LIFERATE SYSTEMS INC, 10KSB40/A, 1998-11-05

LIFERATE SYSTEMS INC
10KSB40/A, 1998-11-05
COMPUTER INTEGRATED SYSTEMS DESIGN

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------------
FORM 10-KSB/A
AMENDMENT NO. 1
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
( ) Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
(Exact name of small business issuer as specified in its charter)

COMMISSION FILE NO. 0-25530

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

LIFERATE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)

MINNESOTA 41-1682994
(State of Incorporation) (I.R.S. Employer Identification No.)

7210 METRO BOULEVARD
MINNEAPOLIS, MINNESOTA 55439
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (612) 844-0599

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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE

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Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES _X_ NO ___

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X)

The Registrant's revenues for the fiscal year ended December 31, 1997
were $620,300.

As of March 2, 1998, 12,485,000 shares of Common Stock of the
Registrant were outstanding, and the aggregate market value of the Common Stock
of the Registrant as of that date (based upon the average between the closing
bid and asked prices for the Common Stock on that date), excluding shares owned
beneficially by executive officers, directors and greater-than-5% shareholders,
was approximately $3,944,531.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its Annual Meeting to be held May 14, 1998 (the
"1998 Proxy Statement").

Transitional Small Business Disclosure Format (check one):
YES ___ NO _X_

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<PAGE>

THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS REPORT 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. SEE
ITEM 6. "MANAGEMENT'S DISCUSSION AND ANALYSIS - CERTAIN FACTORS."

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

RESULTS OF OPERATIONS

Revenues in 1997 were $620,300 compared to revenues of $615,700 in
1996. Revenues of $275,000, or 44.3% of total revenue, were generated from
development work done for National Jewish Medical and Research Center. Revenues
of $100,200, or 16.1% of total revenue, were generated from National Allergy and
Asthma System ("NAAS"). Revenues of $97,500, or 15.7% of total revenue, were
generated from Washington Heart, a cardiovascular medical center. The remaining
$147,600 of 1997 revenues are related to the installation and monthly license
fees generated from the Company's Cardiovascular Outpatient product.

Revenues for 1996 were $615,700, a $352,400 increase from 1995.
Revenues of $349,800, or 56.8% of total revenue, were generated from NAAS .
Revenues of $68,200, or 11.1% of total revenue, were generated from two Pfizer,
Inc. related Cardiovascular Outpatient product installations and two Pfizer,
Inc. evaluation sites. The Company recognized $25,000, or 4.1% of total revenue,
in 1996 from National Jewish Medical & Research Center. The remaining $172,700
of 1996 revenues were related to the installation and monthly license fees
generated from the Company's Cardiovascular Outpatient product and other
development work. The revenue increase in 1996 was primarily due to fees from
NAAS and an increase in the number of customer installations of the Company's
products.

During the first quarter of 1997, the Company implemented a cost
reduction program to reduce levels of expenditures and conserve cash funds. As
part of this cost reduction program, the Company reduced employee head count
during 1997 in order to more effectively match expenses with revenues.

Cost of revenues in 1997 was $532,800, a $318,400 decrease from 1996.
The 1997 expense consists of $50,500 in amortization of software development
costs, $36,500 of royalty expense and $445,800 of customer support expenses.
Customer support expenses declined in 1997 as a result of the cost reduction
program described above.

Cost of revenues in 1996 was $851,200, a $808,200 increase from 1995.
The expense in 1996 consists of $100,800 in amortization of software development
costs, $46,100 in royalty expenses, and $704,300 of customer support expenses.
In 1995, no royalty or software development amortization costs were incurred.
Customer support expenses were not significant in 1995 as the Company's first
commercial sales of the Outpatient product were not made until December 1995.

Cost of revenues in future periods will continue to be affected by
royalty payments. As described in Note 11 to the financial statements, in March
1997 the Company completed a modified agreement with Dr. Furnary. Beginning in
1999 (or sooner if the Company reaches $20,000,000 of cumulative revenues) the
Company is obligated to pay royalties in the amount of 3.0% on all gross
revenues (as defined in the agreement) up to $100,000,000 and, thereafter, 3.6%
on all gross revenues. Through March 31, 1997, the Company was obligated to pay
royalties of 7.5% of gross revenues under the prior agreement with Dr. Furnary.
In March 1997, the Company also issued a convertible subordinated note to The
Atlanta Cardiology Group, P.C. ("ACG") in the principal amount of $2,250,000 in
exchange for the cancellation of the royalty agreement with ACG, which required
the Company to pay royalties to ACG at the rate of 10% of gross sales of the
Company's cardiology system and 2% of all database sales. The Company incurred
royalty expenses of $36,500, $46,100 and $0 in 1997, 1996 and 1995,
respectively, under these agreements.

Sales and marketing expense in 1997 was $1,279,700, a $458,400, or
26.4% decrease from 1996 expense of $1,738,000. Sales and marketing expense in
1996 declined $787,800, or 31%, from 1995. During 1995, Clinical Sales and
Service, Inc. ("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. Sales and marketing expense
declined

<PAGE>

in 1997 compared to 1996 as a result of the cost reduction program described
above and one-time costs associated with the integration of CSSI in 1996.

During 1997, research and development efforts were focused on a new
release of the Outpatient modules for cardiovascular and asthma and allergy,
continued development of the cardiac catheterization laboratory product and
development work under the agreement with National Jewish Medical and Research
Center. Research and development expenses in 1997, which consist primarily of
payroll and related benefit expenses, totaled $1,302,100, a decrease of
$4,007,800 or 75.5% from 1996. The reduction in expenses was due to the cost
reduction program described above and one-time expenses incurred in 1996 of
$3,174,000, which are described below. 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. Additional
functionality was added to the core system in 1996 to increase the operational
benefit of using the system. 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 of the royalty agreement with Dr. Furnary,
the Company granted Dr. Furnary options to purchase shares of common stock for
services 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. The
Company plans to continue to invest the resources needed to develop the product
capabilities demanded by the market place.

The Company capitalizes software development costs in accordance with
the provisions of Financial Accounting Standards Board ("FASB") Statement No.
86. 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 and 1997 for the core
LifeRate System, as the efforts were on enhancements released to customers when
technological feasibility was obtained. In 1997, the Company capitalized $28,600
of development costs related to development of the Company's CLE product, an
entry-level cardiac catheterization laboratory product that was released for
sale in January 1998.

General and administrative expenses were $2,402,500 in 1997, a decrease
of $443,200 or 15.6% from 1996. The decrease was due to the cost reduction
program described above and several one-time expenses incurred in 1996. General
and administrative expenses were $2,845,700 in 1996, an increase of $1,592,700,
or 127.1% 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 lease
cancellation and lawsuit settlements referred to above. 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.

Interest income for 1997, 1996 and 1995 was $34,000, $261,900 and
$97,000, respectively. These changes in interest income primarily reflect
increases and decreases in the Company's cash balances during the respective
years, as the Company completed significant financings in March 1995, December
1995/January 1996, and November 1997.

Interest expense for 1997, 1996 and 1995 was $299,300, $6,300 and
$29,300, respectively. The increase in 1997 was due to interest expense accrued
on the convertible notes issued in 1997.

The extraordinary item of $200,000 in 1997 relates to the restructuring
of the Company's convertible notes payable as described under "Liquidity and
Capital Resources". The extraordinary item represents $200,000 of interest
payable that was forgiven.

<PAGE>

RESTATEMENT

The Company has restated previously issued financial results for the
year ended December 31, 1997. The restated financial results reflect the
correction of an error related to the extraordinary gain recognized from its
troubled debt restructuring. The following summarizes the impact of the
restatement.

As reported Restated

Extraordinary item-debt
restructuring $1,312,800 $200,000

Extraordinary item per share $.30 $.05

Net loss per share -
basic and diluted $(.88) $(1.13)

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily
through private and public placement of Common Stock, and, secondarily from
revenues. During 1997, the Company needed additional financing to fund
operations.

In May 1997, the Company issued a convertible promissory note in the
principal amount of $1,000,000 to Medtronic, Inc., a shareholder of the Company
with a representative that serves on the Company's Board of Directors. Under the
original terms of the note, interest was at the prime rate, principal was due
upon the earlier of completion of an equity financing raising 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 of at least $5,000,000. In addition, the Company granted
Medtronic a warrant to purchase 100,000 shares of Common Stock exercisable at
the same price as the conversion price on the note. In connection with the
November 1997 equity financing, the Medtronic note was amended to provide that
no interest will accrue thereunder and accrued interest will be forgiven,
principal will not become due until May 2002 and the conversion price of the
note is $1.50 per share. The warrant was also amended to change the conversion
price to $.50 per share.

In July 1997, the Company issued additional convertible promissory
notes in the amount of $500,000 and warrants in a private placement. The notes
accrued interest at the prime rate, were due at the earlier of November 30, 1997
or completion of the next equity financing and were convertible at the lesser of
$2.00 per share or the average per share price paid in the next equity
financing. In addition, 50,000 warrants were issued to purchasers of the notes
at an exercise price of the lesser of $2.00 per share or the average purchase
price paid in the next equity financing. In connection with the November 1997
equity financing, the notes were converted to Common Stock at a price of $2.00
per share, accrued interest was forgiven and the warrant conversion price was
fixed at $2.00 per share.

In September, October and November 1997, the Company obtained bridge
loans of $258,000 from Miller, Johnson and Kuehn, Inc. while the Company
attempted to complete the November 1997 equity financing. After completing the
November 1997 equity financing, $206,000 of the notes were repaid in cash and
$52,000 of the notes were converted into 104,000 shares of Common Stock at a
conversion price of $.50 per share and warrants to purchase 104,000 shares of
Common Stock at an exercise price of $1.50 per share.

In October and November 1997, the Company obtained bridge loans of
$46,200 from the Company's Board of Directors. After completion of the November
1997 equity financing, $40,425 of the notes were repaid in cash and $5,775 of
the notes were converted into 11,550 shares of Common Stock at a conversion
price of $.50 per share.

In November 1997, the Company entered into a securities purchase
agreement whereby the Company agreed to sell up to 9,000,000 shares of Common
Stock at prices ranging from $.50 to $.56 per share and warrants to purchase up
to 9,000,000 shares of Common Stock at an exercise price of $1.50 per share. In
November 1997, 4,290,000 shares of Common Stock were sold under the agreement
resulting in net proceeds to the Company of $1,964,400. The agreement provided
that if the Company fulfilled certain conditions by January 15, 1998, the
Company would issue up to an additional 4,500,000

<PAGE>

shares of Common Stock and warrants. The Company satisfied the conditions and in
January 1998 sold an additional 4,000,000 shares of Common Stock and warrants
under the agreement resulting in additional net proceeds to the Company of
$1,958,000.

At December 31, 1997, the Company had $764,200 in cash and cash
equivalents, a $1,307,800 decrease from December 31, 1996. In 1997, the Company
used $4,729,400 to fund operations, $20,100 to purchase furniture and equipment
and $28,600 to fund capitalized software development costs.

The Company does not have significant commitments to purchase
additional equipment, but does plan to continue to fund software development
efforts.

The Company estimates that its current cash balances, including the
proceeds received in January 1998 at the final closing of the November 1997
equity financing, will not be sufficient to fund operations of the Company
through the end of 1998. The Company estimates it will need additional operating
capital during the fourth quarter of 1998. Accordingly, the report of the
independent auditors on the Company's 1997 financial statements contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern. There can be no assurance that the Company will be able to obtain
additional financing on satisfactory terms, or at all. If the Company is unable
to obtain additional financing it will be forced to cease operations and may be
forced to seek protection under bankruptcy laws.

YEAR 2000 ISSUES

Computer programs have historically been written to abbreviate dates by
using two digits instead of four digits to identify a particular year. The so
called "Year 2000" problem or "millennium bug" is the inability of computer
software or hardware to recognize or properly process dates ending in "00." As
the year 2000 approaches, significant attention is being focused on updating or
replacing such software and hardware in order to avoid system failures,
miscalculations or business interruptions that might otherwise result.

The Company has reviewed its software products and internal information
systems and believes that the costs and effort to address the Year 2000 problem
will not be material to its business, financial condition or results of
operations. However, the Year 2000 problem may also adversely impact the Company
by affecting the business and operations of parties with which the Company
transacts business.

CERTAIN FACTORS

In addition to the factors identified above, there are several
important factors that could cause the Company's actual results to differ
materially from those anticipated by the Company or which are reflected in any
forward-looking statements of the Company. These factors, and their impact on
the success of the Company's operations and its ability to achieve its goals,
include the following:

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT. The Company was formed
in July 1990, and has had revenues of $1,810,600 to date. As of December 31,
1997, the Company had an accumulated deficit of $22,070,400. The Company
believes that its future success will be dependent on the successful marketing
of its cardiovascular and asthma and allergy products and successful
modification of its core software system for other medical specialties. There
can be no assurance that the Company will generate sufficient sales to achieve
positive cash flow or profitable operations.

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 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 significant market presence in 1998 to achieve
long-term success.

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.
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 operate
LifeRate's system. In addition, payers with significant investments in other
hardware and software systems may be reluctant to abandon those systems for
LifeRate's system.

<PAGE>

COMPETITION. The healthcare information industry, of which the Company
is a part, is characterized by intense competition. 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.

TECHNICAL OBSOLESCENCE. Computer-based technology in all industries is
undergoing, and is expected to continue to undergo, rapid and significant
technical advances. 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.

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. 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.

CONTROL BY CERTAIN PERSONS. As of February 10, 1998, Special Situations
Fund III., L.P. and certain affiliated funds and Medtronic, Inc. beneficially
own (within the meaning of the 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, Inc. 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 and control
the outcome of shareholder votes.

LEGAL PROCEEDINGS. The Company is a defendant in a shareholder lawsuit.
See Item 3 of this Report on Form 10-KSB for more information.

<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

INDEX TO FINANCIAL STATEMENTS

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

Financial Statements: Page
- --------------------- ----

Report of Independent Auditors ...............................................7

Balance Sheets as of December 31, 1997 and 1996...............................8

Statements of Operations for the years ended December 31, 1997, 1996
and 1995 and the period from July 18, 1990 (date of inception) to
December 31, 1997 ...........................................................10

Statements of Shareholders' Equity (deficit) for the period from July,
1990 to December 31, 1997 ...................................................11

Statements of Cash Flow for the years ended
December 31, 1997, 1996 and 1995 and the period
from July 18, 1990 (date of inception) to December 31, 1997..................14

Notes to Financial Statements ...............................................15

<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, 1997 and 1996 and the
related statements of operations, shareholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1997, and for the
period from July 18, 1990 (inception) to December 31, 1997. 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, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 and for the period from July 18, 1990 (inception)
to December 31, 1997, in conformity with generally accepted accounting
principles.

As discussed in Note 3 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. The 1997 financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 27, 1998, except for
Note 4 as to which date is November 2, 1998

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Balance Sheets

DECEMBER 31
1997
RESTATED 1996
-------- ----
ASSETS
Current assets:
Cash and cash equivalents $ 764,200 $2,072,000
Accounts receivable, less allowance of $62,850
in 1997 and $60,350 in 1996 278,200 142,400
Prepaid expenses and other
current assets 59,800 122,700
---------- ----------
Total current assets 1,102,200 2,337,100

Furniture and fixtures 177,600 177,400
Computer equipment 872,000 837,200
---------- ----------
1,049,600 1,014,600
Less accumulated depreciation 635,600 325,900
---------- ----------
414,000 688,700

Software development costs, net
of accumulated amortization of
$100,800 in 1996 28,600 50,500

---------- ----------
Total assets $1,544,800 $3,076,300
========== ==========

<PAGE>

DECEMBER 31
1997
RESTATED 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 71,600 $ 251,700
Accrued compensation 203,300 43,900
Accrued consulting fees 5,000 86,100
Accrued royalties 19,700 36,100
Other current liabilities 3,200 73,900
Current portion of long-term debt and capital
lease obligations 12,300 11,800
------------ ------------
Total current liabilities 315,100 503,500

Long-term debt and capital lease obligations 3,106,500 2,251,800
Deferred rent 4,900 16,800
Deferred revenue 172,300 151,800

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 - 75,000,000
Issued and outstanding shares - 8,485,000
in 1997 and 3,811,639 in 1996 20,016,400 17,260,700
Deficit accumulated during the development stage (22,070,400) (17,108,300)
------------ ------------
Total shareholders' equity (deficit) (2,054,000) 152,400
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,544,800 $ 3,076,300
============ ============
</TABLE>

SEE ACCOMPANYING NOTES.

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Operations

JULY 18, 1990
(DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1997 1997
RESTATED 1996 1995 RESTATED
----------- ---- ---- --------
<S> <C> <C> <C> <C>
Net revenues $ 620,300 $ 615,700 $ 263,300 $ 1,810,600
Cost of revenues 532,800 851,200 43,000 1,427,000
------------ ------------ ------------ ------------
Gross profit 87,500 (235,500) 220,300 383,600

Operating expenses:
Sales and marketing 1,279,700 1,738,000 2,525,800 5,929,500
Research and development 1,302,100 5,309,900 2,104,500 9,313,700
General and administrative 2,402,500 2,845,700 1,253,000 7,467,400
------------ ------------ ------------ ------------
Loss from operations (4,896,800) (10,129,100) (5,663,000) (22,327,000)
Interest income 34,000 261,900 97,000 392,900
Interest expense 299,300 6,300 29,300 336,300
------------ ------------ ------------ ------------
Net loss before extraordinary
item (5,162,100) (9,873,500) (5,595,300) (22,270,400)
Extraordinary item - debt
restructuring 200,000 -- -- 200,000
------------ ------------ ------------ ------------

Net loss $ (4,962,100) $ (9,873,500) $ (5,595,300) $(22,070,400)
============ ============ ============ ============

Net loss per share before
Extraordinary item $ (1.18) $ (2.61) $ (2.66) $ (12.63)
Extraordinary item per share 0.05 -- -- 0.11
------------ ------------ ------------ ------------
Net loss per share - basic and diluted $ (1.13) $ (2.61) $ (2.66) $ (12.52)
============ ============ ============ ============
Weighted average number of
common shares outstanding 4,387,405 3,783,931 2,105,811 1,762,514
============ ============ ============ ============
</TABLE>

SEE ACCOMPANYING NOTES.

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Shareholders' Equity (Deficit)

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>

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Shareholders' Equity (Deficit) (continued)

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 - restated -- -- (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>

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Statements of Shareholders' Equity (Deficit) (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
Private placement of common stock, net of
offering costs of $177,700 4,290,000 1,964,400 -- -- 1,964,400
Conversion of notes payable to common stock,
net of unamortized discount of $31,800 365,550 525,900 -- -- 525,900
Value of warrants issued to holders of notes -- 204,500 -- -- 204,500
Stock options exercised 17,811 33,400 -- -- 33,400
Value of stock options granted for services
rendered -- 27,500 -- -- 27,500
Net loss - restated -- -- (4,962,100) -- (4,962,100)
-------- -------- ----------- -------- -----------
Balance December 31, 1997 8,485,000 $ 20,016,400 $(22,070,400) $ -- $ (2,054,000)
=========== ============= ============== ============== ==============
</TABLE>

SEE ACCOMPANYING NOTES.

<PAGE>

LifeRate Systems, Inc.

(A Development Stage Company)
Statements of Cash Flows

JULY 18, 1990
(DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1997 1997
RESTATED 1996 1995 RESTATED
-------- ---- ---- --------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,962,100) $ (9,873,500) $ (5,595,300) $(22,070,400)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 309,700 238,600 61,100 636,200
Amortization of software development costs 50,500 100,800 -- 151,300
Amortization of discounts on long-term debt 49,400 -- -- 49,400
Value of stock options granted for services rendered 27,500 974,000 -- 1,001,500
Value of warrants issued to note holders 43,500 -- -- 43,500
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 -- -- 129,500 187,500
Changes in operating assets and liabilities:
Accounts receivable (135,800) (38,000) (80,900) (278,200)
Advances to agent -- -- 108,000 --
Prepaid and other current assets 68,200 (61,700) (61,000) (54,500)
Other assets -- 11,800 (1,200) --
Accounts payable (180,100) (247,700) 381,400 96,400
Accrued compensation 159,400 (200,900) (34,700) 503,300
Accrued consulting fees (81,100) (296,500) 333,400 5,000
Accrued royalties (16,400) 36,100 -- 19,700
Other current liabilities (70,700) 72,400 (1,500) 14,200
Deferred revenue 20,500 90,900 (29,600) 172,300
Deferred rent (11,900) (11,900) (8,600) 4,900
------------ ------------ ------------ ------------
Net cash used in operating activities (4,729,400) (6,955,600) (4,199,800) (16,668,300)

INVESTING ACTIVITIES
Software development costs (28,600) -- (750,900) (779,500)
Purchase of furniture and equipment (20,100) (602,600) (332,400) (992,500)
------------ ------------ ------------ ------------
Net cash used in investing activities (48,700) (602,600) (1,083,300) (1,772,000)

FINANCING ACTIVITIES
Payments on notes payable and capital leases (265,000) (27,900) (55,900) (426,400)
Stock subscription received -- 5,000 -- 5,000
Proceeds from issuance of notes payable 1,737,500 -- 51,800 2,027,700
Proceeds from issuance of common stock 1,997,800 1,902,600 12,424,500 17,598,200
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,470,300 1,879,700 12,420,400 19,204,500
------------ ------------ ------------ ------------

(Decrease) increase in cash and cash equivalents (1,307,800) (5,678,500) 7,137,300 764,200
Cash and cash equivalents at beginning of period 2,072,000 7,750,500 613,200 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 764,200 $ 2,072,000 $ 7,750,500 $ 764,200
============ ============ ============ ============

</TABLE>

SEE ACCOMPANYING NOTES

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

1. 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. Cash equivalents are
carried at cost, which approximates market value.

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

In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No.
128, "Earnings Per Share." FASB Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. Earnings per share amounts for all periods have been presented,
and where necessary, restated to conform to the FASB Statement No. 128
requirements.

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.

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 writedowns to the net realizable
value of software development costs totaling $599,600 due to pending product
upgrades.

<PAGE>

LifeRate Systems, Inc
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Revenues derived from software licenses are recognized upon execution of a
license agreement, delivery of the software product, reasonable assurance of
customer acceptance of the software and fulfillment of any other significant
contract obligations. Revenues derived from customer service and support
activities are deferred and recognized ratably over the term of the contract.
Revenues derived from software development contracts will be recognized using a
percentage of completion method based on meeting key milestones over the term of
the contract. Cash received as deposits on software license contracts is
recorded as deferred revenue in the accompanying balance sheet.

COST OF REVENUES

Cost of revenues includes royalty expense, amortization of capitalized software
expense and costs of customer support activities.

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.

STOCK-BASED COMPENSATION

The Company has adopted the disclosure only provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 (APB 25), and related interpretations in
accounting for its stock option 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.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." FASB Statement No. 130 is effective for financial statements for fiscal
years beginning after December 15, 1997. This standard defines comprehensive
income as the changes in equity of an enterprise except those resulting from
stockholder transactions. All components of comprehensive income are required to
be reported in a new financial statement. Management believes the adoption of
FASB Statement No. 130 will not have a material effect on the Company's
financial statements.

In June 1997, the FASB also issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." FASB Statement No. 131 is
effective for financial statements for periods beginning after December 15,
1997. FASB Statement No. 131 establishes standards for disclosures about
operating segments, products and services, geographic areas and major customers.
Management believes the adoption of FASB Statement No. 131 will not have a
material effect on the Company's financial statements.

<PAGE>

LifeRate Systems, Inc
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The American Institute of Certified Public Accountants has approved a new
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which
will supersede Statement of Position 91-1, "Software Revenue Recognition."
Management is currently evaluating the impact of SOP 97-2 and has not determined
the result, if any, on the Company's financial position, results of operations
or cash flows.

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform with the 1997
presentation.

3. CONTINUED EXISTENCE

The company has incurred losses since inception and has an accumulated deficit
of $22,070,400 at December 31, 1997. 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 estimates
that cash balances at December 31, 1997 and proceeds from the January 1998 sale
of common stock will not be enough to fund operations for 1998. The Company will
require additional capital during 1998 to continue operations and is currently
exploring financing alternatives. There can be no assurance that the Company
will be successful in obtaining additional financing.

4. LONG-TERM DEBT AND EXTRAORDINARY ITEM

Long-term debt consists of the following:

DECEMBER 31
1997 1996
----------------------------
<S> <C> <C>
Convertible subordinated note payable, non-interest
bearing at December 31, 1997 (10% interest at December
31, 1996), due April 2002 $2,250,000 $2,250,000

Convertible promissory note payable, non-interest
bearing, due May 2002 1,000,000 -

Note payable, bears interest at 1.0% above prime
(9.5% at December 31, 1997), due in monthly
installments of $970 plus interest through February 1998 1,700 12,600

Capital lease obligation, bears interest at 19.1%,
due in monthly installments of $1,020 through March 1999 13,500 1,000
---------- ----------
3,265,200 2,263,600
Less discount on Medtronic, Inc. note (146,400) -
Current portion - long-term debt (12,300) (11,800)
---------- ----------
$3,106,500 $2,251,800
========== ==========

</TABLE>

<PAGE>

LifeRate Systems, Inc
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

4. LONG-TERM DEBT AND EXTRAORDINARY ITEM (CONTINUED)

Future payments of long-term debt and capital lease obligations are as follows:

Year ending December 31:
1998 $13,900
1999 3,100
2002 3,250,000
----------
3,267,000
----------
Less amount representing interest (1,800)
----------
$3,265,200
==========

In March 1997, the Company issued a $2,250,000 convertible subordinated note for
services previously rendered by a physician group. In November 1997, the terms
of the note were restructured. Under the new terms, the convertible subordinated
note was changed to be non-interest bearing (prior to the restructuring the note
incurred interest at 10% per year) and all accrued interest from March 1997 to
November 1997, amounting to approximately $142,400, was forgiven. The note is
convertible into shares of the Company's common stock at the conversion rate of
$3.32 per share.

In May 1997, the Company issued a $1,000,000 convertible promissory note to
Medtronic, Inc. The terms of the note called for interest to be incurred at the
prime rate and the note was due on the earlier of November 30, 1997 or the
completion of $5,000,000 of additional financing for the Company. In connection
with the note, the Company issued Medtronic a warrant to purchase 100,000 shares
of stock at a price of $2.00 per share. The warrant was determined to have a
value of $161,000 and is being amortized over the life of the note. The warrant
expires in 2002. In November 1997, the terms of the note were changed to be
non-interest bearing, accrued interest of approximately $44,000 was forgiven and
the term of the note was extended to 2002. In addition, the conversion price on
the note was changed to $1.50 per share and the exercise price on the warrant
was changed to $.50 per share.

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. During 1997, non-employee directors of the Company loaned the
Company $46,200. In November 1997, $5,775 of the loans were converted into
11,550 shares of common stock and $40,425 was repaid.

EXTRAORDINARY ITEM

The extraordinary item of $200,000 in 1997 relates to the cancellation of
$200,000 in interest due on various notes from the time of issuance until
November 1997, when the terms of the notes were restructured. The Company has
restated previously issued financial results for the year ended December 31,
1997. The restated financial results reflect the correction of an error related
to the extraordinary gain recognized in a transaction recorded as a troubled
debt restructuring. The Company had previously reported an extraordinary amount
of $1,312,800 for the year ended December 31, 1997. In restating the amount of
the extraordinary item, the Company is reversing the discounts previously
provided and accounted for on the restructured notes. Future operations will be
positively impacted by the restatement since the discount would have resulted in
interest expense being recorded over the life of the notes. The following
summarizes the impact of the restatement on operations for the year ended
December 31, 1997:

Extraordinary item-debt
restructuring $1,312,800 $200,000

Extraordinary item per share $ 0.30 $ 0.05

Net lose per share --
basic and diluted $ (0.88) (1.13)

5. COMMON STOCK AND WARRANTS

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

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

5. COMMON STOCK AND WARRANTS (CONTINUED)

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
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 12).

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
December 1995 and January 1996 private placements of stock, the Company agreed
to grant the underwriter 85,540 warrants to purchase shares of common stock. The
warrants are exercisable at a price of $6.50 and remain outstanding for a period
of ten years.

In July 1997, the Company issued convertible promissory notes totaling $500,000.
Purchasers of the notes also received 50,000 warrants at an exercise price of
$2.00 per share. The warrants remain outstanding for a period of five years. In
connection with the sale of the notes, the underwriter was granted a warrant to
purchase 25,000 shares of common stock. The warrant is exercisable at a price of
$2.00 per share and remains outstanding for a period of five years. In November
1997, the convertible promissory notes were converted into 250,000 shares of
common stock at a conversion price of $2.00 per share and $13,600 of accrued
interest was forgiven.

In November 1997, a director loan of $5,775 was converted into 11,550 shares of
stock at a price of $.50 per share. In November 1997, notes payable for an
aggregate of $52,000 were converted into 104,000 shares of common stock at a
price of $.50 per share and ten year warrants for 104,000 shares of common stock
at an exercise price of $1.50 per share.

In November 1997, the Company sold 4,290,000 shares of common stock and issued
warrants to purchase 4,290,000 shares of common stock at an exercise price of
$1.50. The warrants expire in November 2007. The sale resulted in net proceeds
to the Company of $1,964,400.

As of December 31, 1997, the Company had 4,901,395 warrants outstanding with
exercise prices ranging from $ .50 to $6.50. The warrants expire at various
dates ranging from December 1999 to November 2007.

6. EMPLOYEE STOCK PURCHASE PLAN

The Company has an Employee Stock Purchase Plan whereby eligible employees may
purchase on each purchase date, as defined, shares of common stock at the lower
of 85% of the market price at the time of grant or the time of purchase.
Employees may contribute up to 10% of wages to the plan and may purchase up to
2,000 shares per year under the plan. There are 100,000 shares reserved for this
plan. During 1997, 17,811 shares were issued at prices ranging from $.53 to
$2.76.

7. STOCK OPTIONS

In December 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 stock options or

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

7. STOCK OPTIONS (CONTINUED)

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 and the option term may
not exceed ten years from the date of grant.

Option activity is summarized as follows:

1997 1996 1995
------------------- ------------------ -------------------
AVERAGE AVERAGE AVERAGE
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 409,441 $7.68 250,106 $5.97 84,442 $3.36
Granted 302,779 2.82 274,333 8.84 245,664 5.90
Exercised - (41,665) 5.66 -
Canceled (539,873) 5.77 (73,333) 7.35 (80,000) 5.88
------- ----- ------- ----- ------- -----
Outstanding at end of year 172,347 $5.14 409,441 $7.68 250,106 $5.97
======= ===== ======= ===== ======= =====
Options exercisable
at year-end 147,789 $5.52 239,326 $7.03 167,445 $3.97
======= ===== ======= ===== ======= =====

</TABLE>

At December 31, 1997, there were 577,653 shares available for grant under the
1993 Stock Option Plan.

The following table summarizes information about stock options outstanding at
December 31, 1997:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- --------------- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$1.00 to $1.938 30,707 4.7 Years $1.33 30,707 $ 1.33
$2.625 to $3.00 44,974 5.5 Years 2.91 20,416 3.00
$5.875 to $6.33 45,666 7.2 Years 5.99 45,666 5.99
$8.625 51,000 8.4 Years 8.625 51,000 8.625
------- -------
172,347 6.7 Years $5.14 147,789 $ 5.52
======= =======

</TABLE>

The Company has also granted non-qualified options to certain employees and
directors that are outside of the 1993 Stock Option Plan. These options total
956,000 shares with prices ranging from $.50 to $5.00 per share. Expiration
dates of these options range from August 2003 to March 2007. At December 31,
1997, 306,001 options were exercisable at a weighted average exercise price of
$2.23 per share.

In March 1997, the Company canceled previously granted options held by employees
and consultants to purchase 186,000 shares of common stock with original
exercise prices that ranged from $4.50 to $10.625 per share. New options
totaling 163,550 shares were granted with exercise prices ranging from $2.625 to
$3.00 per share.

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

7. STOCK OPTIONS (CONTINUED)

Pro forma information regarding net loss and loss per share is required by FASB
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. For
purpose 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:

1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(5,332,400) $(11,094,600) $(5,931,700)
Pro forma loss per share - basic and diluted $( 1.22) $(2.93) $ (2.82)

</TABLE>

The pro forma effect on the net loss for 1997, 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.

The fair value of options granted during 1997, 1996 and 1995 was estimated using
the Black-Scholes option pricing model with the following assumptions: no
dividend yield; a risk free interest rate of 5.5%, 6.0% and 6.0% during 1997,
1996 and 1995, respectively; expected volatility of the market price of the
Company's common stock of 71%, 64% and 64% during 1997, 1996 and 1995,
respectively; and expected option lives ranging from three to five years. The
weighted average fair value of plan options granted at market prices during the
years ended December 31, 1997, 1996 and 1995 was $1.05, $5.19 and $3.33 per
share, respectively. The weighted average fair value of non-plan options granted
at market prices during the years ended December 31, 1997, 1996 and 1995 was
$.90, $3.09 and $2.68 per share, respectively.

The Black-Sholes 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.

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

8. INCOME TAXES

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

1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $8,688,800 $6,704,000
Accounts receivable allowance 25,100 24,100
Deferred rent 2,000 6,700
Deferred revenue 68,900 60,700
Accrued salaries 81,300 17,200
Accrued consulting fees 2,000 34,400

Deferred tax liabilities:
Depreciation 49,500 56,300
--------- ---------
Net deferred tax assets 8,818,600 6,790,800
Valuation allowance 8,818,600 6,790,800
--------- ---------
$ - $ -
========= =========

A valuation allowance of 100% of tax benefits has been provided because of the
Company's history of operating losses.

At December 31, 1997, the Company had net operating loss carryforwards of
approximately $21,721,900 that expire at various times through the year 2012.
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, 1995 and 1997.
However, the Company does not believe that such changes will significantly limit
its ability to use the existing net operating loss carryforwards.

9. COMMITMENTS

LEASES

The Company leases its office facilities under an operating lease that expires
September 30, 2001. The Company leases office equipment under various operating
leases, which expire from September 1999 to March 2001. Rent expense for the
years ended December 31, 1997, 1996, and 1995 was $255,700, $182,600 and
$72,300, respectively. Future minimum rental payments required under the leases
are as follows:

Year ending December 31:
1998 $262,600
1999 276,600
2000 208,900
2001 139,600
--------
$887,700
========

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

9. COMMITMENTS (CONTINUED)

LETTER OF CREDIT

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. The balance at December
31, 1997 on the letter of credit was $40,000.

10. 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 payers. The agreement had an initial term of three
years and was renewable on an annual basis thereafter.

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 was 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 were exercisable at a price of $5.875 with a term of ten years from the
date of grant. These options were subsequently canceled.

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.

No expense was incurred in 1997 or 1996 by the Company related to CSSI business
development fees. In 1995, the Company paid CSSI $1,650,000 in business
development fees and other costs.

11. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS

In 1995, the Company entered into an agreement with a physician group, of which
a doctor in the group was 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 physicians group and recorded $50,000 of
revenue for systems 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 of the Company's database occurred. In March 1997, this
agreement was terminated. The Company issued the physician group a $2,250,000
convertible subordinated note as compensation for services rendered by the
physician group in prior years. The terms of the note were restructured in
November 1997. (See Note 4). The physician group may convert up to $2,000,000 of
the convertible subordinated note into common stock at a conversion rate of
$3.32 per share, subject to certain antidilution provisions.

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

11. 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 agreed to pay to the advisor a royalty of 7.5% through
December 31, 1998, and 5% thereafter, on certain product sales. 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 revenues 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
agreed to make certain milestone payments aggregating $450,000 based upon the
Company reaching certain revenue goals and had 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. In
November 1997, the consulting agreement and the Company's obligation to make
certain milestone payments were canceled. Also, the option to purchase 550,000
shares of common stock was changed to 200,000 shares of common stock with an
exercise price of $1.00 per share.

The Company incurred royalty expense of $36,500, $46,200 and $0 in 1997, 1996
and 1995, respectively.

12. 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 worldwide, royalty free license relating to the sales and use of the
Company's system 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 at one site specified by Medtronic at no cost and
to engage with Medtronic in joint development of products and services.

13. SUPPLEMENTAL CASH FLOW INFORMATION

The Company entered into the following non-cash transactions:

DECEMBER 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Stock subscription receivable canceled as
consideration for services provided $ - $ - $50,000
Conversion of notes payable
into common stock 557,800 - -
Equipment and other assets
acquired under a capital lease 20,200 - -

</TABLE>

14. MAJOR CUSTOMERS

In 1997, the Company had three customers that accounted for 44.3%, 16.1% and
15.7% of revenue, respectively. In 1996, two customers accounted for 56.8% and
11.1% of revenue, respectively.

<PAGE>

LifeRate Systems, Inc.
(A Development Stage Company)

Notes to Financial Statements
December 31, 1997

15. LEGAL PROCEEDINGS

In February 1998, the Company was named in a complaint brought in New York state
court, by a shareholder, alleging fraud, deceit, negligent misrepresentation and
other wrongdoing in connection with the Company's December 1995 private
placement of common stock. The plaintiffs, who purchased approximately $1
million of common stock, are seeking rescission of their investment,
compensatory damages, punitive damages and restitution of profits received by
the Company and other named defendants. The Company has not yet had an
opportunity to evaluate the claims against the Company in detail but believes
the claims to be without merit and plans to vigorously defend this action. It is
not possible at this time to estimate the loss, if any, the Company will incur
with regards to the legal proceedings, and thus the Company has not established
a reserve for the outcome of the proceedings.

16. SUBSEQUENT EVENT

In January 1998, a special meeting of shareholders was held. At the meeting the
shareholders approved increasing the authorized shares of common stock from
20,000,000 shares to 75,000,000 shares.

Also in January 1998, the Company sold an additional 4,000,000 shares of common
stock and issued warrants to purchase 4,000,000 shares of common stock at an
exercise price of $1.50 per share. The warrants expire in January 2008. Net
proceeds to the Company from the sale were $1,958,000.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

LIFERATE SYSTEMS, INC.

Dated: November 5, 1998 By: /s/ F.G. Hamilton
----------------------------------
F.G. Hamilton
Acting Chief Executive Officer

By:/s/Kenneth G. Tarr
----------------------------------
Kenneth G. Tarr
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)

<PAGE>

EXHIBIT INDEX

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

3.1 Amended and Restated Articles of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997, File
No. 0-25530).

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

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

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

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

4.8 Warrant dated May 12, 1997 to purchase 100,000 shares of Common Stock
issued to Medtronic, Inc. (Incorporated by reference to Exhibit 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 the Company
issued to investors in connection with the July, 1997 Bridge Financing.
(Incorporated by reference to Exhibit 4.9 of the Company's Registration
Statement on Form SB-2, File No. 333-42155).

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

<PAGE>

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

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

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 of 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 of Non-Statutory Stock Option Agreement for Non-Employees.
(Incorporated by reference to Exhibit 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
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 April 30, 1993.
(Incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form SB-2, File No. 33-89016C).

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

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

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

10.10 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. (Incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K dated December
22, 1995, File No. 0-25530).

10.11 Employment Agreement, dated April 29, 1996 between the Company and
William W. Chorske. (Incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1996, File No. 0-25530).

10.12 Stock Option Agreement, dated April 29, 1996, between the Company and
William W. Chorske. (Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1996, File No. 0-25530).

<PAGE>

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

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

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

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

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

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

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

10.19 Agreement, dated September 25, 1996, between the Company and Donna J.
Edmonds. (Incorporated by reference to Exhibit 10.28 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 December 18, 1996, between the Company and National
Jewish Center (confidential portions have been omitted and filed with
the Secretary of the Commission). (Incorporated by reference to Exhibit
10.30 of the 10.20 Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996, File No. 0-25530).

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

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

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

10.24 Non-Statutory Stock Option Agreement, dated March 24, 1997, covering
550,000 shares between the Company and APF, LLC. (Incorporated by
reference to Exhibit 10.38 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, File

<PAGE>

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

No. 0-25530).

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

10.37 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. (Incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K dated November 26,
1997, File No. 0-25530).

23.1 Consent of Independent Auditors. (Filed herewith.)

27.1. Amended Financial Data Schedule. (Filed herewith.)

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-02856) pertaining to the LifeRate Systems, Inc. 1993 Stock
Option Plan, as amended, in the Registration Statement on Form S-8 (No.
333-06783) pertaining to the LifeRate Systems, Inc. Employee Stock Option Plan
and in the Registration Statement on Form S-3 (No. 333-04939) dated June 21,
1996, of our report dated February 27, 1998, except as to note 4 as to which
the date is November 2, 1998, with respect to the financial statements of
LifeRate Systems, Inc. included in the Annual Report on Form 10-KSB/A for the
year ended November 5, 1998.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
March 25, 1998

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

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 764
<SECURITIES> 0
<RECEIVABLES> 341
<ALLOWANCES> 63
<INVENTORY> 0
<CURRENT-ASSETS> 1,102
<PP&E> 1,050
<DEPRECIATION> 636
<TOTAL-ASSETS> 1,545
<CURRENT-LIABILITIES> 315
<BONDS> 3,107
0
0
<COMMON> 20,016
<OTHER-SE> (22,070)
<TOTAL-LIABILITY-AND-EQUITY> 1,545
<SALES> 620
<TOTAL-REVENUES> 620
<CGS> 533
<TOTAL-COSTS> 4,921
<OTHER-EXPENSES> (34)
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 299
<INCOME-PRETAX> (5,162)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 200
<CHANGES> 0
<NET-INCOME> (4,962)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)

</TABLE>