutory Stock Option Agreement dated September 1, 1996, between
the Company and William Knopf, M.D.

10.23 Non-Statutory Stock Option Agreement, dated September 1, 1996, between
the Company and Donna J. Edmonds.

10.24 Agreement, dated September 25, 1996, between the Company and Donna J.
Edmonds.

10.25 Agreement, dated December 18, 1996, between the Company and National
Jewish Center (confidential portions have been omitted and filed with
the Secretary of the Commission).

10.26 Technical Support Agreement, dated as of December 18, 1996, between the
Company and National Jewish Center.

10.27 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
26,000 shares between the Company and APF, LLC.

10.28 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
10,333 shares between the Company and APF, LLC.

10.29 Non-Statutory Stock Option Agreement, dated March 24, 1997, covering
550,000 shares between the Company and APF, LLC.

10.30 Master Agreement, dated March 25, 1997, among the Company, Anthony
Furnary, M.D. and APF, LLC.

10.31 Modification Agreement, dated March 25, 1997, among the Company,
Anthony Furnary, M.D. and APF, LLC.

10.32 Agreement, dated March 28, 1997 between The Company and Atlanta
Cardiology Group, P.C.

10.33 Convertible Subordinated Promissory Note, dated March 28, 1997, issued
by the Company to The Atlanta Cardiology Group, P.C.

10.34 Mutual Release, dated March 28, 1997, between the Company and The
Atlanta Cardiology Group, P.C.

10.35 Note dated May 12, 1997 in the principal amount of $1,000,000 issued to
Medtronic, Inc.

10.36 Employment Agreement, dated August 18, 1997, between the Company and
David J. Chinsky.

<PAGE>

EXHIBIT
NO. DESCRIPTION
- --- -----------

10.37 Letter Agreement, dated November 10, 1997, among the Company, APF, LLC
and Anthony P. Furnary, M.D.

10.38 Letter Agreement, dated November 10, 1997, between the Company and the
Atlanta Cardiology Group, P.C.

10.39 Letter Agreement, dated November 10, 1997, between the Company and
Medtronic, Inc.

10.40 Amendment to Employment Agreement, dated November 13, 1997, between the
Company and David J. Chinsky.

10.41 Non-Statutory Stock Option Agreement, dated November 13, 1997, between
the Company and David J. Chinsky.

10.42 Securities Purchase Agreement, dated as of November 14, 1997, among the
Company and the Purchasers. Omitted from this Exhibit, as filed, are
the exhibits and schedules referenced in such agreement. The Company
will furnish supplementally a copy of any such exhibits and schedules
to the Commission upon request.

23.1 Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1).

23.2 Consent of Independent Auditors.

24.1 Power of Attorney (included on page II-9 of this Registration
Statement).

27.1. Financial Data Schedule.

ITEM 28. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;

<PAGE>

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis and State of Minnesota, on February 24,
1998.

LIFERATE SYSTEMS, INC.

By /s/ David J. Chinsky
------------------------------------------
David J. Chinsky
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David J. Chinsky, as his true and lawful
attorney-in-fact and agent, with full powers of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to this Registration
Statement, and any additional Registration Statements filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.

Signatures Title Date
- ---------- ----- ----

/s/ David J. Chinsky President and Chief Executive February 24, 1998
- -------------------------- Officer and Director
David J. Chinsky (principal executive, financial
and accounting officer)

/s/ Daniel A. Pelak Director February 25, 1998
- --------------------------
Daniel A. Pelak

/s/ Mark W. Sheffert Director February 24, 1998
- --------------------------
Mark W. Sheffert

<PAGE>

LIFERATE SYSTEMS, INC.
REGISTRATION STATEMENT ON FORM SB-2
EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation........... Incorporated by reference to Exhibit
3.1 of the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

3.2 Amended and Restated Bylaws, as amended.................. Incorporated by reference to Exhibit
3.2 of the Company's Annual Report on
Form 10-KSB for the year ended
December 31, 1995 (File No. 0-25530).

4.1 Form of the Company's Common Stock Certificate........... Incorporated by reference to Exhibit
4.1 of the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

4.2 Amended and Restated Articles of Incorporation........... See Exhibit 3.1.

4.3 Amended and Restated Bylaws, as amended.................. See Exhibit 3.2.

4.4 Form of Warrant dated December, 1994 to purchase shares Incorporated by reference to Exhibit
of Common Stock issued to investors in connection with 10.17 of the Company's Registration
the Company's December, 1994 Private Placement........... Statement on Form SB-2 (File No.
33-89016C).

4.5 Form of Warrant dated March, 1995 to purchase 91,000 Incorporated by reference to Exhibit
shares of Common Stock issued to Principals of Miller 4.5 of the Company's Registration
Johnson & Kuehn in connection with the Company's Initial Statement on Form SB-2 (File No.
Public Offering.......................................... 333-42155).

4.6 Form of Warrant dated December, 1995 to purchase 56,286 Incorporated by reference to Exhibit
shares of Common Stock issued to Principals of Miller 4.6 of the Company's Registration
Johnson & Kuehn in connection with the Company's Statement on Form SB-2 (File No.
December, 1995 Private Placement......................... 333-42155).

<PAGE>

EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------

4.7 Form of Warrant dated January, 1996 to purchase 29,555 Incorporated by reference to Exhibit
shares of Common Stock issued to Principals of Miller 4.7 of the Company's Registration
Johnson & Kuehn in connection with the Company's Statement on Form SB-2 (File No.
January, 1996 Private Placement......................... 333-42155).

4.8 Warrant dated May 12, 1997 to purchase 100,000 shares of Incorporated by reference to Exhibit
Common Stock issued to Medtronic, Inc.................... 10.2 of the Company's Quarterly
Report on Form 10-QSB for the quarter
ended June 30, 1997 (File No.
0-25530).

4.9 Form of Warrant to purchase shares of Common Stock of Incorporated by reference to Exhibit
the Company issued to investors in connection with the 4.9 of the Company's Registration
July, 1997 Bridge Financing.............................. Statement on Form SB-2 (File No.
333-42155).

4.10 Form of Warrant dated July 21, 1997 to purchase 29,555 Incorporated by reference to Exhibit
shares of Common Stock to Principals of Miller Johnson & 4.10 of the Company's Registration
Kuehn in connection with the Company's July, 1997 Bridge Statement on Form SB-2 (File No.
Financing................................................ 333-42155).

4.11 Form of Warrant to Purchase Common Stock of the Company Incorporated by reference to Exhibit
issued in connection with the November, 1997 Equity 10.2 of the Company's Current Report
Financing................................................ on Form 8-K dated November 26, 1997
(File No. 0-25530).

5.1 Opinion and Consent of Oppenheimer Wolff & Donnelly LLP.. Filed herewith.

10.1 1993 Stock Option Plan, as amended....................... Incorporated by reference to Exhibit
99.1 to the Company's Registration
Statement on Form S-8 (File No.
333-02850).

10.2 Form Incentive Stock Option Agreement for Employees...... Incorporated by reference to Exhibit
10.14 to the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

10.3 Form Non-Statutory Stock Option Agreement for Incorporated by reference to Exhibit
Non-Employees............................................ 10.15 to the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

10.4 Employee Stock Purchase Plan, as amended................. Incorporated by reference to

<PAGE>

EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------

Exhibit 10.27 to the Company's
Annual Report on Form 10-KSB/A
(Amendment No. 1)(File No.
0-25530).

10.5 Form of Employment Agreement............................. Incorporated by reference to Exhibit
10.1 to the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

10.6 Lease Agreement with Alpha Associates, Inc. dated Incorporated by reference to Exhibit
April 30, 1993........................................... 10.20 to the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

10.7 Agreement with Clinical Sales and Service, Inc., Incorporated by reference to Exhibit
dated July 1, 1994....................................... 10.3 to the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

10.8 Letter Agreement with The Atlanta Cardiology Group, dated Incorporated by reference to Exhibit
September 28, 1994 (confidential portions have been omitted 10.2 to the Company's Registration
and filed with the Secretary of the Commission).......... Statement on Form SB-2 (File No.
33-89016C).

10.9 Agreement with Clinical Sales and Service, Inc., dated Incorporated by reference to Exhibit
November 1, 1994......................................... 10.4 to the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

10.10 Amendment to Marketing Agreement with Clinical Sales and Incorporated by reference to Exhibit
Service, Inc., dated December 31, 1994.................. 10.5 to the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

10.11 Promissory Note, dated January 24, 1995, from Paul Benson Incorporated by reference to Exhibit
to the Company.......................................... 10.19 to the Company's Registration
Statement on Form SB-2 (File No.
33-89016C).

10.12 Computer Software Purchase Agreement, dated July 2, Incorporated by reference to Exhibit
1995, between the Company, Anthony Furnary, M.D. 10.28 of the Company's Annual Report
and APF, LLC. ........................................... on Form 10-KSB for the year ended
December 31, 1995 (File No. 0-25530).

10.13 Sales and Marketing Services Agreement, dated as of Incorporated by reference to

<PAGE>

EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------

September 18, 1995, between the Company and Clinical Exhibit 10.29 of the Company's
Sales and Services, Inc.................................. Annual Report on Form 10-KSB
for the year ended December 31,
1995 (File No. 0-25530).

10.14 Investment Agreement, dated as of December 26, 1995 between Incorporated by reference to Exhibit
the Company and Medtronic, Inc........................... 10.2 of the Company's Current Report
on Form 8-K dated December 22, 1995
(File No. 0-25530).

10.15 License and Development Agreement, dated as of December 26, Incorporated by reference to Exhibit
1995 between the Company and Medtronic, Inc.............. 10.3 of the Company's Current Report
on Form 8-K dated December 22, 1995
(File No. 0-25530).

10.16 Shareholder Voting Agreement, dated as of December 26, 1995 Incorporated by reference to Exhibit
by and among the Company, Medtronic, Inc., Donna J. 10.1 of the Company's Current Report
Edmonds, Jeffrey B. Comer, David W. Haskin and Paul D. on Form 8-K dated December 22, 1995
Benson................................................... (File No. 0-25530).

10.17 Stock Option Agreement, dated April 29, 1996, between the Incorporated by reference to Exhibit
Company and William W. Chorske........................... 10.1 of the Company's Quarterly Report
on Form 10-QSB for the quarter ended
March 30, 1996 (File No. 0-25530).

10.18 Agreement, dated June 4, 1996, between the Company and Incorporated by reference to Exhibit
Jeffrey B. Comer......................................... 10.21 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.19 Non-Statutory Stock Option Agreement, dated June 6, 1995, Incorporated by reference to Exhibit
between the Company and Jeffrey B. Comer................. 10.23 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.20 Agreement, dated June 5, 1996, between the Company and Incorporated by reference to Exhibit
David W. Haskin.......................................... 10.24 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

<PAGE>

EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------

10.21 Agreement, dated September 1, 1996, between the Company Incorporated by reference to Exhibit
and William Knopf, M.D................................... 10.1 of the Company's Quarterly Report
on Form 10-QSB for the quarter ended
September 30, 1996 (File No. 0-25530).

10.22 Non-Statutory Stock Option Agreement dated September 1, Incorporated by reference to Exhibit
1996, between the Company and William Knopf, M.D......... 10.3 of the Company's Quarterly
Report on Form 10-QSB for the quarter
ended September 30, 1996 (File No.
0-25530).

10.23 Non-Statutory Stock Option Agreement, dated September 1, Incorporated by reference to Exhibit
1996, between the Company and Donna J. Edmonds........... 10.29 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.24 Agreement, dated September 25, 1996, between the Company Incorporated by reference to Exhibit
and Donna J. Edmonds..................................... 10.28 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.25 Agreement, dated December 18, 1996, between the Company and Incorporated by reference to Exhibit
National Jewish Center (confidential portions have been 10.30 of the Company's Annual Report
omitted and filed with the Secretary of the Commission).. on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.26 Technical Support Agreement, dated as of December 18, 1996, Incorporated by reference to Exhibit
between the Company and National Jewish Center........... 10.31 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.27 Non-Statutory Stock Option Agreement, dated March 4, 1997, Incorporated by reference to Exhibit
covering 26,000 shares between the Company and APF, LLC.. 10.39 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

<PAGE>

EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------

10.28 Non-Statutory Stock Option Agreement, dated March 4, 1997, Incorporated by reference to Exhibit
covering 10,333 shares between the Company and APF, LLC.. 10.40 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.29 Non-Statutory Stock Option Agreement, dated March 24, 1997, Incorporated by reference to Exhibit
covering 550,000 shares between the Company and APF, LLC.. 10.38 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.30 Master Agreement, dated March 25, 1997, among the Company, Incorporated by reference to Exhibit
Anthony Furnary, M.D. and APF, LLC....................... 10.35 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.31 Modification Agreement, dated March 25, 1997, among the Incorporated by reference to Exhibit
Company, Anthony Furnary, M.D. and APF, LLC.............. 10.36 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.32 Agreement, dated March 28, 1997 between The Company and Incorporated by reference to Exhibit
Atlanta Cardiology Group, P.C............................ 10.32 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.33 Convertible Subordinated Promissory Note, dated March 28, Incorporated by reference to Exhibit
1997, issued by the Company to The Atlanta Cardiology 10.33 of the Company's Annual Report
Group, P.C............................................... on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.34 Mutual Release, dated March 28, 1997, between the Company Incorporated by reference to Exhibit
and The Atlanta Cardiology Group, P.C.................... 10.34 of the Company's Annual Report
on Form 10-KSB for the year ended
December 31, 1996 (File No. 0-25530).

10.35 Note dated May 12, 1997 in the principal amount of Incorporated by reference to Exhibit
$1,000,000 issued to Medtronic, Inc...................... 10.1 of the Company's Quarterly
Report on Form 10-QSB for the quarter
ended June 30, 1997 (File No.
0-25530).

<PAGE>

EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------

10.36 Employment Agreement, dated August 18, 1997, between the Incorporated by reference to Exhibit
Company and David J. Chinsky............................. 10.6 of the Company's Current Report
on Form 8-K dated November 26, 1997
(File No. 0-25530).

10.37 Letter Agreement, dated November 10, 1997, among the Incorporated by reference to Exhibit
Company, APF, LLC and Anthony P. Furnary, M.D............ 10.3 of the Company's Current Report
on Form 8-K dated November 26, 1997
(File No. 0-25530).

10.38 Letter Agreement, dated November 10, 1997, between the Incorporated by reference to Exhibit
Company and the Atlanta Cardiology Group, P.C............ 10.4 of the Company's Current Report
on Form 8-K dated November 26, 1997
(File No. 0-25530).

10.39 Letter Agreement, dated November 10, 1997, between the Incorporated by reference to Exhibit
Company and Medtronic, Inc............................... 10.5 of the Company's Current Report
on Form 8-K dated November 26, 1997
(File No. 0-25530).

10.40 Amendment to Employment Agreement, dated November 13, Incorporated by reference to Exhibit
1997, between the Company and David J. Chinsky........... 10.7 of the Company's Current Report
on Form 8-K dated November 26, 1997
(File No. 0-25530).

10.41 Non-Statutory Stock Option Agreement, dated November 13, Incorporated by reference to Exhibit
1997, between the Company and David J. Chinsky........... 10.8 of the Company's Current Report
on Form 8-K dated November 26, 1997
(File No. 0-25530).

10.42 Securities Purchase Agreement, dated as of November 14, Incorporated by reference to Exhibit
1997, among the Company and the Purchasers. Omitted 10.1 of the Company's Current Report
from this Exhibit, as filed, are the exhibits and on Form 8-K dated November 26, 1997
schedules referenced in such agreement. The Company (File No. 0-25530).
will furnish supplementally a copy of any such exhibits
and schedules to the Commission upon request.............

23.1 Consent of Oppenheimer Wolff & Donnelly LLP.............. Included in Exhibit 5.1.

<PAGE>

EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------

5.1 Opinion of Oppenheimer Wolff & Donnelly LLP.............. Filed herewith.

23.2 Consent of Independent Auditors.......................... Filed herewith.

24.1 Power of Attorney........................................ Included on page II-9 of this
Registration Statement.

27.1. Financial Data Schedule.................................. Filed herewith.

</TABLE>

EXHIBIT 5.1

[OPPENHEIMER WOLFF & DONNELLY LETTERHEAD]

February 27, 1998

Board of Directors
LifeRate Systems, Inc.
7210 Metro Boulevard
Minneapolis, MN 55439

RE: REGISTRATION STATEMENT ON FORM SB-2

Ladies and Gentlemen:

We have acted as counsel to LifeRate Systems, Inc., a Minnesota corporation (the
"Company"), in connection with the registration by the Company of the resale of
an aggregate of 8,000,000 shares (the "Shares") of the Company's common stock,
no par value (the "Common Stock"), pursuant to the Company's Registration
Statement on Form SB-2 filed with the Securities and Exchange Commission on
February 27, 1998 (the "Registration Statement") on behalf of certain selling
shareholders named therein (the "Selling Shareholders"). The Shares consist of
an aggregate of 4,000,000 shares of Common Stock (the "Issued Shares") currently
outstanding and beneficially owned by the Selling Shareholders and an aggregate
of 4,000,000 shares of Common Stock issuable pursuant to outstanding warrants
held by the Selling Shareholders (the "Unissued Shares").

In acting as counsel for the Company and arriving at the opinions expressed
below, we have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of public officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein. In
connection with our examination, we have assumed the genuiness of all
signatures, the authenticity of all documents tendered to us as originals, the
legal capacity of all natural persons and the conformity to original documents
of all documents submitted to us as certified or photostatic copies.

Based on the foregoing, and subject to the qualifications and limitations stated
herein, it is our opinion that:

1. The Company had the corporate authority to issue the Issued Shares and
has the corporate authority to issue the Unissued Shares in the manner
and under the terms set forth in the Registration Statement.

<PAGE>

Board of Directors
LifeRate Systems, Inc.
February 27, 1998
Page 2

2. The Issued Shares being registered for resale by the Selling
Shareholders under the Registration Statement have been duly authorized
and are validly issued, fully paid and nonassessable. The Unissued
Shares being registered for resale by the Selling Shareholders under
the Registration Statement have been duly authorized, and when issued,
delivered and paid for in accordance with the warrants, will
be validly issued, fully paid and nonassessable.

We express no opinion with respect to laws other than those of the State of
Minnesota and the federal laws of the United States of America, and we assume no
responsibility as to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction.

We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement, to its use as part of the Registration Statement, and to
the use of our name under the caption "Validity of Shares" in the Prospectus
constituting a part of the Registration Statement.

We are furnishing this opinion to the Company solely for its benefit in
connection with the Registration Statement as described above. It is not to be
used, circulated, quoted or otherwise referred to for any other purpose. Other
than the Company, no one is entitled to rely on this opinion.

Very truly yours,

/s/ Oppenheimer Wolff & Donnelly LLP

OPPENHEIMER WOLFF & DONNELLY LLP
Plaza VII
45 South Seventh Street
Suite 3400
Minneapolis, MN 55402

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated February 13, 1997, except
for Note 9 as to which the date is April 1, 1997, in the Registration Statement
(Form SB-2) and related Prospectus of LifeRate Systems, Inc. for the
registration of 8,000,000 shares of its Common Stock.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 24, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF EARNINGS AND THE BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
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<BONDS> 0 0
0 0
0 0
<COMMON> 17,261 17,300
<OTHER-SE> (17,108) (21,164)
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<OTHER-EXPENSES> (262) (26)
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<NET-INCOME> (9,874) (4,056)
<EPS-PRIMARY> (2.61) (1.06)
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