UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   ----------


                               AMENDMENT NO. 1 TO
                                  FORM 10-K ON
                                   FORM 10-K/A


(Mark One)


[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       or
[ ]   TRANSACTION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                         COMMISSION FILE NUMBER 0-22052

                                 PROXYMED, INC.
                                 --------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                     FLORIDA                                65-0202059
                     -------                                ----------
         (STATE OR OTHER JURISDICTION OF                 (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                 IDENTIFICATION NO.)

      2555 DAVIE ROAD, SUITE 110, FORT LAUDERDALE, FLORIDA    33317-7424
      ------------------------------------------------------------------
            (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)          (ZIP CODE)

     REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE    (954) 473-1001
     --------------------------------------------------------------------

           SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT: NONE

              SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:

                          COMMON STOCK, $.001 PAR VALUE
                          -----------------------------
                                (TITLE OF CLASS)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act if
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. [X] Yes [ ] No

         Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant computed using $10.00 per share, the closing price of the
registrant's common stock on the Nasdaq National Market on March 5, 1999, was
$78,359,380.

         As of March 5, 1999, 17,818,372 shares of the registrant's common stock
were issued and outstanding.


         Documents Incorporated by Reference: NONE


<PAGE>

                                     PART I

ITEM 1.  BUSINESS


         ProxyMed, Inc. is a healthcare information services company operating
in three primary business segments:

o        healthcare electronic transaction processing services and communication
         devices,

o        network engineering services and


o        prescription drug dispensing.


         Our principal executive offices are located at 2555 Davie Road, Suite
110, Fort Lauderdale, Florida 33317-7424, and our telephone number is (954)
473-1001.

         HEALTHCARE ELECTRONIC TRANSACTION PROCESSING SERVICES AND COMMUNICATION
DEVICES

         We provide healthcare electronic transaction processing services and
related software products to physicians, independent physician associations,
insurance companies, managed care organizations, pharmacies, commercial and
hospital laboratories and nursing homes. Our electronic transaction processing
services support a broad range of both financial and clinical transactions. To
facilitate these services, we have developed and operate ProxyNet,(TM) our
proprietary national electronic healthcare information network, which provides
physicians and other primary care providers with direct connectivity to the
industry's second largest list of payers, the largest list of chain and
independent pharmacies and the largest list of clinical laboratories.

         The healthcare industry generates billions of financial and clinical
transactions each year, including prescription orders, refill authorizations,
lab orders and results, radiology orders and results, medical insurance claims,
insurance eligibility inquiries, encounter notifications, and referral requests
and authorizations. We believe that the healthcare industry lags behind many
other transaction-intensive industries, such as the travel, securities and
banking industries, in the number of transactions processed electronically, with
the vast majority of healthcare transactions being performed manually and on
paper. For physicians, payers, labs and pharmacies to meet the financial and
clinical demands of an evolving managed care system, we believe that
participants in the healthcare system will need to process many of these types
of transactions electronically. Due to the number of participants, lack of
standards and complexity of establishing reliable and secure communication
networks, the healthcare industry needs companies such as ProxyMed, with its
secure, proprietary systems, to facilitate the processing of these transactions.

         Physicians control most healthcare decisions and are a center point for
patient-related financial and clinical transactions generated each year. Because
of our broad range of both financial and clinical transaction capabilities, we
are positioned to provide "one-stop shopping" for all of a physician's
electronic transaction processing needs. ProxyMed's goal is to become the
nation's leading provider of physician office connectivity and transaction
processing services.

         To gain access to the greatest number of physicians, we utilize the
following sales and distribution channels for our healthcare electronic
transaction processing and communication devices segment:


                                       2
<PAGE>

<TABLE>
<CAPTION>

     DISTRIBUTION
       CHANNEL                                  FOCUS                                   IMPLEMENTATION
----------------------       -----------------------------------------    ------------------------------------
<S>                          <C>                                          <C>
ProxyMed Software            ProxyMed has a direct sales force that       Software and Communication Products:
and Communication            serves physicians, payers, pharmacies and    Financial - EZ-Claims software
Devices - Direct Sales       labs. ProxyMed licenses its proprietary      Pharmacy - PreScribe software
                             software products for use on physician       Lab - ClinScan software and systems
                             desktops for access to ProxyNet,             Lab - Kit series of intelligent
                             transaction creation and communication              printers
                             between healthcare participants.             Nursing home - ProxyCare software

Electronic Commerce          ProxyMed has established its electronic      Agreements:
Partners                     commerce partner program to work with the    IDX Systems Corporation
                             nation's leading providers of physician      Medical Manager Corp.
                             desktop software, so that they may enable    Eclipsys Corporation
                             their existing applications to communicate   Epic Systems Corporation
                             through ProxyNet to payers, pharmacies
                             and labs.

Gateway Agreements           ProxyMed connects other electronic           Gateways:
                             transaction processing networks to           Kinetra
                             ProxyNet so that the participants on both    National Data Corp.
                             networks can communicate with each other.

Internet/World Wide          ProxyMed is establishing itself as an        Services Planned for Release by fall 1999:
Web                          Application Service Provider of financial    Lab Results Reporting
                             and clinical electronic transaction          Prescription Refill Authorization
                             processing services hosted on the web,
                             which may be accessed by any physician
                             with an internet connection.
</TABLE>

         Physicians labs and nursing homes, which we describe as "front-end"
customers, pay recurring network access and database subscription fees, as well
as software license, purchases and service fees for our desktop equipment,
software and communication devices. We market our products and services to these
customers through the distribution channels outlined in the table above - direct
"retail" sales of our software and communication devices to the physicians, labs
and nursing homes, and "wholesale" sales through relationships with electronic
commerce partners and gateway agreements. The more significant of these
"wholesale" relationships are with the parties named in the table above. These
relationships generally include the following elements of revenue which are paid
to us by the partner: a one-time integration fee to cover our costs in
establishing connectivity to the other party (recognized as revenue when the
development work is completed), and recurring monthly revenue based on the
number of physicians using our services for network access and use of our
databases (recognized monthly as services are provided).

         Payers, laboratories and pharmacies, which we describe as "back-end"
customers, pay for transaction processing services on a per transaction basis,
and the revenue is recognized as the transactions are generated. If transactions
are initiated through an electronic commerce partner or a gateway agreement, we
generally will rebate a portion of the "back-end" revenue to such electronic
commerce partner or gateway. The rebates, which are expensed as the transactions
are generated, vary in amount based on the volume of transactions received from
the electronic commerce partner or gateway.

         In prior years, a significant portion of our revenues were generated by
our other business segments. In 1998, however, the electronic transaction
processing and communication devices segment accounted for the majority of our
revenues and is expected to increase as a percentage of revenues in 1999.


         See Note 14 of the Notes to the Consolidated Financial Statements for
more financial

                                       3
<PAGE>

information about our segments.


         NETWORK ENGINEERING SERVICES

         We provide client-server software development services, internet access
services and commercial software packages to public and private sector
organizations. We also sell and support a variety of systems integration
products and services from major network equipment manufacturers in a variety of
technological niches, including hubs, routers, switches, remote access devices,
servers, storage devices and network operating systems. This division is a full
service internet access provider with network facilities in Tallahassee, Tampa
and Fort Myers, Florida. We purchase computer hardware products for resale from
a variety of suppliers and are not dependent upon any one supplier.

         PRESCRIPTION DRUG DISPENSING

         Our wholly-owned subsidiary, ProxyCare, Inc., is a pharmacy business
which dispenses and delivers unit dose oral prescription drugs to patients
residing in long-term care facilities, primarily in assisted care living
facilities in South Florida. Prescriptions are delivered monthly to such
facilities utilizing a variety of packaging systems, including
"Medicine-On-Time," which is a packaging system that permits the dispensing of
multiple prescriptions to nursing home patients. We have considered from time to
time selling this subsidiary, but have no current agreements or understandings
in this regard.


ACQUISITION PROGRAM


         Since 1997, we have completed the following mergers and acquisitions:

         o    In March 1997, we acquired substantially all of the assets of
              Clinical MicroSystems, Inc., a clinical laboratory software
              company.

         o    In April 1997, we acquired substantially all of the assets of
              Hayes Computer Systems, Inc., a network engineering services
              company.

         o    In June 1997, we acquired from Walgreen Co., owner of the
              Walgreen's pharmacy chain, the proprietary electronic prescription
              software known as PreScribe.

         o    In November 1997, we acquired substantially all of the assets of
              US HealthData Interchange, Inc., a provider of healthcare
              financial electronic transaction processing services.

         o    In May 1998, we acquired all of the capital stock of WPJ, Inc.,
              which did business as Integrated Medical Services, also a provider
              of healthcare financial electronic transaction processing
              services.

         o    In December 1998, we acquired all of the capital stock of Key
              Communications Service, Inc., a provider of clinical laboratory
              printer and communication devices.

         o    In January 1999, we acquired the electronic transaction processing
              assets of Specialized Medical Management, Inc., also a provider of
              healthcare financial electronic transaction processing services.


                                       4
<PAGE>

PRODUCT DEVELOPMENT


         We believe that our future success will depend in large part on our
ability to enhance our current line of electronic transaction processing
products and services, develop new electronic transaction processing products
and services, maintain technological competitiveness and satisfy an evolving
range of customers' requirements. We intend to expand our products and services
through acquisition and internal development. Our product development group is
responsible for improving and upgrading existing products and services,
exploring applications of core technologies and incorporating new technologies
into our products and services.

         We are currently broadening our offerings to include internet-based
financial and clinical electronic transaction processing services to be imbedded
in a web-based physician office suite of applications. All applications will
have a common user interface and will be easily accessed via the internet. We
plan to establish relationships with national internet service providers to ease
the set-up costs to access the internet. Planned services will include complete
clinical transactions such as electronic prescription orders and refills,
formulary messaging, laboratory orders and results, financial transactions such
as claims processing, encounters, eligibility verification, referrals and
electronic remittance advices, and office applications such as secure e-mail.
The first two applications -- laboratory results reporting and pharmacy
prescription refill authorizations - are expected to be available in fall 1999.

         The total amount capitalized for purchased technology and capitalized
software as of December 31, 1998, was $13,026,000, net of amortization. Research
and development expense was approximately $2,978,000 in 1998, $1,908,000 in
1997, and $177,000 in 1996. See Note 1 of Notes to Consolidated Financial
Statements.



                                       5

<PAGE>

COMPETITION


         We face competition from many healthcare information systems companies
and other technology companies. Many of our competitors are significantly larger
and have greater financial resources than we do and have established reputations
for success in implementing healthcare information service systems. The
healthcare electronic transaction processing transaction industry has been
targeted for growth by many companies, including companies developing new
technologies utilizing an internet-based system.


GOVERNMENT REGULATION


         Our products and services are not directly subject to governmental
regulation. Our customers, however, are subject to extensive and frequently
changing federal and state healthcare laws and regulations. A primary feature of
our clinical electronic transaction processing products and services is the
ability to electronically transmit (either by computer-to-facsimile or
computer-to-computer) prescriptions or laboratory orders and results to and from
a doctor's office and a pharmacy or a laboratory, respectively. The ability of a
pharmacist to fill an electronically transmitted prescription is governed by
federal and state law. A majority of states have approved the dispensing of
prescriptions transmitted via facsimile, and many states have pharmacy laws and
regulations that permit the electronic dispensing of prescriptions. In addition,
in a limited number of states where electronic transmission of
computer-generated prescriptions is not specifically addressed, the state boards
of pharmacy have generally taken the position that electronic prescriptions are
permissible.

         Similarly, the ability of laboratories or physicians to electronically
accept and transmit laboratory orders and results is governed by federal and
state law. The federal Office of Inspector General and numerous states have
published compliance plans for clinical laboratories. The end-


                                       6
<PAGE>


users, and not us, are responsible for being in compliance with federal and
state medical necessity guidelines, which set forth the steps that the end-users
should implement in order to ensure that only claims for tests that are
medically necessary for the diagnosis and treatment of the patient are submitted
to Medicare for reimbursement. Although one of our products, ClinScan, is
designed to allow end-users to install medical-necessity verification
functionality acquired directly from the applicable government entity, we do not
warrant that our products and services are or will be medical-necessity
compliant.

         The Health Insurance Portability and Accountability Act provides a
framework for the establishment of nationwide security standards and the
protection of health information. Regulations are pending which, if enacted,
provide for security standards for all electronic health information. Also, all
states have various laws and regulations protecting the confidentiality of some
patient medical records and information which obligate parties, such as
physicians, pharmacists, laboratories, hospitals and other healthcare providers,
payers, and healthcare clearinghouses such as us, to maintain the
confidentiality of this data. We have access to this data to the extent that any
data is transmitted to or from any healthcare provider or payer through our
proprietary electronic work. We have procedures in place to maintain the
confidentiality of data that passes through our electronic network.

         Our institutional pharmacy dispensing business must comply with various
federal and State of Florida laws and regulations in the operation of its
business.

         We believe we are in compliance in all material respects with the
federal and state laws and regulations governing our operations and have
obtained all licenses necessary for the operation of our business.

INSURANCE

         We maintain the following insurance polices:

         o   A general liability insurance policy that includes a $1,000,000 per
             occurrence limit of liability and a $2,000,000 aggregate limit of
             liability. The general liability coverage for our institutional
             prescription drug business includes druggist professional
             liability.

         o   A $10,000,000 umbrella policy above and beyond the general
             liability limits.

         o   An electronic data processing errors and omissions insurance policy
             with a $2,000,000 limit of liability per occurrence and in the
             aggregate.

         We believe our present insurance coverage is adequate for the
electronic transaction processing services which we provide.


INTELLECTUAL PROPERTY


         In large part, our success is dependent on our proprietary information
and technology. We rely on a combination of contract, copyright, trademark and
trade secret laws and other measures to protect our proprietary information and
technology. We have federal trademark registrations for ProxyCare, ClinScan,
ProxyScript and RxReceive and have filed trademark applications for PreScribe
and ProxyNet, which are currently pending approval. If used, these trademarks
may be


                                       7
<PAGE>


renewed for an indefinite period of time. We have no patents. As part of our
confidentiality procedures, we generally enter into nondisclosure agreements
with our employees, distributors and customers which seek to preserve the
confidentiality of our trade secrets in perpetuity, and limit access to and
distribution of our software, databases, documentation and other proprietary
information. Although we believe our products, services and technology do not
infringe on any proprietary rights of others, as the number of software products
available in the market increases and the functions of those products further
overlap, software developers may become increasingly subject to infringement
claims.


EMPLOYEES

         As of March 5, 1999, we employed 324 full-time employees. We are not
and never have been a party to a collective bargaining agreement. We consider
our relationship with our employees to be good.


ITEM 2. PROPERTIES


         We lease various properties as described below. We are also obligated
under several other operating leases for certain operating facilities which are
for periods of less than one year or are otherwise immaterial. Our leases
generally contain renewal options and require us to pay costs such as property
taxes, maintenance and insurance. We consider our present facilities adequate
for our operations and believe that alternative and additional facilities are
readily available in the event that a particular lease is not renewed.

<TABLE>
<CAPTION>

                                                                                                            AGGREGATE
                                                                                                             MONTHLY
                                                                                                              LEASE
                  INDUSTRY SEGMENT                             LOCATION                SQUARE FOOTAGE        PAYMENT
    ---------------------------------------------- --------------------------------- -------------------- ---------------
    <S>                                            <C>                                     <C>               <C>
    Corporate, Healthcare Electronic Transaction   Fort Lauderdale, FL                     20,484            $19,215
       Processing and Communication Devices
    ---------------------------------------------- --------------------------------- -------------------- ---------------
    Healthcare Electronic Transaction Processing   New Albany, IN                          43,560            $33,391
       and Communication Devices
    ---------------------------------------------- --------------------------------- -------------------- ---------------
    Healthcare Electronic Transaction Processing   Santa Ana, CA                            7,732             $8,892
       and Communication Devices
    ---------------------------------------------- --------------------------------- -------------------- ---------------
    Network Engineering Services                   Tallahassee, FL                          7,000             $8,162
    ---------------------------------------------- --------------------------------- -------------------- ---------------
    Prescription Drug Dispensing                   Fort Lauderdale, FL                      4,700             $3,101
    ---------------------------------------------- --------------------------------- -------------------- ---------------
</TABLE>


ITEM 3.  LEGAL PROCEEDINGS


         We are not a party to any material legal proceedings.

                                       8
<PAGE>


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


         There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1998.

                                        9
<PAGE>

                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK MATTERS


         Our common stock trades on the National Market tier of the Nasdaq Stock
Market under the symbol "PILL". The following table sets forth the high and low
sale prices of the common stock for the periods indicated. The common stock has
traded on The Nasdaq National Market since November 8, 1996. Previously, the
common stock traded on the SmallCap tier of the Nasdaq Stock Market.

<TABLE>
<CAPTION>
                                                                                  High          Low

         <S>                                                                      <C>           <C>
         1997:


                      First Quarter.........................................       $9.50        $5.38
                      Second Quarter........................................       11.25         4.13
                      Third Quarter.........................................       10.81         7.00
                      Fourth Quarter........................................       10.63         6.50

         1998:

                      First Quarter.........................................      $15.75        $5.25
                      Second Quarter........................................       17.13         8.38
                      Third Quarter.........................................       10.81         6.75
                      Fourth Quarter........................................       11.88         6.63

         1999

                      First Quarter.........................................      $12.00        $8.50
                        (through March 5, 1999)
</TABLE>


         On March 5, 1999, the last reported sale price of the common stock was
$10.00 per share. As of March 5, 1999, there were 203 holders of record of the
common stock. We believe that many of these holders of record are in "street
name" and that the number of individual shareholders is over 2,500.

         We have not paid any dividends on our common stock. We intend to retain
all earnings for use in our operations and the expansion of our business, and do
not anticipate paying any dividends on the common stock in the foreseeable
future. The payment of dividends is within the discretion of our Board of
Directors. Any future decision with respect to dividends will depend on future
earnings, future capital needs and our operating and financial condition, among
other factors.


         In December 1998, we issued 1,968,106 shares of our common stock in
connection with the Key Communications merger. The issuance was made in reliance
on Section 4(2) of the Securities Act of 1933.

ITEM 6.  SELECTED FINANCIAL DATA

         The following table sets forth selected consolidated financial
information for us as of and for each of the five years in the period ended
December 31, 1998, and have been derived from our audited consolidated financial
statements. Since March 1995, our business focus changed from primarily the sale
of prescription drugs to healthcare electronic transaction processing and
communication devices. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of


                                       10
<PAGE>

Financial Condition and Results of Operations" and our Consolidated Financial
Statements and related notes.

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                         -----------------------------------------------------------------------------
                                              1998             1997           1996           1995           1994
                                              ----             ----           ----           ----           ----
<S>                                      <C>              <C>             <C>            <C>            <C>
STATEMENT OF
OPERATIONS DATA:
      Revenues                           $ 37,767,677     $ 10,931,969    $ 3,054,151    $ 7,622,803    $16,533,006
      Operating loss                     $(11,681,614)    $(18,784,262)   $(4,305,293)   $(2,626,882)   $(4,126,165)
      Net loss                           $(11,788,185)    $(18,517,122)   $(2,853,735)   $(2,848,887)   $(4,265,657)
      Net loss applicable to
      common shareholders                $(11,788,185)    $(18,517,122)   $(2,949,538)   $(2,962,249)   $(4,265,657)


PER SHARE DATA:
      Basic and diluted net loss
      per share of common stock          $       (.75)    $      (1.75)   $      (.39)   $      (.61)   $     (1.01)
      Weighted average common
      shares outstanding                   15,653,374       10,589,333      7,660,383      4,816,980      4,209,876


DIVIDEND DATA:
      Dividends on cumulative
       preferred stock                   $          -     $          -    $    95,803    $   113,362    $         -
</TABLE>

<TABLE>
<CAPTION>
                                                                         December 31,
                                         -----------------------------------------------------------------------------
                                              1998             1997           1996           1995           1994
                                              ----             ----           ----           ----           ----
<S>                                      <C>              <C>             <C>            <C>            <C>
BALANCE SHEET DATA:
      Working capital (deficiency)       $  7,564,488     $ 1,966,406     $12,426,178    $   990,734    $(  469,097)
      Long-term obligations              $  1,367,193     $ 1,049,630     $         -    $   199,393    $   425,256
      Total assets                       $ 48,836,574     $19,603,121     $15,695,055    $ 4,993,337    $ 9,217,934
      Stockholders' equity               $ 40,279,119     $13,151,752     $14,915,305    $ 2,593,620    $ 3,336,035
</TABLE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         IN GENERAL

         ProxyMed is a healthcare information services company providing
financial and clinical electronic transaction processing services and healthcare
technology software products to physicians and other healthcare providers such
as nursing homes, pharmacies, commercial and hospital laboratories, insurance
companies and managed care organizations. In addition, we derive revenues from
network engineering services and related computer hardware sales principally to
state government agencies, sales and leasing of computer peripheral equipment to
various healthcare and non-healthcare customers, contract manufacturing of
circuit boards to non-healthcare customers, and the dispensing of prescription
drugs to patients who are residing in long-term care facilities. Our products
and services are provided from our four


                                       11
<PAGE>

principal operating facilities located in Fort Lauderdale and Tallahassee,
Florida; Santa Ana, California; and New Albany, Indiana.


         Business combinations were consummated during the periods presented and
are included in the financial statements after their respective dates of
acquisition. Key Communications merged with ProxyMed in December 1998 (accounts
of Key Communications are includable as of May 1, 1998 due to a leveraged
buy-out consummated on April 30, 1998 by Key Communications' shareholders);
Integrated Medical Services was acquired in May 1998; US HealthData Interchange
was acquired in November 1997; and Clinical MicroSystems was acquired in March
1997. These four entities are reportable under the healthcare electronic
transaction processing and communication devices segment. Hayes Computer Systems
was acquired in April 1997 and is reportable under the network engineering
services segment.

RESULTS OF OPERATIONS


YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997


         NET REVENUES. Consolidated net revenues for 1998 increased by
$26,835,708, or 245%, to $37,767,677 from consolidated net revenues of
$10,931,969 in 1997.

         The healthcare electronic transaction processing and communication
devices segment revenues increased by $20,412,204, or 1123%, to $22,229,326 in
1998 from $1,817,122 in 1997. This increase was primarily due to the
acquisitions of Integrated Medical Services in 1998 ($2,530,000) and US
HealthData Interchange in late 1997 ($2,099,000), the merger with Key
Communications in 1998 ($10,439,000), and three significant software licenses
sold for our ProxyCare and ClinScan products ($4,751,000).

         The network electronic transaction processing services segment revenues
increased by $6,075,671, or 78%, to $13,855,458 in 1998 from $7,779,787 in 1997.
This increase was primarily due to a new agency of the State of Florida which
became a new customer in 1998 and a full year of revenue in 1998 as compared to
eight months of revenue in 1997, as Hayes Computer Systems was acquired in April
1997. In 1998 and 1997, approximately 87% and 91%, respectively, of the network
engineering services revenues were from the State of Florida and its related
agencies. Approximately 84% and 81%, in 1998 and 1997, respectively, of this
segment's revenues are from sales of hardware and third-party software products.


         The prescription drug dispensing segment revenues increased by
$347,833, or 26%, to $1,682,893 in 1998 from $1,335,060 in 1997, primarily as a
result of increased marketing efforts to obtain new customers.


         COST OF SALES AND GROSS PROFIT MARGIN. Cost of services and license
fees includes labor and travel costs, third-party support arrangements,
third-party electronic transaction processing transaction processing costs and
Internet related communication fees. Cost of sales for computer systems,
prescription drugs and other tangible goods includes hardware, third-party
software, prescription and non-prescription drugs, manufactured goods and direct
labor and consumable materials used in contract manufacturing.

         Consolidated gross profit margin for 1998 was 56% compared to 37% in
1997. The increase is primarily due to the impact of a higher percentage of
total sales arising from increased electronic


                                       12
<PAGE>


transaction processing transaction revenues and other revenues due to our
acquisitions in the healthcare electronic transaction processing and
communication devices segment (68% for Key Communications, and 77% for
Integrated Medical Services and US HealthData Interchange combined), as well as
the sales of higher margin software licenses for the ProxyCare and ClinScan
products (100%). Combined, the gross profit margin for the healthcare electronic
transaction processing and communication devices segment was 79% in 1998 and
1997. The gross profit margin in the network engineering services segment was
23% in 1998 compared to 27% in 1997. This decrease was primarily due to a higher
amount of lower margin hardware products, as compared to the sales of services.
The gross profit margin in the drug dispensing segment was 32% in 1998 compared
to 37% in 1997. This decrease was due to a change in the mix of customers from
private pay patients to lower margin third-party payers.


         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for 1998 increased by $9,580,726, or 72%, to
$22,874,079 from consolidated selling, general and administrative expenses of
$13,293,353 in 1997. Consolidated selling, general and administrative expenses
as a percentage of consolidated net sales decreased to 61% in 1998, from 122% in
1997, as we established a higher revenue base through our acquisitions. In
addition, the rate of increase in sales in 1998 exceeded the rate of increase in
selling, general and administrative expenses.


         Selling, general and administrative expenses for the healthcare
electronic transaction processing and communication devices segment increased by
$8,336,518, or 105%, to $16,268,058 in 1998 from selling, general and
administrative expenses of $7,931,540 in 1997. The increase consisted primarily
of selling, general and administrative expenses of Key Communications
($5,441,000), Integrated Medical Services ($1,616,000) and US HealthData
Interchange ($1,801,000) and net decreases of $521,000 in selling, general and
administrative expenses from existing segment operations.

         Selling, general and administrative expenses for the network
engineering services segment increased by $953,791, or 52%, to $2,778,758 in
1998 from selling, general and administrative expenses of $1,824,967 in 1997.
This increase resulted from a full year of operations included in 1998, whereas
only eight months was included in the prior year as the acquisition of Hayes
Computer Systems occurred in April 1997.


         Selling, general and administrative expenses for the drug dispensing
segment increased by $95,141, or 20%, to $561,186 in 1998 from selling, general
and administrative expenses of $466,045 in 1997. This increase primarily
resulted from payroll, commissions and related costs to support the increase in
revenues.

         Corporate related selling, general and administrative expenses
increased by $195,276, or 6%, to $3,266,077 in 1998 from $3,070,801 in 1997.
This increase was primarily a result of the net effect of various costs and
expenses.


         DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$7,802,973, or 724%, to $8,881,273 in 1998 from $1,078,300 in 1997. This
increase was due to the following: (i) amortization charges for goodwill
associated with our acquisitions completed in 1997 and 1998 which are being
amortized over three years ($3,971,000); (ii) amortization of purchased
technology and capitalized software costs for healthcare electronic transaction
processing and communication devices ($3,021,000); (iii) depreciation charges
associated with ProxyMed's internal systems and related equipment ($424,000);
(iv) amounts payable to Walgreens associated with the acquisition of PreScribe
($250,000); and (v) amortization charges for other intangibles associated with
our


                                       13
<PAGE>


acquisitions ($137,000). Goodwill previously recorded from the acquisitions of
US HealthData Interchange and Clinical MicroSystems is being amortized on the
straight-line method over three years beginning April 1, 1998. Goodwill from
these acquisitions was previously being amortized on the straight-line method
over 15 years. This change in estimate results in an additional amortization
expense of approximately $1,015,000 per year.

         IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY. As a result of a
contingent payment made to the former owner of Hayes Computer Systems in 1998,
we recorded a charge of $742,623 in 1998 related to the expensing of in-process
research and development technology. In 1997, we recorded a charge of $8,467,098
for in-process research and development technology. A full description of these
charges is contained in the following paragraphs.

       Portions of the initial purchase prices for the Hayes Computer Systems
and Clinical MicroSystems acquisitions were allocated to in-process research and
development technology, resulting in charges to our 1997 operations of
$4,167,098 for the Hayes Computer Systems acquisition and $4,300,000 for the
Clinical MicroSystems acquisition. The following products are includible as
in-process research and development technology:

(a)      Krypton Internet Messaging Server - The in-process research and
         development acquired from Hayes Computer Systems consisted of the
         Krypton Internet Messaging Server, a server-to-server intranet email
         system designed to provide more security, higher performance and a
         lower price than comparable UNIX based email systems. At the time of
         the acquisition, this product was in the alpha phase of programming and
         had the capability of processing only simple email communications.
         ProxyMed intended to complete the development of a testing lab, the
         development of the Krypton Internet Messaging Server product, and the
         development of the electronic transaction processing version of the
         product at an estimated cost of approximately $253,000 and include it
         in its electronic transaction processing product offering to physicians
         and other healthcare providers using the ProxyNet network by the end of
         calendar 1997. ProxyMed anticipated that revenues would commence in
         1998, and would grow at a rate ranging from 53% to 25% per year through
         2006, with the lower growth rates being achieved in the later years. In
         addition, ProxyMed had assumed operating expenses associated with this
         product in the range of 40% to 50% of gross revenues, as well as
         expenditures for fixed assets and further software development.

         However, shortly after the acquisition, Microsoft Corporation released
         its improved email product. Therefore, the decision to complete the
         Krypton Internet Messaging Server product was temporarily suspended
         until an assessment of the Microsoft product could be completed. After
         analyzing the Krypton Internet Messaging Server product and discussing
         the opportunities for it, ProxyMed decided to complete the Krypton
         Internet Messaging Server product and expects to have it completed in
         1999 and include it in its future web-based product line.

(b)      CLINSCAN INTRANET - The in-process research and development acquired
         from Clinical MicroSystems consisted of the ClinScan Intranet, a system
         designed to provide hospitals with the capability to connect
         hospital-based and office-based physicians together, in a private wide
         area network, or Intranet. The hospitals and physicians would have the
         ability to electronically exchange messages, images, files and other
         valuable clinical information, including the exchange of clinical
         orders and results using proven interface technology. By incorporating
         the ClinScan workstation at physician sites, this software application
         would provide access to all of the hospital based legacy systems
         invisibly. By adding high-speed communications access, hospitals and
         physicians would be able to access the Internet. At the time of the
         acquisition, completion of the communication protocols for incoming and
         outgoing messaging and an interface for communications to the legacy
         systems had been developed. ProxyMed intended to complete the global
         patient data repository, routing functionality, cross-relational master
         indexes, and master catalogue of


                                       14
<PAGE>


         clinical functionality of the product at an estimated cost of
         approximately $600,000 and include it as a clinical electronic
         transaction processing product offering to physicians, laboratories and
         other healthcare providers by the start of 1998.

         The technology supported by the research performed on the ClinScan
         Intranet was used by ProxyMed to develop its Lab Network Intranet
         Server, the central information processor for its latest ClinScan
         software product. Revenues from the sales of ClinScan involving its Lab
         Network Internet Server commenced in 1998.

Management of ProxyMed is responsible for estimating the fair value of acquired
in-process research and development. To assist in determining the fair value of
the acquired in-process research and development, ProxyMed used standard
appraisal methodologies. Each appraisal procedure performed involved projected
cash flows for Krypton Internet Messaging Server and ClinScan Intranet over
their estimated useful lives, net of ongoing operating investment needs
(including working capital, fixed assets and other assets) that support the
products. An effective income tax rate of 37.6% was applied to each of the cash
flows representing the expected marginal combined federal and state tax rate to
apply over the cash flow periods. These cash flows were discounted to their
present value using a discount rate of 70%, which is reflective of a "start up"
company for which the Krypton Internet Messaging Server and ClinScan Intranet
products are similar in risk. The Krypton Internet Messaging Server product was
valued at $6,400,000 and the ClinScan Intranet product was valued at $4,300,000
using these model assumptions. The development of these projects had not yet
reached technological feasibility to permit capitalization, and the technology
had no alternative future use. Income tax benefits resulted from these charges
of approximately $1,563,000 and $1,613,000 for the Hayes Computer Systems and
Clinical MicroSystems acquisitions, respectively; however, based on the weight
of available evidence, valuation allowances for the full amounts have been
recorded.

         INTEREST, NET. We incurred net interest expense for 1998 of $106,571,
whereas we earned net interest income for 1997 of $267,140. The 1998 amount
reflects interest expense incurred on the debt of Key Communications ($206,000)
and interest expense on the debt issued for the acquisition of Clinical
MicroSystems ($122,000) offset by interest earned on invested funds ($221,000).
In connection with the merger with Key Communications, the debt guaranteed by
Key Communications was retired.

         OTHER. As a result of our merger with Key Communications, we recorded
$426,970 in merger related expenses in 1998.

         NET LOSS. As a result of the foregoing, we recorded a net loss of
$11,788,185 in 1998, as compared to a net loss of $18,517,122 in 1997. Net loss
for 1998 includes income from the operations of Key Communications of $1,117,398
for the period from May 1, 1998 through December 31, 1998.


YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

         NET REVENUES. Consolidated revenues for 1997 increased by $7,877,818,
or 258%, to $10,931,969 from consolidated revenues of $3,054,151 in 1996.


         The healthcare electronic transaction processing and communication
devices segment revenues decreased by $68,885, or 4%, to $1,817,122 in 1997 from
$1,886,007 in 1996. This decrease was primarily due to the net effect of two
factors. First, as a result of the acquisitions of Clinical MicroSystems
($1,294,000), US HealthData Interchange ($280,000) and PreScribe in 1997
($72,000),


                                       15
<PAGE>

segment revenues increased by $1,646,218 over 1996 levels. Revenues for these
acquisitions include the processing of certain clinical and financial
transactions, proprietary computer software and hardware, and annual software
support contracts. Second, segment revenues in 1996 include one-time license fee
revenue from Bergen Brunswig Drug Corporation and Blue Cross and Blue Shield of
Massachusetts, Inc. totaling $1,204,000, whereas no such license fee income was
received in 1997.


         The network engineering services segment revenues were $7,779,787 in
1997 compared to no such revenues in 1996, due to the acquisition of Hayes
Computer Systems in April 1997. Approximately 91% of the network engineering
services revenues were to the State of Florida and its related agencies.
Approximately 81% of this segment's revenues are from sales of hardware and
third-party software products.


         The prescription drug dispensing segment revenues increased by
$166,916, or 14%, to $1,335,060 in 1997 from $1,168,144 in 1996, primarily as a
result of increased marketing efforts to obtain new customers.


         COST OF SALES AND GROSS PROFIT MARGIN. Cost of services and license
fees includes labor and travel costs, third-party support arrangements,
third-party electronic transaction processing costs and internet-related
communication fees. Cost of sales for computer systems and prescription drugs
includes hardware, third-party software, and prescription and non-prescription
drugs.

         Consolidated gross profit margin for 1997 was 37% compared to 57% in
1996. The gross profit margin for the healthcare electronic transaction
processing and communication devices segment was 79% in 1997 compared to 70% in
1996. This increase is primarily attributable to the contribution in 1997 from
our lab software products and annual software support contracts, which typically
carry high gross profit margins. The gross profit margin in the network
engineering services segment was 27% in 1997 due to the high concentration of
lower margin hardware products. The gross profit margin in the prescription drug
dispensing segment was 37% in 1997 compared to 34% in 1996. This increase was
due to a change in the mix of customer from third-party payers to higher margin
private pay patients.


         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for 1997 increased by $7,583,920, or 133%,
to $13,293,353 in 1997 from consolidated selling, general and administrative
expenses of $5,709,433 in 1996. Consolidated selling, general and administrative
expenses as a percentage of consolidated net revenues decreased to 122% in 1997
from 187% in 1996, as the rate of increase in revenues in 1997 exceeded the rate
of increase in selling, general and administrative expenses.


         Selling, general and administrative expenses for the healthcare
electronic transaction processing and communication devices segment increased by
$5,217,656, or 192%, to $7,931,540 in 1997 from selling, general and
administrative expenses of $2,713,884 in 1996. The increase resulted from
acquisitions of Clinical MicroSystems ($1,550,000) and US HealthData Interchange
($264,000), and internal growth in order to support this core business of
ProxyMed. The increase consisted primarily of the following: (i) additional
payroll and related costs for sales, product development, customer service,
implementation services, technical operations and management personnel
($3,866,000); (ii) additional marketing expenses including attendance at
national and local trade shows, print ads, and travel to potential customers
($721,000); (iii) telecommunication costs related to our further development of
our ProxyNet network costs including direct connectivity with our strategic
partners ($293,000); (iv) consulting fees to various software and business
consultants ($160,000); (v) occupancy costs primarily associated with the
acquisitions of Clinical MicroSystems


                                       16
<PAGE>


and US HealthData Interchange and additional facilities for product development
and sales ($105,000); (vi) write-off of certain capitalized software that we
determined had no continuing future benefit to its operations ($202,000); (vii)
charges related to certain compensatory stock options and warrants issued in
1996, whereas there were no such charges in 1997 (decrease of $300,000); and
(viii) net increases in various other selling, general and administrative
expenses which were individually less than $100,000 ($171,000).

         Selling, general and administrative expenses for the network
engineering services segment were $1,824,967 in 1997 and resulted from the
acquisition of Hayes Computer Systems in 1997. These expenses consisted
primarily of payroll and related costs ($1,345,000), occupancy costs ($144,000),
telecommunications costs ($114,000), and marketing related costs including
travel to potential customers ($82,000).


         Selling, general and administrative expenses for the prescription drug
dispensing segment increased by $114,927, or 33%, to $466,045 in 1997 from
selling, general and administrative expenses of $351,118 in 1996. This increase
primarily resulted from payroll, commissions and related costs to support the
increase in business.

         Corporate-related selling, general and administrative expenses
increased by $426,370, or $16%, to $3,070,801 in 1997 from $2,644,431 in 1996.
This increase was primarily a result of the following: (i) termination and
separation payments for certain employees ($235,000); (ii) the write-off of
certain computer hardware that we determined that we will no longer utilize in
our corporate operations ($161,000); and (iii) a net increase in various other
selling, general and administrative expenses ($30,000).


         DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$755,712 in 1997, or 234%, to $1,078,300 from $322,588 in 1996. This increase
was primarily due to the following: (i) amortization of capitalized software
costs for healthcare electronic transaction processing and communication devices
($214,000); (ii) depreciation charges associated with ProxyNet and related
systems ($100,000); (iii) amounts payable to Walgreens associated with the
acquisition of PreScribe ($250,000); (iv) amortization charges for goodwill and
other intangible assets associated with our acquisitions completed in 1997
($84,000); and (v) other general depreciation increases ($108,000).

         INTEREST, NET. Net interest income decreased $169,519, or 39%, to
$267,140 in 1997 from $436,569 in 1996. The decrease in net interest income is
due primarily to interest expense of approximately $136,000 in 1997 on the debt
issued for the acquisition of Clinical MicroSystems, which was not present in
1996.

         IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY. As a result of the
acquisitions of Clinical MicroSystems and Hayes Computer Systems, we recorded
charges totaling $8,467,098 in 1997 related to the expensing of in-process
research and development technology. See Note 2 of Notes to Consolidated
Financial Statements for a full description of such charges.


         OTHER. In 1996, we earned $1,014,989 from the sale of certain assets of
our drug dispensing operations to Eckerd Corporation in 1995.

         NET LOSS. As a result of the foregoing, we recorded a net loss of
$18,517,122 in 1997, as compared to a net loss of $2,853,735 in 1996

                                       17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES


         In 1998, cash used in operating activities totaled $4,916,287. This was
primarily due to our net loss partially offset by depreciation and amortization
charges. These activities were financed through available cash resources,
private placement sales of 3,013,416 shares of our common stock resulting in net
proceeds of $29,118,505 and $1,451,700 in proceeds from the exercise of stock
options and warrants. During this period, we acquired Integrated Medical
Services for $25,965,325 in cash plus common stock, made $406,556 in debt and
interest payments for notes payable acquired with Integrated Medical Services
and Key Communications, and made several cash payments related to acquisitions
completed in 1997 including: a debt payment under our obligation to the former
owner of Clinical MicroSystems for $750,000, a contingent payment to the former
owner of Hayes Computer Systems in the amount of $500,000 for meeting defined
operating criteria in the 12 months subsequent to the acquisition, and $500,000
to Walgreens under our contract for the purchase of PreScribe. Additionally, we
incurred approximately $400,000 in net costs (principally leasehold
improvements, relocation expenses and rent deposits) for the relocation of our
corporate offices and our network and development operations in Fort Lauderdale
in September 1998. After these receipts and expenditures, we had cash and cash
equivalents totaling $4,681,671 as of December 31, 1998. These available funds
continue to be used for operations, the further development and marketing of our
products and services, equipment and other general corporate purposes. In
addition, we are continuously evaluating acquisition opportunities and other
strategic alternatives that add synergies to our product offerings and business
strategy. Pursuant to this strategy, we purchased the healthcare electronic
transaction processing assets of Specialized Medical Management for $1,000,000
in cash in January 1999.

         In general, we believe that the long-term effects of our various
acquisitions will be accretive to our operating results and our liquidity. For
example, the electronic transaction processing operations relating to the
acquisitions of Integrated Medical Services, US HealthData Interchange and
Specialized Medical Management are being merged into one location; the lab
operations relating to the Clinical MicroSystems products and the Key
Communications operations are being merged together; and the PreScribe
technology is being merged with the pre-existing prescription electronic
transaction processing products. Hayes Computer Systems will continue to be
operated from its existing location as a separate segment. While no assurance
can be given that revenue synergies will occur, we expect that there will be
opportunities to increase revenues by cross-selling products and services to the
customers of the acquired entities, as well as revenue opportunities from the
development of new services from our product development efforts. In addition,
we expect to experience cost reduction synergies from the operations that have
been or are planned to be combined. These savings will occur primarily from
elimination of facilities, duplicate personnel in the areas of network
operations, management and customer service, duplicate marketing efforts and
other general and administrative costs. However, on a short-term basis, we
generally incur additional expenses resulting from our acquisitions due to
stay-pay incentives during the transition period and moving costs for employees
that are retained. We do not expect our interest costs to increase as a result
of our acquisitions, as most of the financing for the acquisitions resulted from
issuances of our equity securities, and debt carried by the acquired entities
was paid off. While amortization of goodwill and other intangible assets from
our acquisitions will not affect our future cash outflows, we expect that such
acquisition-related charges will approximate $2,800,000 per quarter through the
second quarter of 2001.


         We have a revolving bank line of credit of up to $5,000,000, subject to
availability of suitable collateral, which was renewed in August 1998.
Borrowings, if any, are due on demand, collateralized by


                                       18
<PAGE>

certificates of deposit and U.S. Treasury Notes, and bear interest at the prime
rate less 3/4%. There were no outstanding borrowings on this line of credit as
of December 31, 1998.


         As a result of the acquisitions of Clinical MicroSystems, Hayes
Computer Systems and PreScribe in 1997, we are obligated to make certain
payments in the next 12 months. These payments are as follows: $500,000 for
Clinical MicroSystems, $1,000,000 for Hayes Computer Systems, and $500,000 for
PreScribe. The Clinical MicroSystems and Hayes Computer Systems payments may be
made at least 50% in cash and the balance, if any, in common stock.


         We do not have any material commitments for capital expenditures.


         The ratio of current assets to current liabilities was 2.1 times in
1998 compared to 1.4 times in 1997. This increase is attributable to the
additional cash and accounts receivable generated from our recent acquisitions.
Accounts receivable turnover for us was 6.3 times in the 1998 period which was
comparable to 6.6 times in 1997. Inventory turnover 5.6 times in the 1998 period
compared to 7.4 times in the 1997 period; this decrease is attributable to
slower inventory turnover at Key Communications.

         We expect to continue to incur negative net cash flow from operations
until we begin receiving higher levels of revenues from our healthcare
electronic transaction processing and communication devices segment and/or from
cash generated by our network engineering services segment. Management is
committed to the strategy of investing funds in further marketing and
development of our products and services and may pursue additional acquisitions
which are deemed to be in accordance with our business strategy, both of which
may require additional equity or debt financing. As a result of these factors,
we believe that we will have to access sources of cash to continue to fund our
operating needs, our acquisition obligations and our strategic needs. In the
recent past, we have raised cash to fund our operations and pay for acquisitions
from the private placement sales of our common stock. We believe that we can
continue to finance our short-term cash needs in this manner. In addition, we
believe that asset-based debt financing will be available to help finance our
short-term needs. Further, we believe that we may be able to raise cash for both
our short-term and long-term needs through the public equity markets. However,
there can be no assurances that any such financing will be available under terms
and conditions acceptable to us.

FUTURE OUTLOOK

         We continue to grow through strategic acquisitions and concentration on
our core healthcare electronic transaction processing and communication devices
segment, our distribution channels with other healthcare entities and other
plans to increase the usage of our healthcare information technology products
and services to achieve requisite economies of scale. We have successfully
reduced our operating losses before non-cash charges. Such non-cash charges are
significant and result primarily from amortization expenses related to our
acquisitions. However, we anticipate that we will continue to incur operating
losses until we generate sufficient recurring revenues from our products and
services to cover the total of our cash and non-cash expenses. There can be no
assurance that we will realize an adequate level of recurring revenues from the
sale of our products and services, or that revenues from its operations or those
of our recently acquired businesses and any future acquisitions will ultimately
result in achievement of profitability.


                                       19

<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

         Effective January 1, 1998, we adopted and are reporting in accordance
with SFAS No. 130, "Reporting Comprehensive Income," and SOP No. 97-2, "Software
Revenue Recognition." There were no differences between our net loss and
comprehensive loss under SFAS No. 130 and the adoption of SOP No. 97-2 did not
have a material effect on the timing of our revenue recognition.

YEAR 2000 COMPLIANCE

         GENERAL. Many currently installed computer systems and software
products are coded to accept only two digit dates. Such systems may not be able
to distinguish 20th century dates from 21st century dates. To address these and
any other Year 2000 operational issues which may affect us, in September 1998 we
appointed a Year 2000 Committee and hired a Year 2000 project manager to review
our internal computer systems and our products and services as well as review
the progress of our principal customers, vendors and resellers.

         The Committee has developed a priority order list of our products and
services and has commenced the Year 2000 project plan in accordance with this
list. Our Year 2000 project plan consists of four phases: assessment,
remediation, validation and distribution.

         The primary purpose of the assessment phase is to list and analyze the
inventory of our products sold and supported. The major issues encountered
during this phase are the identification of language the software is written in,
the source code and any third-party libraries in a product. The remediation
phase is where changes to the programs and codes are actually made. The
validation phase is where the remediated products are tested and then submitted
for independent verification and validation. The distribution phase,
specifically for proprietary products, is where the remediated products are
provided to our customers.


         PRODUCTS AND SERVICES. With respect to our products and services,
except those recently acquired from our business combinations with Key
Communications and Specialized Medical Management, the assessment phase is
substantially complete. The assessment and remediation phases for our three top
priority products have been fully completed, with two products currently in the
distribution phase. We expect that all of our software products and our clinical
and financial transaction processing networks will be Year 2000 ready by July
1999.


         Concurrently, we have contacted all third party vendors whose
proprietary tools and library products are incorporated into our products in
order to determine their respective Year 2000 readiness status. Certain of those
third parties have required actions to be taken by us. Such actions have been
performed in accordance with instructions provided by the vendor.

         Finally, we have contacted our customers to inform them of our Year
2000 readiness status. Updates to that information are posted on our website
when necessary.


         ACQUISITIONS. The Committee is also responsible for identifying Year
2000 issues that may be present in acquisition candidates, as Year 2000
compliance is a factor in determining the suitability of an acquisition. Recent
acquisitions have included representations from the sellers regarding Year 2000
compliance, so that we may have recourse in the event that unforeseen Year 2000
issues arise.


                                       20
<PAGE>


         Based on representations made at time of our merger with Key
Communications, we believe that Key Communications' products and services will
operate satisfactorily in a Year 2000 environment. We have begun the assessment
phase to verify those representations. Based on procedures performed to date, we
do not expect any additional actions to be required.

         Concerning our acquisition of Specialized Medical Management, we have
identified three potential Year 2000 issues. First, all of Specialized Medical
Management's customers require a software upgrade. We are in the process of
replacing their software with our Year 2000-ready products and expect that this
will be completed by May 1, 1999. Second, Specialized Medical Management's
financial transactions network is being combined with our existing financial
transactions network, which is Year 2000 compliant, by July 1999. Third, certain
financial transaction services currently provided to a certain payer will either
be remediated or we will purchase a replacement.


         INTERNAL SYSTEMS, VENDORS AND SUPPLIERS. We have completed the
assessment phase with respect to our internal administrative systems, our
vendors and suppliers, and we are in various stages of remediation. We plan to
complete the Year 2000 compliance for these areas by the end of the third
quarter of 1999. We also plan to have contacted all of our significant clinical
and financial transaction processing partners by the end of the first quarter of
1999 in order to assess their Year 2000 readiness status.

         COSTS. Since the formation of the Year 2000 Committee in September
1998, we have spent $32,000 through December 31, 1998 primarily for personnel
costs. The total estimated budget for expenditures directly related to our Year
2000 effort is approximately $500,000. The budget includes staffing costs for
employees hired specifically to address Year 2000 issues; however, it does not
include the internal staff costs incurred or to be incurred as these costs are
considered part of the normal release structure of our products. The estimated
budget also includes hardware upgrade costs much of which would have been
incurred in our normal equipment replacement plans. As such, anticipated total
spending for the Year 2000 effort is not expected to have a significant impact
on our ongoing results of operations.

         CONTINGENCY PLAN. While some "worst case scenarios" are associated with
risks outside our control (including power and communications), we have started
assessing those scenarios within our control. The Year 2000 Committee identified
the major areas of concern to be the handling of data formatting and
transmitting compliant data and our customers' usage of our software products.
To deal with some of these concerns, we have informed our financial network
users of the availability of an algorithm to allow those with non-compliant
formats to continue transmitting to payers in a Year 2000 compatible format.
During the second quarter of 1999, we will be formulating documented scenarios
for our customer service representatives to assist our hardware and software
users if they have Year 2000 related issues.

         We expect that by the fourth quarter 1999 we will have a documented
business continuity plan to cover all aspects of our customer and internal
concerns, including our products and services, alternative vendors/suppliers,
backup power sources and staffing issues to assure coverage immediately before
and after the millennium. However, due to the general uncertainty inherent in
the Year 2000 issue, there can be no assurance that all Year 2000 problems will
be foreseen and corrected on a timely basis.

         FORWARD-LOOKING STATEMENTS. The foregoing Year 2000 discussion and the
information contained herein are provided as a "Year 2000 Readiness Disclosure"
as defined in the Year 2000


                                       21
<PAGE>

Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998 and contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which we expect to complete certain actions, are based on management's best
current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability to
identify and remediate all relevant systems, results of Year 2000 testing,
adequate resolution of Year 2000 issues by governmental agencies, businesses and
other third parties who are outsourcing service providers, suppliers, and
vendors of ours, unanticipated system costs, the adequacy of and the ability to
implement contingency plans and uncertainties. The "forward-looking statements"
made in the foregoing Year 2000 discussion speak only as of the date on which
such statements are made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995


         This document contains "forward-looking statements" within the meaning
of the federal securities laws. These forward-looking statements include
assumptions, beliefs and opinions relating to our growth strategy based upon our
interpretation and analysis of healthcare industry trends and management's
ability to successfully develop, implement, market and sell our secure network
transaction processing services, software programs, clinical databases and
financial transaction services to physicians and other healthcare providers.
This strategy assumes that physicians will prefer "one-stop shopping" for our
products and services and that we will be able to successfully develop, acquire,
maintain and upgrade competitive clinical and financial transaction sets and
successfully integrate them with our existing products and services. This
strategy also assumes that we will be able to successfully develop and execute
our distribution relationships, especially with the providers of information
systems to physicians under our electronic partnership program and with medical
laboratories, pharmacy chains, independent pharmacy owners and pharmacy
information system vendors. Many known and unknown risks, uncertainties and
other factors, including general economic conditions, healthcare reform
initiatives, millennium compliance issues that may arise, and risk factors
detailed from time to time in our Securities and Exchange Commission filings,
may cause these forward-looking statements to be incorrect, and may cause actual
results to be materially different from any future results expressed or implied
by these assumptions, opinions and beliefs. We expressly disclaim any intent or
obligation to update any forward-looking statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and schedules are included beginning at Page
F-1.


                                       22
<PAGE>


ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


         We have not had any change in or disagreement with our accountants on
accounting and financial disclosures during our two most recent fiscal years or
any later interim period.

                                       23
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Our directors and executive officers are as follows:

<TABLE>
<CAPTION>
NAME                                         AGE              POSITION
----                                         ---              --------
<S>                                           <C>             <C>
Harold S. Blue                                37              Chairman of the Board, Chief
                                                                Executive Officer

John Paul Guinan                              38              Co-President and Director

Bennett Marks                                 50              Co- President, Chief Financial
                                                                Officer and Director

James Pickering                               44              Co-President and Chief
                                                                Operating Officer

Frank M. Puthoff                              53              Executive Vice President,
                                                                Chief Legal Officer and
                                                                Secretary

Bruce S. Roberson                             50              Executive Vice President -
                                                                Sales and Marketing

Samuel X. Kaplan(2)                           76              Director

Bertram J. Polan(1)(2)                        47              Director

Peter A. A. Saunders(1)(2)                    57              Director

Eugene R. Terry(1)                            60              Director
</TABLE>

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

(1)    Member of the Audit Committee, the Chairman of which is Mr. Saunders.
(2)    Member of the Compensation Committee, the Chairman of which is Mr. Polan.

         HAROLD S. BLUE joined ProxyMed in 1993 and currently serves as Chief
Executive Officer and Chairman of the Board. From 1992 to 1996, Mr. Blue was
also President and Chief Executive Officer of Health Services Inc., a physician
practice management company which was sold to InPhyNet Medical Management, Inc.
From 1979 to 1984, Mr. Blue was President and Chief Executive Officer of Budget
Drugs, Inc., a retail discount pharmacy chain located in South Florida. In
September 1984, Mr. Blue founded Best Generics, Incorporated. Best Generics was
later sold to pharmaceutical manufacturer, Ivax Corporation, where Mr. Blue
served as a member of Ivax's Board of Directors from 1988 to 1990. He currently
serves as a director of three publicly-held companies, iMall, Inc., the largest
independent mall on the Internet, Windsor Capital Corp., a specialty regional
mall based retailer, and AccuMed International, Inc., a global diagnostics
information company.

                                       24
<PAGE>


         JOHN PAUL GUINAN has been Co-President and a director of ProxyMed since
June 1995. He was its Chief Operating Officer from August 1996 to January 1998.
He was an Executive Vice President of ProxyMed from July 1993 until June 1995.
From March 1993 to June 1993, Mr. Guinan was the Chief Executive Officer and
co-founder of ProxyScript, Inc. (f/k/a Medical Containment Systems, Inc.), which
ProxyMed acquired in June 1993. From 1989 until April 1993, Mr. Guinan founded
and developed two companies: The Desktop Professionals, Inc., a company which
supplied automation systems to South Florida professional offices; and POSitive
Thinking, Inc., a software development company which specialized in point of
sale systems.

         BENNETT MARKS was appointed Co-President in November 1998 and has been
Executive Vice President Finance, Chief Financial Officer and a director of
ProxyMed since October 1993. From May 1991 to October 1993, Mr. Marks was Vice
President - Finance and a director of another public company engaged in the
manufacturing and marketing of network management systems for use by
telecommunication companies. From 1981 to April 1991, Mr. Marks was an audit
partner with KPMG, an international accounting and consulting firm. While with
KPMG, Mr. Marks was the partner on audits of numerous public companies and
served as an Associate SEC Reviewing Partner. He also served as the
Administrative Partner in charge of KPMG's West Palm Beach office. Mr. Marks is
a certified public accountant.

         JAMES PICKERING was appointed Co-President in November 1998 and was
appointed Executive Vice President-Operations and Chief Operating Officer in
January 1998. From September 1995 to January 1998, Mr. Pickering served as
President of Med-Link Technologies, Inc., a healthcare electronic transaction
processing company and a subsidiary of SPS Payment Systems, Inc., a New York
Stock Exchange company and affiliate of Morgan Stanley, Dean Witter Discover and
Co. From October 1991 to September 1995, Mr. Pickering was Vice
President-Systems for National Electronic Information Corporation (NEIC), also a
healthcare electronic transaction processing company. Prior to that, Mr.
Pickering served as a consultant for Metropolitan Life Insurance Company and the
Prudential Insurance Company designing and implementing claims administration,
utilization review and managed care capitation systems.

         FRANK M. PUTHOFF was appointed Executive Vice President, Chief Legal
Officer and Secretary of ProxyMed in August 1996. From July 1994, he was Vice
President, General Counsel and Secretary for Miami Subs Corporation. Between
July 1990 and July 1994, he held several executive positions with Ground Round
Restaurants, Inc., an affiliate of Hanson PLC, serving most recently as Senior
Vice President, General Counsel and Secretary. Prior thereto, he served as
Division Counsel for PepsiCo, Inc. and held various executive positions with
Marriott Corporation.

         BRUCE S. ROBERSON was appointed Executive Vice President - Sales and
Marketing of ProxyMed in October 1996. From June 1994 to October 1996, he served
as Vice President - Sales and Marketing for Health Care Information for National
Data Corporation, a healthcare electronic transaction processing company. From
December 1993 to June 1994, he was Director of Business Development for First
Consulting Group and from September 1990 to December 1993, he was Vice President
of Sales and Marketing for IBAX Healthcare, a joint venture of International
Business Machine Corp. and Baxter International, Inc., which marketed healthcare
information systems. From 1988 to September 1990, he was manager of the Florida
operations of the American Express Health Systems Group and from June 1984 to
November 1988, he was Senior Sales Executive of McDonald Douglas Health Systems
Company.


                                       25
<PAGE>


         SAMUEL X. KAPLAN has been a director of ProxyMed since August 1995.
Since 1987, Mr. Kaplan has been a healthcare management consultant. He has also
been the President of U.S. Care, Inc., a California-based company which designs
and administers long-term care insurance programs, since 1987, when he founded
that company. In 1962, he founded U.S. Administrators, Inc., a healthcare
management company, which he served as President and Chairman until 1987.

         BERTRAM J. POLAN has been a director of ProxyMed since August 1995. Mr.
Polan is the founder and President of Gemini Bio-Products, Inc., a
California-based supplier of biological products used in medical schools,
private medicine research institutes and the bio-technology industry, which he
founded in 1985. From 1973 to 1985, Mr. Polan was employed in various executive
capacities, most recently as vice president of sales and marketing, with North
American Biologicals, Inc., one of the world's largest independent providers of
human plasma products.


         PETER A. A. SAUNDERS, F.R.S.A. (Fellow of Royal Society of Arts) is the
owner and Chairman of Pass Consultants, a marketing and business consulting firm
he founded in Surrey, England in 1988. From 1992 through 1994, he also served as
Managing Director of United Artist Communications (London-U.K.), Ltd. From 1959
to 1984, Mr. Saunders held various executive and directorship positions with
Allders Department Stores, a subsidiary of United Drapery Department Stores
Group, and, after its acquisition by Hanson Trust, P.L.C. in 1984, continued as
a Director until 1988. Since 1989, Mr. Saunders has been serving as a Director
of Theragenics Corporation, a public company specializing in the treatment of
prostate cancer located in Norcross, Georgia; as a non-executive Director of
Mayday Healthcare NHS Trust, a 700-bed hospital in Surrey, England from 1992 to
1998; and as a non-executive Director of Eurobell (Sussex) Limited, a United
Kingdom cable television and telecommunications company from 1993 to 1998.


         EUGENE R. TERRY has been a director of ProxyMed since August 1995. Mr.
Terry is a pharmacist and the founder and Chairman of Bloodline, Inc., a New
Jersey-based company engaged in the blood services business, which he founded in
1980. In 1971, Mr. Terry founded Home Nutritional Support, Inc. ("HNSI"), one of
the first companies established in the home infusion industry. In 1984, HNSI was
sold to Healthdyne, Inc. HNSI was later sold to the W.R. Grace Group. From 1975
to 1984, Mr. Terry was also founder and Chief Executive Officer of Paramedical
Specialties, Inc., a respiratory and durable medical equipment company, which
was also sold to Healthdyne, Inc.


         AUDIT COMMITTEE - Our Audit Committee consists of three non-employee
directors: Peter A. A. Saunders (Chair), Bertram J. Polan and Eugene R. Terry.
The Audit Committee is responsible for meeting with representatives of our
independent accountants and with representatives of senior management to review
the general scope of our annual audit, matters relating to internal audit
control systems and the fee charged by the independent accountants. In addition,
the Audit Committee is responsible for reviewing and monitoring the performance
of non-audit services by our independent accountants and for recommending the
engagement or discharge of our independent accountants.

         COMPENSATION COMMITTEE - Our Compensation Committee consists of three
non-employee directors: Bertram J. Polan (Chair), Samuel X. Kaplan and Peter A.
A. Saunders. The Compensation Committee is responsible for approving and
reporting to the Board on the annual compensation for all officers, including
salary, stock options and other consideration, if any. The Committee is also
responsible for granting stock awards, stock options and other awards to be made
under our existing plans.

                                       26
<PAGE>

         Directors are elected annually at our annual meeting of shareholders.
Each director serves until his successor is elected and qualified or until the
earlier death, resignation, removal or disqualification of the director. The
officers are elected annually by the directors.


         We have "key person" life insurance policies for our benefit on the
lives of Mr. Blue and Mr. Guinan in the amount of $1,000,000 each.


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities and Exchange Act of 1934 (the "Exchange
Act") requires our officers and directors, and persons who own more than 10% of
the registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC").
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file.


         Based on our review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, we believe that, during our fiscal year ended
December 31, 1998, all filing requirements applicable to our officers and
directors, and greater than 10% beneficial owners were complied with, except
that we have not received from Bellingham Industries Inc. a required Form 5 or a
written representation that no Form 5 is required.

ITEM 11. EXECUTIVE COMPENSATION


                  The following table sets forth the compensation paid during
the past three fiscal years to our Chief Executive Officer and our other four
most highly compensated executive officers with annual compensation for such
years over $100,000 (the "named executive officers"):

                                       27
<PAGE>

<TABLE>
<CAPTION>
                                           SUMMARY COMPENSATION TABLE
                                                                                 LONG-TERM COMPENSATION
                                                                         ---------------------------------------
                                           ANNUAL COMPENSATION                     AWARDS              PAYOUTS
                                   ------------------------------------- ---------------------------- ----------
                                                              OTHER                    SECURITIES                     ALL
                                                              ANNUAL      RESTRICTED    UNDERLYING                   OTHER
        NAME AND                                              COMPEN-       STOCK        OPTIONS/       LTIP        COMPEN
   PRINCIPAL POSITION       YEAR      SALARY       BONUS      SATION       AWARD(S)        SARS        PAYOUTS     -SATION
---------------------       ----      --------     -----      -------     ----------   ------------    -------     -------
<S>                         <C>       <C>          <C>        <C>         <C>          <C>             <C>         <C>

Harold S. Blue              1998      145,033          --           --            --             --         --          --
Chairman and CEO            1997      125,000          --           --            --             --         --          --
                            1996      100,983          --           --            --        150,000         --          --

John Paul Guinan            1998      163,943      15,063           --            --             --         --          --
Co-President                1997      125,000          --           --            --             --         --          --
                            1996      127,792          --           --            --         15,000         --          --

Bennett Marks               1998      145,305      20,000           --            --         20,000         --          --
Co-President and            1997      128,646      15,000           --            --             --         --          --
CFO                         1996      107,542          --    10,625(1)            --         86,250         --          --

James H. Pickering          1998      165,456(2)   10,000    47,182(4)            --        130,000         --          --
Co-President and
COO

Bruce S. Roberson           1998      177,693      55,063           --            --         20,000         --          --
Exec. V.P.                  1997      180,000      50,000    22,506(4)            --             --         --          --
                            1996       30,000(3)       --    24,759(4)            --        100,000         --          --
</TABLE>

(1) Mr. Marks received a non-accountable expense allowance of $15,000 (net of
    taxes) per year through September 15, 1996.
(2) Mr. Pickering joined us on January 5, 1998.
(3) Mr. Roberson joined us on October 28, 1996.
(4) Consists of reimbursement of relocation expenses.

         The following table provides information on stock option grants during
fiscal year 1998 to each of the named executive officers:

                                       28
<PAGE>

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

                                                                                          Potential Realizable
                                                                                            Value at Assumed
                                  Individual Grants                                       Annual Rates of Stock
                                                                                         Price Appreciation for
                                                                                               Option Term
                              # of           % of Total                                  ----------------------
                           Securities       Options/SARs
                           Underlying        Granted To
                            Options/        Employee In     Exercise or   Expiration
         Name             SARs Granted      Fiscal Year      Base Price      Date          5%            10%
--------------------      ------------      -----------     -----------   ----------    --------     ----------
<S>                          <C>                <C>            <C>          <C>         <C>          <C>
Harold S. Blue                 --                --              --           --           --            --
John Paul Guinan               --                --              --           --           --            --
Bennett Marks                20,000              5%            $7.19        9/1/08      $ 90,435     $  229,180
James H. Pickering           100,000            26%            $7.00        1/5/08      $440,226     $1,115,620
James H. Pickering           30,000              8%            $7.19        9/1/08      $135,653     $  343,770
Bruce S. Roberson            20,000              5%            $7.19        9/1/08      $ 90,435     $  229,180
</TABLE>

         The following table sets forth certain information concerning
unexercised options held by each of the named executive officers:

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>

                                                             NUMBER OF SECURITIES               VALUE OF UNEXERCISED
                                                            UNDERLYING UNEXERCISED                  IN-THE-MONEY
                                                          OPTIONS/SARS AT FY-END (#)        OPTIONS/SARS AT FY-END ($)*
                                                          --------------------------        ---------------------------
                            # OF SHARES
                            ACQUIRED ON      $ VALUE
          NAME                EXERCISE      REALIZED     EXERCISABLE    UNEXERCISABLE     EXERCISABLE      UNEXERCISABLE
-------------------------- ------------     --------     -----------    -------------     -----------      -------------
<S>                            <C>          <C>            <C>                <C>          <C>                   <C>
Harold S. Blue                 30,000       $266,400       150,000            --           $1,171,500            --
John Paul Guinan                 --            --          217,500            --           $1,571,775            --
Bennett Marks                  60,000       $190,200       101,250          20,000         $ 681,263          $ 82,400
James H. Pickering               --            --           17,000         113,000          $ 73,270          $481,330
Bruce S. Roberson                --            --          100,000          20,000         $ 437,000          $ 87,400
</TABLE>


*Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end market
value of the common stock, which was $11.31 on December 31, 1998.


         There were no awards made to named executive officers in the last
completed fiscal year under any long-term incentive plan for performance to
occur over a period longer than one fiscal year. We do not have any defined
benefit or actuarial plans for our employees. No stock options for named
executive officers were amended, cancelled, replaced or otherwise repriced
during the past ten years.

COMPENSATION OF DIRECTORS

         Our employee directors are not compensated for their services as
directors. Outside directors receive $2,000 for each regularly scheduled board
meeting personally attended, $500 for each telephonic


                                       29
<PAGE>

board meeting, and $500 each quarter for each committee a director is a member.
All directors are reimbursed for reasonable expenses incurred in attending board
meetings. In addition, non-employee directors receive stock options under the
1995 Outside Plan (described below) upon the directors' initial election or
appointment to the Board of Directors. In 1995 and 1996, Messrs. Kaplan, Polan
and Terry, upon joining the Board, were each granted options to purchase 75,000
shares of common stock at an exercise price equal to the market price on the
date of grant. These options are now fully vested and expire five years after
the dates of grant. Upon joining the Board in 1998, Mr. Saunders received 20,000
options at $7.19 price per share. Half of these options vested in September
1998, and the other half vest in September 1999. These options expire ten years
after the date of grant.

EMPLOYMENT AGREEMENTS WITH THE NAMED EXECUTIVE OFFICERS

         On April 1, 1996, we entered into an employment agreement with Mr. Blue
for a period of three years, which is automatically extended from year to year
unless terminated by either party upon 60 days' written notice. Mr. Blue
receives an annual base salary of $200,000 and is entitled to such bonuses as
may be awarded from time to time by the Board of Directors and to participate in
any stock option or bonus plans which we may now have or in the future develop.
Mr. Blue may be terminated for "cause," as defined in the agreement. If he is
terminated for cause, he will be entitled to base salary earned, and he will
retain all vested stock options which shall remain exercisable for 90 days after
the date of termination. If he is terminated "without cause," then he will be
entitled to receive an amount equal to his base salary plus bonus, if any, and
continuation of health insurance for six months following termination. In
addition, the agreement contains confidentiality and non-competition covenants.
Mr. Guinan has an employment agreement with us for a three-year term commencing
on December 5, 1995, which is substantially similar to Mr. Blue's, with an
annual base salary of $180,000. The employment agreement was renewed by its
terms for an additional year.

                  In November 1996, we entered into employment agreements with
Mr. Marks and Mr. Roberson. In November 1997, we entered into an employment
agreement with Mr. Pickering. The agreements are for a three-year term and
automatically extend from year to year thereafter unless terminated by us upon
90 days written notice or by the employee upon 30 days written notice prior to
the end of the initial term or any extension. They receive an annual base salary
of $180,000, $180,000 and $200,000, respectively, and are entitled to such
bonuses as may be awarded from time to time and to participate in any stock
option or bonus plans which we may now have or in the future develop. They may
be terminated for "cause" as defined in their agreements. If terminated for
cause, they will be entitled to base salary earned, and they will retain all
vested stock options which shall remain exercisable for 90 days after the date
of termination. If, upon 90 days prior written notice, they are terminated
"without cause," they will be entitled to receive an amount equal to their base
salary plus bonus, if any, and continuation of health insurance for six months
following termination, plus any unvested options shall vest. In addition, the
agreements contain confidentiality and non-competition covenants.

LIABILITY AND INDEMNIFICATION OF OUR DIRECTORS AND OFFICERS

         We have entered into indemnification agreements with each of our
directors and executive officers limiting their personal liability for monetary
damages for breach of their fiduciary duties as officers and directors, except
for liability that cannot be eliminated under the Florida Business Corporation
Act. The Florida Business Corporation Act provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duty as directors, except for liability (i) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (ii) for any unlawful payment of a dividend or unlawful stock
repurchase or redemption,

                                       30
<PAGE>

as provided in Section 607.0834 of the Florida Business Corporation Act, (iii)
for any transaction from which the director derived an improper personal
benefit, or (iv) for a violation of criminal law. Our Restated Articles of
Incorporation and Bylaws also provide that we shall indemnify our directors and
officers to the fullest extent permitted by Section 607.0831 of the Florida
Business Corporation Act, including circumstances in which indemnification is
otherwise discretionary. We have procured and maintains a policy of insurance
under which our directors and officers are insured, subject to the limits of the
policy, against certain losses arising from claims made against such directors
and officers.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


         The following table sets forth information regarding the beneficial
ownership of our common stock as of March 5, 1999, with respect to (i) each
person known to us to be the beneficial owner of more than 5% of our common
stock, (ii) each director, (iii) each executive officer named in the Summary
Compensation Table, and (iv) all of our directors and officers as a group:

<TABLE>
<CAPTION>
         NAME AND ADDRESS(1)                         # OF SHARES (2)            % OF CLASS
         ----------------                            ---------------            ----------
         <S>                                           <C>                         <C>
         Harold S. Blue(3)                             794,132                     4.4%

         John Paul Guinan(4)                           217,500                     1.2%

         Bennett Marks(5)                              169,750                       *

         James H. Pickering(4)                          34,000                       *

         Frank M. Puthoff(4)                            54,779                       *

         Bruce S. Roberson(4)                          100,000                       *

         Samuel X. Kaplan(4)                            75,000                       *

         Bertram J. Polan(6)                            82,500                       *

         Peter A. A. Saunders(7)                        20,000                       *

         Eugene R. Terry(4)                             75,000                       *


         Bellingham Industries Inc.(8)               6,514,842                    36.1%
         Urraca Building
         Frederico Boyd Avenue
         Panama City, Panama


         All directors and officers                  4,839,563                    25.6%
         as a group (30 persons)(9)
</TABLE>

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

*Less than 1%

                                       31
<PAGE>


(1)      The address for each person, unless otherwise noted, is 2555 Davie
         Road, Suite 110, Fort Lauderdale, Florida 33317-7424.
(2)      In accordance with Rule 13d-3 of the Exchange Act, shares that are not
         outstanding, but that are subject to options, warrants, rights or
         conversion privileges exercisable within 60 days from March 5, 1999,
         have been deemed to be outstanding for the purpose of computing the
         percentage of outstanding shares owned by the individual having such
         right, but have not been deemed outstanding for the purpose of
         computing the percentage for any other person.
(3)      Includes 644,132 shares held of record, and 150,000 shares issuable
         upon the exercise of currently exercisable stock options.
(4)      Represents shares issuable upon the exercise of currently exercisable
         stock options.
(5)      Includes 68,500 shares held of record, and 101,250 shares issuable upon
         the exercise of currently exercisable stock options.
(6)      Includes 7,500 shares held of record, and 75,000 shares issuable upon
         exercise of currently exercisable stock options.
(7)      Includes 10,000 held of record, plus 10,000 shares issuable upon
         exercise of currently exercisable stock options.
(8)      Includes 6,264,842 shares held of record, and 250,000 shares issuable
         upon the exercise of currently exercisable stock options. Share amounts
         were provided by Bellingham.
(9)      Includes 3,717,592 shares held of record, and 1,121,971 shares issuable
         upon the exercise of currently exercisable stock options.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         On April 30, 1997, we loaned a total of $350,000 to Mr. Blue. The funds
were advanced pursuant to two demand promissory notes with recourse in the
principal amounts of $290,000 and $60,000, respectively, each bearing interest
at a rate of 7 3/4% per year. Mr. Blue has agreed to collateralize the notes
pursuant to pledges of securities, including shares of our common stock,
satisfactory to our Board of Directors.

                                       32
<PAGE>



         On September 1, 1998, we loaned Mr. Marks a total of $259,800 in
connection with his exercise of certain stock options that were to expire in
lieu of selling his stock to the public in a cashless exercise. The funds were
advanced pursuant to a promissory note with recourse bearing interest at the
rate of 5% per year. The promissory note is collateralized pursuant to a Stock
Pledge Agreement with 60,000 shares of our stock owned by Mr. Marks.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
         ON FORM 8-K


<TABLE>
<CAPTION>
                                                                                                           PAGE
                                                                                                           ----
<S>               <C>                                                                                      <C>
  (a)             (1) The following financial statements are included in
                      Part II, Item 8:


                      Consolidated Financial Statements
                       Report of Independent Accountants                                                     F-2
                       Consolidated Balance Sheets - December 31, 1998                                       F-3
                        and 1997
                       Consolidated Statement of Operations - Years Ended                                    F-4
                        December 31, 1998, 1997 and 1996
                       Consolidated Statements of Stockholders' Equity -                                     F-5
                        Years Ended December 31, 1998, 1997 and 1996
                       Consolidated Statements of Cash Flows - Years Ended                                   F-6
                        December 31, 1998, 1997 and 1996
                       Notes to Consolidated Financial Statements                                         F-7 - F-26


                  (2)  The following schedule for the years 1998 and 1997 are submitted
                       herewith:


                       Report of Independent Accountants                                                     F-27
                       Schedule II - Valuation and Qualifying Accounts -                                     F-28
                        Years Ended December 31, 1998 and 1997


                  (3)  Exhibits required to be filed by Item 601 of Regulation S-K as exhibits to
                       this Report are listed in the Exhibit Index appearing on pages 28 through
                       30.


  (b)                  Reports on Form 8-K:

                       During the quarter ended March 31, 1999, a Form 8-K report was
                       filed by ProxyMed with the Securities and Exchange Commission
                       on January 14, 1999, reporting an event dated December 31,
                       1998, regarding the exchange of common stock and merger with
                       Key Communications.
</TABLE>


                                       33
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.


Dated:  June 16, 1999                 PROXYMED, INC.


                                      By: /S/HAROLD S. BLUE
                                      ------------------------------------------
                                          Harold S. Blue, Chairman of the Board
                                          and Chief Executive Officer


                                       34
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                                          DESCRIPTION
-----------                                          -----------
<S>                        <C>
  3.1                      Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the
                           Registration Statement on Form SB-2, File No. 333-2678).

  3.2                      Bylaws, as amended (incorporated by reference to Exhibit 3.1 of the Registration
                           Statement on Form SB-2, File No. 333-2678).


 10.1                      License Agreement between ProxyMed and Blue Cross and Blue Shield of Massachusetts,
                           Inc., dated March 1, 1996 (incorporated by reference to Exhibit 3.1 of the
                           Registration Statement on Form SB-2, File No. 333-2678).

 10.2                      Strategic Marketing Agreement among ProxyMed, IntePlex, Inc. and Bergen Brunswig
                           Drug Company dated February 1, 1996 (incorporated by reference to
                           Exhibit 1 of Form 8-K, File No. 000-22052, reporting an event dated
                           February 1, 1996).

 10.3                      Agreement for Acquisition of Stock between ProxyMed and National Health Care
                           Affiliates, Inc. dated September 6, 1995 (incorporated by reference to Exhibit 1 of
                           Form 8-K, File No. 000-22052, reporting an event dated August 28, 1996).

 10.4                      Asset Purchase Agreement between ProxyMed and Eckerd Corporation (incorporated by
                           reference to Exhibit 1 to the Form 8-K, File No. 000-22052, reporting an event dated
                           February 7, 1995).

 10.5                      *Employment Agreement between ProxyMed and Harold S. Blue (incorporated by reference
                           to Exhibit 3.1 of the Registration Statement on Form SB-2, File No. 333-2678).

 10.6                      *Employment Agreement between ProxyMed and John Paul Guinan (incorporated by reference
                           to Exhibit 3.1 of the Registration Statement on Form SB-2, File No. 333-2678).

 10.7                      *Employment Agreement between ProxyMed and Bennett Marks dated November 11, 1996
                           (incorporated by reference to Exhibit 10.7 of the Form 10-KSB for the period ending
                           December 31, 1996).

 10.8                      Asset Purchase Agreement between ProxyMed and Clinical MicroSystems, Inc. and
                           Glenn Gilchrist (incorporated by reference to Exhibit 1 of Form 8-K,
                           File No.000-22052, reporting an event dated March 14, 1997).

 10.9                      *Employment Agreement between ProxyMed and Frank M. Puthoff dated November 11, 1996
                           (incorporated by reference to Exhibit 10.7 of the Form 10-KSB for the period ending
                           December 31, 1996).
</TABLE>


                                       35
<PAGE>

<TABLE>
<S>                        <C>

 10.10                     *Amended 1993 Stock Option Plan (incorporated  by reference to Exhibit A of ProxyMed
                           's Proxy Statement for its 1994 Annual Meeting of Shareholders).


 10.11                     *1995 Stock Option Plan (incorporated by reference to Exhibit 3.1 of the Registration
                           Statement on Form SB-2, File. No. 333-2678).

 10.12                     *1995 Outside Director Stock Option Plan (incorporated by reference to Exhibit 3.1 of
                           the Registration Statement on Form SB-2, File No. 333-2678).


 10.13                     *Employment Agreement between ProxyMed and Bruce Roberson dated October 17, 1996
                           (incorporated by reference to Exhibit 10.1 of the 10-QSB for the period ending
                           September 30, 1996).


 10.14                     Form of Indemnification Agreement for All Officers and Directors (incorporated by
                           reference to Exhibit 10.3 of the 10-QSB for the period ending September 30, 1996).


 10.15                     Stock Purchase Agreement between ProxyMed and WPJ, Inc. and Robert Weinberger and Mark
                           Pehl (incorporated by reference to Exhibit 2.1 of Form 8-K, File No. 000-22052,
                           reporting an event dated May 19, 1998).

 10.16                     Asset Purchase Agreement between ProxyMed and Hayes Computer Systems, Inc. and Danny
                           Hayes (incorporated by reference to Exhibit 1 of Form 8-K, File No. 000-22052,
                           reporting an event dated April 30, 1997).

 10.17                     Asset Purchase Agreement between ProxyMed and U.S. HealthData Interchange, Inc.
                           (incorporated by reference to Exhibit 2.1 of Form 8-K, File No. 000-22052, reporting
                           an event dated November 19, 1997).

 10.18                     *1997 Stock Option Plan (incorporated by reference to Exhibit A of ProxyMed's Proxy
                           Statement for its 1997 Annual Meeting of Shareholders).

 10.19                     *Employment Agreement between ProxyMed and James Pickering dated November 10, 1997
                           (incorporated by reference to Exhibit 10.19 of the 10-K for the period ending
                           December 31, 1997).


 10.20                     Agreement and Plan of Merger between ProxyMed Acquisition Corp., Key Communications
                           Service, Inc., Jeff K. Carpenter, A. Thomas Hardy and Carl W. Garmon (incorporated by
                           reference to Exhibit 2.1 of Form 8-K,. File #000-22052, reporting an event dated
                           December 31, 1998).


 10.21                     *Employment Agreement between ProxyMed and Jeff K. Carpenter dated December 31, 1998
                           (incorporated by reference to Exhibit 2.5 of Form 8-K, File No. 000-22052, reporting
                           an event on December 31, 1998).

 10.22                     Asset Purchase Agreement between ProxyMed and Specialized Medical Management, Inc. and
                           its parent, Texas Health Management Services, Inc., dated January 12, 1999.(1)
</TABLE>


                                       36
<PAGE>
<TABLE>
<S>                        <C>


  21                       Subsidiaries of the ProxyMed.(1)


  23                       Consent of PricewaterhouseCoopers LLP.


  27                       Financial Data Schedule.(1)
</TABLE>


---------------------------------
*Denotes employment agreement or compensatory plan.


(1)      Previously filed.


                                       37
<PAGE>


                         PROXYMED, INC. AND SUBSIDIARIES

             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>

                                                                                               PAGE
                                                                                               ----
<S>                                                                                            <C>
Consolidated Financial Statements

     Report of Independent Accountants                                                         F-2

     Consolidated Balance Sheets - December 31, 1998 and 1997                                  F-3

     Consolidated Statements of Operations -                                                   F-4
         Years Ended December 31, 1998, 1997 and 1996

     Consolidated Statements of Stockholders' Equity -                                         F-5
         Years Ended December 31, 1998, 1997 and 1996

     Consolidated Statements of Cash Flows -                                                   F-6
         Years Ended December 31, 1998, 1997 and 1996

     Notes to Consolidated Financial Statements                                             F-7 - F-26

Financial Statement Schedule

     Report of Independent Accountants                                                         F-27

     Schedule II - Valuation and Qualifying Accounts -                                         F-28
         Years Ended December 31, 1998 and 1997
</TABLE>

                                      F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

February 19, 1999

To the Stockholders of ProxyMed, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of ProxyMed,
Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of ProxyMed's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PricewaterhouseCoopers LLP

Miami, Florida

                                      F-2
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                               ASSETS                                            1998               1997
                                                                               -----               ----
<S>                                                                         <C>                 <C>
Current assets:
     Cash and cash equivalents                                              $ 4,681,671         $ 2,654,423
     Accounts receivable - trade, net of allowance for
        doubtful accounts of $594,854 and $242,549, respectively              6,383,996           2,364,455
     Other receivables                                                          463,894             826,998
     Inventory                                                                2,970,210           1,202,431
     Other current assets                                                       254,979             319,838
                                                                            -----------         -----------
        Total current assets                                                 14,754,750           7,368,145
Property and equipment, net                                                   4,335,944           2,323,174
Goodwill, net                                                                15,539,821           4,338,515
Purchased technology, capitalized software and
     other intangible assets, net                                            13,654,399           5,530,226
Other assets                                                                    551,660              43,061
                                                                            -----------         -----------

        Total assets                                                        $48,836,574         $19,603,121
                                                                            ===========         ===========

                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Current portion of long-term debt                                      $   498,453         $   735,980
     Accounts payable and accrued expenses                                    6,244,631           4,239,073
     Deferred revenue                                                           447,178             426,686
                                                                            -----------         -----------
        Total current liabilities                                             7,190,262           5,401,739
     Long-term debt                                                             667,193           1,049,630
     Long-term deferred revenue                                                 700,000                   -
                                                                            -----------         -----------
        Total liabilities                                                     8,557,455           6,451,369
                                                                            -----------         -----------

Commitments and contingencies

Stockholders' equity:
     Common stock - $.001 par value. Authorized
        50,000,000 shares; issued and outstanding
        17,808,172 and 11,781,872 shares (after deducting
        110,000 shares in treasury in 1997), respectively                        17,808              11,782
     Additional paid-in capital                                              82,427,262          42,695,386
     Accumulated deficit                                                    (41,906,151)        (29,555,416)
     Note receivable from stockholder                                          (259,800)                  -
                                                                            -----------         -----------
        Total stockholders' equity                                           40,279,119          13,151,752
                                                                            -----------         -----------

        Total liabilities and stockholders' equity                         $ 48,836,574        $ 19,603,121
                                                                           ============        ============
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                        1998                1997               1996
                                                                       -----               -----              ----
<S>                                                                 <C>                  <C>                <C>
Revenues:

     Services and license fees                                      $ 18,562,066         $ 3,073,085        $ 1,433,505
     Computer systems, prescription drugs
        and other tangible goods                                      19,205,611           7,858,884          1,620,646
                                                                    ------------         -----------        -----------
                                                                      37,767,677          10,931,969          3,054,151
                                                                    ------------         -----------        -----------

Costs and expenses:
     Cost of services and license fees                                 3,316,068             726,800             59,722
     Cost of tangible goods                                           13,208,278           6,150,680          1,267,701
     Selling, general and administrative expenses                     22,874,079          13,293,353          5,709,433
     Depreciation and amortization                                     8,881,273           1,078,300            322,588
     In-process research and development technology                      742,623           8,467,098                  -
     Merger related expenses                                             426,970                   -                  -
                                                                    ------------         -----------        -----------
                                                                      49,449,291          29,716,231          7,359,444
                                                                    ------------         -----------        -----------

        Operating loss                                               (11,681,614)        (18,784,262)        (4,305,293)

Other income (expense):
     Gain on sale of assets                                                    -                   -          1,014,989
     Interest, net                                                      (106,571)            267,140            436,569
                                                                    ------------         -----------        -----------

        Net loss                                                     (11,788,185)        (18,517,122)        (2,853,735)

Dividends on cumulative preferred stock                                        -                   -             95,803
                                                                    ------------         -----------        -----------

        Net loss applicable to
              common shareholders                                  $ (11,788,185)      $ (18,517,122)      $ (2,949,538)
                                                                   =============       =============       ============


Weighted average common shares outstanding                            15,653,374          10,589,333          7,660,383
                                                                   =============       =============       ============

Basic and diluted net loss per share of common stock                      $ (.75)            $ (1.75)            $ (.39)
                                                                   =============       =============       ============
</TABLE>

See accompanying notes.

                                      F-4
<PAGE>


                         PROXYMED, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                PREFERRED STOCK        COMMON STOCK                                          NOTE
                              ------------------    -------------------                                   RECEIVABLE
                                NUMBER      PAR      NUMBER       PAR      ADDITIONAL      ACCUMULATED       FROM           TOTAL
                              OF SHARES    VALUE    OF SHARES    VALUE   PAID-IN CAPITAL     DEFICIT      STOCKHOLDER
                              ----------   ------   ---------    ------  ----------------    --------     -----------       -----
<S>                               <C>      <C>      <C>        <C>       <C>               <C>                  <C>     <C>
Balances, January 1, 1996         83,000   $ 830    4,945,595  $ 4,946   $ 10,772,403      $ (8,184,559)        $ -     $ 2,593,620

Sale of common stock, net
    of expenses of $1,831,816          -       -    3,367,500    3,367     13,037,942                 -           -      13,041,309
Exercise of stock options
    and warrants                       -       -      432,610      433      1,860,469                 -           -       1,860,902
Common stock issued
    for services                       -       -       15,000       15         55,985                 -           -          56,000
Compensatory stock options             -       -            -        -        300,172                 -           -         300,172
Preferred stock dividends              -       -            -        -        (82,963)                -           -         (82,963)
Conversion of preferred
    stock to common stock        (83,000)   (830)     780,905      781             49                 -           -               -
Net loss                              -       -            -        -              -         (2,853,735)          -      (2,853,735)
                                   -----    ----  ----------  -------    ------------      -------------  ----------    -----------

Balances, December 31, 1996            -       -    9,541,610    9,542     25,944,057        (11,038,294)         -      14,915,305

Sales of common stock, net
    of expenses of $664,863            -       -    1,625,000    1,625     13,389,762                  -          -      13,391,387
Exercise of stock options
    and warrants                       -       -      211,261      211      1,102,440                  -          -       1,102,651
Common stock issued for
    acquired businesses                -       -      514,001      514      2,055,937                  -          -       2,056,451
Warrants issued for acquisition
    of assets                          -       -            -        -        731,938                  -          -         731,938
Compensatory stock options             -       -            -        -         26,100                  -          -          26,100
Purchase of treasury stock             -       -     (110,000)    (110)      (554,848)                 -          -        (554,958)
Net loss                               -       -            -        -              -         (18,517,122)         -    (18,517,122)
                                   -----    ----  ----------  -------    ------------      -------------  ----------    -----------

Balances, December 31, 1997            -       -   11,781,872   11,782     42,695,386        (29,555,416)         -      13,151,752

Sales of common stock, net
    of expenses of $1,091,360          -       -    3,013,416    3,013     29,115,492                  -          -      29,118,505
Exercise of stock options
    and warrants                       -       -      422,639      423      1,711,077                  -   (259,800)      1,451,700
Common stock issued for pooled
    and acquired businesses            -       -    2,590,245    2,590      5,287,894            554,848          -       5,845,332
Retirement of debt for
    pooled company                     -       -            -        -      3,015,505                  -          -       3,015,505
Tax distributions for
    pooled company                     -       -            -        -       (515,490)                 -          -        (515,490)
Reclassification of retained
    earnings of pooled
    company upon termin-
    ation of  S Corporation
    tax status                         -       -            -        -      1,117,398         (1,117,398)         -               -
Net loss                               -       -            -        -              -        (11,788,185)         -     (11,788,185)
                                   -----    ----  ----------  -------    ------------      -------------  ----------    -----------

Balances, December 31, 1998           -     $ -   17,808,172  $17,808    $ 82,427,262      $ (41,906,151) $ (259,800)   $40,279,119
                                   =====    ====  ==========  =======    ============      =============  ==========    ===========
</TABLE>

See accompanying notes.

                                      F-5
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                          1998                  1997                 1996
                                                                      -------------         ------------         ------------
<S>                                                                   <C>                   <C>                  <C>
Cash flows from operating activities:
     Net loss                                                         $ (11,788,185)        $(18,517,122)        $ (2,853,735)
     Adjustments to reconcile net loss to net cash used in
         operating activities:
            Depreciation and amortization                                 8,977,127            1,078,300              322,588
            Acquired in-process research and
                development technology                                      742,623            8,467,098                    -
            Provision for doubtful accounts                                 355,757               76,963                8,105
            Amortization of covenant not-to-compete                         (20,000)             (80,000)             (80,000)
            Write-off of retired assets                                           -              363,237                    -
            Compensatory options and warrants issued                              -               26,100              300,172
            Common stock issued for services                                      -                    -               56,000
            Gain on sale of assets                                                -                    -           (1,014,989)
            Changes in assets and liabilities, net of
               effect of acquisitions and dispositions:
                Accounts and other receivables                           (2,004,119)          (1,126,398)            (203,113)
                Inventory                                                  (336,054)            (570,027)              42,299
                Accounts payable and accrued expenses                    (1,657,362)           1,839,643              (58,102)
                Deferred revenue                                            626,304             (323,861)            (115,000)
                Other, net                                                  187,622              (60,278)              46,660
                                                                        -----------          -----------          -----------
         Net cash used in operating activities                           (4,916,287)          (8,826,345)          (3,549,115)
                                                                        -----------          -----------          -----------

Cash flows from investing activities:
     Acquisition of businesses, net of cash acquired                    (19,933,922)          (9,909,551)                   -
     Payment of prior acquisition contingency                              (500,000)                   -                    -
     Capital expenditures                                                (1,526,060)          (1,386,154)            (665,891)
     Purchased technology and capitalized software                         (510,132)          (3,182,288)            (570,557)
     Purchases of U.S. Treasury Notes                                             -                    -           (8,541,153)
     Maturities of U.S. Treasury Notes                                            -            6,008,698            2,532,455
     Proceeds from sale of dispensary assets                                      -                    -            1,300,000
     Proceeds from sale of subsidiary                                             -                    -              649,275
                                                                        -----------          -----------          -----------
         Net cash used in investing activities                          (22,470,114)          (8,469,295)          (5,295,871)
                                                                        -----------          -----------          -----------

Cash flows from financing activities:
     Net proceeds from sale of equity securities                         29,118,505           13,391,387           13,041,309
     Proceeds from exercise of stock options and warrants                 1,451,700            1,102,651            1,860,902
     Payment of notes payable, long-term debt and capital leases         (1,156,556)              (9,375)            (417,884)
     Purchase of treasury stock                                                   -             (554,958)                   -
     Draw on line of credit                                                       -            2,500,000                    -
     Repayment of line of credit                                                  -           (2,500,000)                   -
     Payment of preferred stock dividends                                         -                    -              (82,963)
                                                                        -----------          -----------          -----------
         Net cash provided by financing activities                       29,413,649           13,929,705           14,401,364
                                                                        -----------          -----------          -----------

Net increase (decrease) in cash                                           2,027,248           (3,365,935)           5,556,378
Cash and cash equivalents at beginning of period                          2,654,423            6,020,358              463,980
                                                                        -----------          -----------          -----------
Cash and cash equivalents at end of period                              $ 4,681,671          $ 2,654,423          $ 6,020,358
                                                                        ===========          ===========          ===========
</TABLE>

See accompanying notes.

                                      F-6
<PAGE>


                         PROXYMED, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    (a) BUSINESS OF PROXYMED - ProxyMed, Inc. is a healthcare information
        services company providing financial and clinical electronic transaction
        processing services and healthcare technology software products to
        physicians and other healthcare providers such as nursing homes,
        pharmacies, commercial and hospital laboratories, insurance companies
        and managed care organizations. In addition, ProxyMed derives revenues
        from network engineering services and related computer hardware sales
        principally to state government agencies, sales and leasing of computer
        peripheral equipment to various healthcare and non-healthcare customers,
        contract manufacturing of circuit boards to non-healthcare customers,
        and the dispensing of prescription drugs to patients who are residing in
        long-term care facilities. ProxyMed's products and services are provided
        from its four principal operating facilities located in Fort Lauderdale
        and Tallahassee, Florida; Santa Ana, California; and New Albany,
        Indiana.

    (b) PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
        include the accounts of ProxyMed and its wholly-owned subsidiaries. All
        significant intercompany transactions have been eliminated in
        consolidation.

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

    (d) REVENUE RECOGNITION - Electronic transaction processing fee revenue is
        recorded in the period the service is rendered. Revenue from sales of
        software, software licenses, computer hardware and manufactured goods is
        recognized when persuasive evidence of an arrangement exists, delivery
        has occurred, the price is fixed or determinable and collectibility is
        probable. The same criteria is applied to each element of multiple
        element arrangements after allocating the amounts paid to individual
        elements based on vendor-specific objective evidence of fair value.
        Revenue from hardware leases, software rentals and maintenance fees is
        recognized ratably over the applicable period. Revenue from ProxyMed's
        prescription drug dispensing activities is reported at net realizable
        amounts from insurance providers and patients at the time the individual
        prescriptions are delivered to the patients.

    (e) CASH AND CASH EQUIVALENTS - ProxyMed considers all highly liquid
        investments with original maturities of three months or less to be cash
        equivalents. Cash balances in excess of immediate needs are invested in
        U.S. Treasury Notes, or in bank certificates of deposit and money market
        accounts. At times, such amounts may be in excess of FDIC insurance
        limits.

                                      F-7
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    (f) ACCOUNTS RECEIVABLE - Substantially all of ProxyMed's accounts
        receivable are due from various healthcare payors and providers and the
        State of Florida or agencies thereof. Collateral is not required. Credit
        losses are provided for in the consolidated financial statements and
        have been within management's expectations.

    (g) INVENTORY - Inventory consisting of component parts, materials and
        supplies (used in the upgrading of peripheral computer equipment and
        contract manufacturing) and finished goods (including direct labor and
        overhead and consisting principally of computer peripherals, hardware
        and software, and prescription drugs) is stated at the lower of cost
        (first-in, first-out method) or market. Reserves for obsolete, damaged
        and slow-moving inventory are maintained and are periodically reviewed
        by management.

    (h) PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and
        includes revenue earning equipment. Depreciation of property and
        equipment is calculated on the straight-line method over the estimated
        useful lives of the assets; depreciation of revenue earning equipment is
        included in cost of sales. Leasehold improvements are amortized on the
        straight-line method over the shorter of the lease term or the estimated
        useful lives of the assets.

        Upon sale or retirement of property and equipment, the cost and related
        accumulated depreciation are eliminated from the accounts and any
        resulting gains or losses are reflected in other income for the period;
        upon sale or retirement of revenue earning equipment, the gross proceeds
        are included in net revenues and the undepreciated cost of the equipment
        sold is included in cost of sales. Maintenance and repair of property
        and equipment are charged to expense as incurred. Renewals and
        betterments are capitalized and depreciated.

    (i) INTANGIBLE ASSETS - Intangible assets consists of the following at
        December 31, 1998 and 1997:

<TABLE>
<CAPTION>

                                                                     1998              1997
                                                                     ----              ----
<S>                                                              <C>               <C>
Goodwill                                                         $19,650,552       $4,442,581
Less accumulated amortization                                      4,110,731          104,066
                                                                 -----------       ----------
                      Goodwill, net                              $15,539,821       $4,338,515
                                                                 ===========       ==========

Purchased technology                                             $11,000,000       $        -
Capitalized software                                               5,544,531        4,987,293
Other intangible assets                                              834,890          834,890
                                                                 -----------       ----------
                                                                  17,379,421        5,822,183
Less accumulated amortization                                      3,725,022          291,957
                                                                 -----------       ----------
       Purchased technology, capitalized software                $13,654,399       $5,530,226
            and other intangible assets, net                     ===========       ==========
</TABLE>

                                      F-8

<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

        GOODWILL - Goodwill, representing the excess of cost over the estimated
        fair value of net assets acquired, is amortized on the straight-line
        basis over 3 to 40 years.

        OTHER INTANGIBLES - Other acquired intangible assets consisting
        primarily of customer contracts and covenants-not-to-compete, and are
        being amortized on a straight-line basis over their estimated useful
        lives of 4 to 5 years.

        The recoverability of goodwill, other intangible assets and other
        long-lived assets is regularly reviewed by ProxyMed for indications that
        the carrying value may be impaired or that the useful lives assigned are
        excessive. In performing such review, goodwill associated with
        acquisition of the intangible assets is included in the analysis of the
        impairment of such intangible assets. When indications exist that
        impairment may have occurred, the carrying values are assessed based
        upon an analysis of estimated future cash flows on an undiscounted basis
        and before interest charges, or useful lives are changed prospectively.

        PURCHASED TECHNOLOGY AND CAPITALIZED SOFTWARE - ProxyMed has recorded
        amounts related to various software and technology that it has purchased
        or capitalized both for external sale to its customers or for its own
        internal systems use. Certain computer software costs for external sale
        are capitalized and are reported at the lower of unamortized cost or net
        realizable value. Such costs are capitalized when they are related to a
        product which has achieved technological feasibility or that has an
        alternative future use, and cease to be capitalized when the product is
        available for general release to customers. The costs are amortized on a
        product-by-product basis using the straight-line method over their
        estimated useful lives, generally over 3 to 5 years, and costs of
        maintenance and support are charged to expense. Costs for computer
        software used for ProxyMed's own internal systems are capitalized during
        the application development stage and are periodically evaluated by
        ProxyMed for indications that the carrying value may be impaired or that
        the useful lives assigned may be excessive. Such software is being
        amortized on a straight-line basis over its estimated useful life of 3
        years. Amortization of purchased technology and capitalized software was
        $3,261,000 in 1998, $251,000 in 1997 and $21,000 in 1996. In addition,
        as a result of ProxyMed's periodic review for impairment, ProxyMed wrote
        off $202,000 of software costs previously capitalized due to changes in
        technologies relating to certain products for resale.

        Management believes that future revenues related to these projects will
        be sufficient to realize the amounts capitalized at December 31, 1998,
        and as such these amounts will be recovered over the lives of the
        related projects. It is reasonably possible, however, that those
        estimates of future revenues could be adversely impacted if these
        projects are not released timely or if the market acceptance of the
        related technology is not what is anticipated by management. As a
        result, the recoveries of these capitalized costs through future
        revenues could be reduced materially.

                                      F-9
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    (j) RESEARCH AND DEVELOPMENT - Software development costs incurred prior to
        achieving technological feasibility are charged to research and
        development expense when incurred. Research and development expense was
        approximately $2,978,000 in 1998, $1,908,000 in 1997, and $177,000 in
        1996, respectively.

    (k) INCOME TAXES - ProxyMed provides for income taxes pursuant to the
        provisions of Statement of Financial Accounting Standards ("SFAS") No.
        109, "Accounting for Income Taxes." Deferred income taxes are determined
        based upon differences between financial reporting and tax bases of
        assets and liabilities and are measured using the enacted tax rates and
        laws that will be in effect when the differences are expected to
        reverse. Deferred tax assets are also established for the future tax
        benefits of loss and credit carryovers. Valuation allowances are
        established for deferred tax assets when, based on the weight of
        available evidence, it is deemed more likely than not that such amounts
        will not be realized.

    (l) NET LOSS PER SHARE - Basic loss per share of common stock is computed by
        dividing net loss applicable to common shareholders by the weighted
        average shares of common stock outstanding during the year. Diluted per
        share results reflect the potential dilution from the exercise or
        conversion of securities into common stock; however, stock options,
        warrants and contingent shares totaling 2,553,488 shares, 2,808,233
        shares and 2,498,214 shares for the three years ended December 31, 1998,
        1997 and 1996, respectively, were excluded from the calculation of
        diluted per share results because their effect was antidilutive.

    (m) NEW ACCOUNTING PRONOUNCEMENTS - Effective January 1, 1998, ProxyMed
        adopted and is reporting in accordance with SFAS No. 130, "Reporting
        Comprehensive Income," and SOP No. 97-2, "Software Revenue Recognition."
        There were no differences between ProxyMed's net loss and comprehensive
        loss under SFAS No. 130 and the adoption of SOP No. 97-2 did not have a
        material effect on the timing of its revenue recognition.

    (n) RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
        conform with current year presentation.

                                      F-10
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(2) BUSINESS COMBINATIONS

    (a) KEY COMMUNICATIONS - On December 31, 1998, ProxyMed merged with Key
        Communications Service, Inc., a privately-owned company based in New
        Albany, Indiana. Key Communications is a designer, manufacturer,
        distributor and servicing company for laboratory results reporting
        communication products for national, regional and hospital-based
        laboratories. ProxyMed issued 2,078,106 shares of common stock in
        exchange for all of Key Communications' capital stock. The transaction
        has been accounted for as a pooling of interests. Because of a leveraged
        buyout transaction consummated on April 30, 1998 by the former
        stockholders of Key, the accounts of Key have been combined with those
        of ProxyMed commencing May 1, 1998. For the period May 1, 1998 to
        December 31, 1998, Key Communications had net revenues of $10,439,327
        and net income of $1,117,398. Merger related expenses of $426,970 have
        been included in the statement of operations for 1998. In connection
        with the merger, certain debt guaranteed by Key Communications' assets
        was retired, and as a result, $3,015,505 was credited to additional
        paid-in capital. In addition, distributions of $515,490 have been
        recorded, representing S Corporation income tax obligations arising from
        Key Communication's operations prior to the merger.

    (b) INTEGRATED MEDICAL SERVICES - In May 1998, ProxyMed acquired all of the
        capital stock of WPJ, Inc., d/b/a Integrated Medical Services, a
        privately-owned company based in Santa Ana, California. Integrated
        Medical Services provides financial electronic transaction processing
        services including medical claims, encounters and other financial
        transactions. The purchase price consisted of $20,620,000 in cash,
        481,836 unregistered shares of ProxyMed's common stock (valued at
        $5,345,325), and acquisition-related costs of $328,433. The cash portion
        of the purchase price was funded through the private placement sale of
        common stock (see Note 5). The acquisition was accounted for as a
        purchase, and the purchase price was allocated as follows: net working
        capital ($497,897); property, equipment and other assets ($373,319);
        purchased technology ($11,000,000); and long-term liabilities
        ($227,189). The excess of the consideration paid over the estimated fair
        value of the net assets acquired in the amount of $14,649,731 was
        recorded as goodwill.

    (c) US HEALTHDATA INTERCHANGE - In November 1997, ProxyMed acquired
        substantially all of the assets and the business of US HealthData
        Interchange, Inc. from Avatex Corporation. US HealthData Interchange
        provides financial electronic transaction processing services including
        medical claims, encounters and other financial transactions. The
        purchase price consisted of $4,000,000 in cash paid at closing, and
        acquisition-related costs of $279,278. The acquisition was accounted for
        as a purchase, and the purchase price was allocated as follows: net
        working capital ($324,391); property, equipment and other assets
        ($71,300); and capitalized software and other intangible assets
        ($842,918). The excess of the consideration paid over the estimated fair
        value of the net assets acquired in the amount of $3,040,669 was
        recorded as goodwill.

                                      F-11
<PAGE>


                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    (d) HAYES COMPUTER SYSTEMS - In April 1997, ProxyMed acquired substantially
        all the assets and assumed certain specific, but limited liabilities of
        Hayes Computer Systems, Inc., a privately-owned company located in
        Tallahassee, Florida. Hayes Computer Systems provides information
        technology solutions and services to principally the public sector
        including systems integration services, Internet access services, and
        client-server software development. The purchase price consisted of
        $3,147,126 in cash, 388,215 shares of unregistered common stock paid at
        closing (valued at $1,296,000 after discounting for a block of
        restricted stock with a two-year holding period), and
        acquisition-related costs of $616,671. The acquisition was accounted for
        as a purchase, and the purchase price was allocated as follows: net
        working capital ($226,671); property, equipment and other assets
        ($412,785); capitalized software ($264,384); long-term liabilities
        ($11,141); and in-process research and development technology
        ($4,167,098). In addition, ProxyMed was obligated to pay up to
        $1,000,000 (at least 50% in cash and the remainder in common stock) in
        each of the two subsequent 12 month periods upon the achievement of
        defined operating criteria. In June 1998, ProxyMed made its first
        contingent payment which consisted of $500,000 in cash and 30,303 shares
        of common stock. ProxyMed allocated this contingent payment to the
        long-term assets acquired as follows: $859,830 to in-process research
        and development technology, $85,617 to property and equipment, and
        $54,553 to capitalized software.

    (e) CLINICAL MICROSYSTEMS - In March 1997, ProxyMed acquired substantially
        all the assets and certain liabilities of Clinical MicroSystems, Inc., a
        privately-owned company located in Babylon, New York. Clinical
        MicroSystems was the developer of ClinScan, a physician desktop lab
        ordering and results posting software. The purchase price consisted of
        the following: $3,000,000 in cash and 125,786 shares of unregistered
        common stock (valued at $760,452) paid at closing, plus $2,000,000 in
        cash and common stock payable over a three-year period as follows:
        $750,000, $500,000 and $750,000 in 12, 24 and 36 months following the
        closing date, respectively (recorded net of interest imputed at the rate
        of 10.31% per annum), plus acquisition-related costs of $161,845. Each
        of the future payments will be at least 50% in cash, with the remaining
        balance, if any, paid in shares of unregistered common stock. The
        acquisition was accounted for as a purchase, and the purchase price was
        allocated as follows: net working capital ($227,560); property,
        equipment and other assets ($1,432); capitalized software and other
        intangible assets ($201,730); and in-process research and development
        technology ($4,300,000). The excess of the consideration paid over the
        estimated fair value of the net assets acquired in the amount of
        $841,130 was recorded as goodwill. In April 1998, ProxyMed paid its
        first debt payment of $750,000 in cash.

                                      F-12
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         Portions of the initial purchase prices for the Hayes Computer Systems
and Clinical MicroSystems acquisitions were allocated to in-process research and
development technology, resulting in charges to ProxyMed's 1997 operations of
$4,167,098 for the Hayes Computer Systems acquisition and $4,300,000 for the
Clinical MicroSystems acquisition. The following products are inculpable as
in-process research and development technology:

    (a) KIMS - The in-process research and development acquired from Hayes
        Computer Systems consisted of the Krypton Internet Messaging Server
        ("KIMS"), a server-to-server intranet email system designed to provide
        more security, higher performance and a lower price than comparable UNIX
        based email systems. At the time of the acquisition, this product was in
        the alpha phase of programming and had the capability of processing only
        simple email communications. ProxyMed intended to complete the
        development of a testing lab, the development of the KIMS product, and
        the development of the electronic transaction processing version of the
        product at an estimated cost of approximately $253,000 and include it in
        its electronic transaction processing product offering to physicians and
        other healthcare providers using the ProxyNet network by the end of
        calendar 1997. ProxyMed anticipated that revenues would commence in
        1998, and would grow at a rate ranging from 53% to 25% per year through
        2006, with the lower growth rates being achieved in the later years. In
        addition, ProxyMed had assumed operating expenses associated with this
        product in the range of 40% to 50% of gross revenues, as well as
        expenditures for fixed assets and further software development.

        However, shortly after the acquisition, Microsoft Corporation released
        its improved email product. Therefore, the decision to complete the KIMS
        product was temporarily suspended until an assessment of the Microsoft
        product could be completed. After analyzing the KIMS product and
        discussing the opportunities for it, ProxyMed decided to complete the
        KIMS product and expects to have it completed in 1999 and include it in
        its future web-based product line.

    (b) CLINSCAN INTRANET - The in-process research and development acquired
        from Clinical MicroSystems consisted of the ClinScan Intranet, a system
        designed to provide hospitals with the capability to connect
        hospital-based and office-based physicians together, in a private wide
        area network, or Intranet. The hospitals and physicians would have the
        ability to electronically exchange messages, images, files and other
        valuable clinical information, including the exchange of clinical orders
        and results using proven interface technology. By incorporating the
        ClinScan workstation at physician sites, this software application would
        provide access to all of the hospital based legacy systems invisibly. By
        adding high-speed communications access, hospitals and physicians would
        be able to access the Internet. At the time of the acquisition,
        completion of the communication protocols for incoming and outgoing
        messaging and an interface for communications to the legacy systems had
        been developed. ProxyMed intended to complete the global patient data
        repository, routing functionality, cross-relational master indexes, and
        master catalogue of clinical functionality of the product at an
        estimated cost of approximately


                                      F-13
<PAGE>

        $600,000 and include it as a clinical electronic transaction processing
        product offering to physicians, laboratories and other healthcare
        providers by the start of 1998.

                                      F-14
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         The technology supported by the research performed on the ClinScan
         Intranet was used by ProxyMed to develop its Lab Network Intranet
         Server, the central information processor for its latest ClinScan
         software product. Revenues from the sales of ClinScan involving a Lab
         Network Intranet Server commenced in 1998.

    Management of ProxyMed is responsible for estimating the fair value of
acquired in-process research and development. To assist in determining the fair
value of the acquired in-process research and development, ProxyMed used
standard appraisal methodologies. Each appraisal procedure performed involved
projected cash flows for KIMS and ClinScan Intranet over their estimated useful
lives, net of ongoing operating investment needs (including working capital,
fixed assets and other assets) that support the products. An effective income
tax rate of 37.6% was applied to each of the cash flows representing the
expected marginal combined federal and state tax rate to apply over the cash
flow periods. These cash flows were discounted to their present value using a
discount rate of 70%, which is reflective of a "start up" company for which the
KIMS and ClinScan Intranet products are similar in risk. The KIMS product was
valued at $6,400,000 and the ClinScan Intranet product was valued at $4,300,000
using these model assumptions. The development of these projects had not yet
reached technological feasibility to permit capitalization, and the technology
had no alternative future use. Income tax benefits resulted from these charges
of approximately $1,563,000 and $1,613,000 for the Hayes Computer Systems and
Clinical MicroSystems acquisitions, respectively; however, based on the weight
of available evidence, valuation allowances for the full amounts have been
recorded.

    Goodwill previously recorded from the acquisitions of US HealthData
Interchange and Clinical MicroSystems is being amortized on the straight-line
method over 3 years beginning April 1, 1998. Goodwill from these acquisitions
was previously being amortized on the straight-line method over 15 years. This
change in estimate results in an additional amortization expense of
approximately $1,015,000 per year. Goodwill relating to the acquisitions of
Integrated Medical Services and Clinical MicroSystems is being amortized over 3
years.

    The following unaudited pro forma summary presents the consolidated results
of operations of ProxyMed, Key Communications, Integrated Medical Services, US
HealthData Interchange, Hayes Computer Systems and Clinical MicroSystems as if
the acquisitions of these businesses had occurred at the beginning of 1997,
including amortization of goodwill, additional interest expense and one-time
charges for acquired in-process research and development technology. These pro
forma results do not necessarily represent results which would have occurred if
the acquisitions had taken place at that date, or of results which may occur in
the future.

                                      F-15
<PAGE>

<TABLE>
<CAPTION>
                                          Year ended December 31,
                                        --------------------------
                                             1998        1997
<S>                                     <C>           <C>
Revenues                                $ 44,565,960  $ 34,946,391
Net loss                                $(14,538,825) $(29,462,660)
Basic and diluted net loss
    per share of common stock           $      (0.83) $      (1.86)
</TABLE>

                                      F-16
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(3) ACQUISITION OF PRESCRIBE TECHNOLOGY

    In June 1997, ProxyMed acquired all rights, title and interest in all
copyrights and trademarks related to the technology underlying the PreScribe(TM)
pharmacy-physician prescription network from Walgreens Co. Concurrently,
Walgreens entered into a network services agreement whereby Walgreens will pay
fees to ProxyMed for 12 years (the first three of which are on an exclusive
basis) for transactions (as defined) received over the PreScribe network or
ProxyMed's existing network, ProxyNet. Such fees are recorded as income in the
period the service is rendered. ProxyMed paid Walgreens $2,000,000 at closing,
issued a 10-year warrant for 200,000 shares of ProxyMed's common stock
exercisable at $9.96 per share (the market price at the date of grant)
commencing on the fourth anniversary of the closing date, and will pay $500,000
per year on the first, second and third anniversaries of the agreement. The
value of the warrant resulted in a $731,938 credit to additional paid-in capital
and was computed using the Black-Scholes model using the following assumptions:
risk-free interest rate of 6.45%, expected life of 10 years, expected volatility
of 75% and no dividend yield. ProxyMed is amortizing the purchase price over the
12 year term of the services agreement, and is expensing the anniversary
payments over the three year term of the payments. In June 1998, ProxyMed made
its first anniversary payment under this agreement.

(4) SALE OF DISPENSARY ASSETS

    On March 15, 1995, ProxyMed sold to Eckerd Corporation certain, but not all,
of the assets related to ProxyMed's HMO prescription drug dispensing operations
for $4,851,481. Of the total purchase price, $2,200,000 was contingent on the
amount of prescription business retained by Eckerd through September 30, 1996.
Accordingly, ProxyMed initially recorded a loss on the sale, and recognized
additional income in 1996 as prescription data was provided by Eckerd.
Ultimately, ProxyMed collected the entire purchase price, including the entire
contingent amount.

                                      F-17
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(5) EQUITY SECURITIES

    (a) SALES OF COMMON STOCK - During 1998, private placement sales of common
        stock totaling 3,013,416 shares were consummated, including 2,063,636
        shares to Bellingham Industries Inc., resulting in net proceeds of
        $29,118,505. Additionally, ProxyMed issued a five-year warrant to
        Bellingham for the purchase of 100,000 shares of ProxyMed's common stock
        at $7.56 per share and issued a five-year warrant to an underwriter for
        the purchase of 94,978 shares of ProxyMed's common stock at $12.10 per
        share.

        During 1997, private placement sales of common stock totaling 1,625,000
        shares were consummated to Bellingham, resulting in net proceeds of
        $13,391,387.

        In 1996, ProxyMed raised net proceeds of $13,041,309 in an underwritten
        offering to the public of 3,367,500 shares of common stock at a price of
        $4.42 per share. As of December 31, 1998, underwriter warrants for the
        purchase of 181,600 shares of common stock at an exercise price of $5.63
        per share remain outstanding through May 7, 2001.

        The value of stock options and warrants issued in connection with the
        sale of common stock and non-redeemable preferred stock are netted
        against the proceeds within stockholders' equity, and have no impact on
        earnings.

    (b) PREFERRED STOCK - In 1995, ProxyMed sold 23.75 units of 9% Series A
        non-redeemable convertible preferred stock, all of which was
        subsequently converted to common stock. As of December 31, 1998,
        underwriter warrants for the purchase of 201,041 shares of common stock
        at an exercise price of $4.17 per share remain outstanding through June
        9, 2000. If the preferred stock had been converted to common stock as of
        the beginning of 1996, net loss per share would have been $(.34) for
        1996.

        ProxyMed has 2,000,000 authorized but unissued shares of preferred
        stock, par value $.01 per share, which is entitled to rights and
        preferences to be determined at the discretion of the Board of
        Directors.

                                      F-18
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    (c) OTHER WARRANTS - In connection with a private placement sale of common
        stock in 1994, warrants are outstanding to the placement agent for the
        purchase of up to 14,000 shares of common stock at an exercise price of
        $3.06 per share through August 19, 1999. Additionally, as part a
        software development agreement with Medical Manager Corp., ProxyMed
        granted a five-year warrant to Medical Manager for the purchase of
        150,000 shares of common stock for $3.50 per share; Medical Manager
        subsequently sold this warrant to Bellingham in 1998. The compensatory
        value of the Medical Manager warrant, as well as a warrant for 37,500
        shares exercisable at $4.17 per share issued in connection with a
        license agreement with Blue Cross and Blue Shield of Massachusetts, Inc.
        and certain other stock options for 12,500 shares issued to two
        consultants, were charged to expense in 1996 in the amount of $300,172.
        The weighted average fair value of each compensatory warrant and option
        was estimated at $1.50 at the date of grant using the Black-Scholes
        option pricing model with the following assumptions: risk-free interest
        rate of 6.17%, expected life of 5 years, expected volatility of 60.8%,
        and no dividend yield.

(6) LOAN AGREEMENT

    ProxyMed has a revolving loan agreement with a bank for borrowings of up to
$5,000,000. Outstanding borrowings bear interest at the prime rate less 3/4%,
are due on demand and are collateralized by U.S. Treasury Notes and certificates
of deposit. There were no borrowings outstanding as of December 31, 1998 or
1997.

(7) INVENTORY

    Inventory consists of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                    1998           1997
                                                ------------   -----------
<S>                                              <C>            <C>
    Materials, supplies and component parts      $1,050,692     $        -
    Work in process                                 129,423              -
    Finished goods                                1,790,095      1,202,431
                                                 ----------     ----------
                                                 $2,970,210     $1,202,431
                                                 ==========     ==========
</TABLE>

                                      F-19
<PAGE>


                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(8) PROPERTY AND EQUIPMENT

    Property and equipment consists of the following at December 31, 1998 and
1997:

<TABLE>
<CAPTION>
                                                                                 ESTIMATED
                                                   1998              1997       USEFUL LIVES
                                                -----------         ---------   ------------
<S>                                             <C>                 <C>         <C>
Furniture, fixtures and equipment               $ 1,427,798         $ 800,240   5 to 7 years
Computer hardware and software                    3,249,782         2,014,293     5 years
Service vehicles                                    145,126                 -     5 years
Leasehold improvements                              559,396           189,908   Life of lease
Revenue earning equipment                           415,344                 -      5 years
                                                   --------         ---------
                                                  5,797,446         3,004,441
Less accumulated depreciation                     1,461,502           681,267
                                                -----------         ---------
       Property and equipment, net              $ 4,335,944        $2,323,174
                                                ===========        ==========
</TABLE>

    Depreciation expense was $1,020,000 in 1998, $499,000 in 1997 and $297,000
in 1996.

(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

    Accounts payable and accrued expenses consists of the following at December
31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                  1998        1997
                                               ----------   ----------
<S>                                            <C>          <C>
Accounts payable                               $3,619,427   $2,671,182
Accrued payroll and related costs                 665,048      365,716
Accrued expenses related to acquisitions        1,036,319      556,316
Other accrued expenses                            923,837      645,859
                                               ----------   ----------
 Total accounts payable and accrued expenses   $6,244,631   $4,239,073
                                               ==========   ==========
</TABLE>

    Accrued expenses related to acquisitions consists of unpaid amounts for
professional fees (legal, accounting and investment banking costs), employee
relocation costs, travel costs incurred during the acquisition process,
contractual lease obligations for duplicate facilities closed as a result of the
acquisition, and similar direct costs of consummating the acquisitions discussed
in Note 2. The 1998 amount also includes accrued distributions to the former
shareholders of Key Communications for S Corporation income tax obligations as
discussed in Note 2. Differences between amounts accrued and amounts
subsequently paid have not been significant.

                                      F-20
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10) INCOME TAXES

    The significant components of the deferred tax asset account is as follows
at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                               1998               1997
                                                          ------------        -----------
<S>                                                       <C>                 <C>
Net operating losses - Federal                            $ 13,074,000        $ 8,224,000
Net operating losses - State                                 2,005,000          1,261,000
In-process research and development technology               3,119,000          2,964,000
Other - net                                                    234,000           (125,000)
                                                          ------------        -----------
    Total deferred tax assets                               18,432,000         12,324,000
Less valuation allowance                                   (18,432,000)       (12,324,000)
                                                          ------------        -----------
    Net deferred tax assets                               $          -        $         -
                                                          ============        ===========
</TABLE>

    Based on the weight of available evidence, a valuation allowance has been
provided to offset the entire deferred tax asset amount. Net operating loss
carryforwards, which amount to $38,454,000 as of December 31, 1998, begin to
expire in 2008.

    The benefit for income taxes differs from the amount computed by applying
the statutory federal income tax rate to the net loss reflected on the
Consolidated Statements of Operations in each of the three years ended December
31, 1998 due to the following:

<TABLE>
<S>                                                              <C>
          Federal income tax benefit at statutory rate           35.0%
          State income tax benefits                               3.5
          Increase in valuation allowance                       (38.5)
                                                                -----
                                                                    -%
                                                                =====
</TABLE>

                                      F-21
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(11) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                               YEAR ENDING DECEMBER 31,
                                                                     ----------------------------------------------
                                                                         1998              1997              1996
                                                                  --------------      ------------       ----------
<S>                                                               <C>                 <C>               <C>
Cash paid for interest                                            $      267,468      $     3,230        $  31,123
                                                                  ==============      ===========        =========

Warrants issued for acquisition of PreScribe technology           $            -      $   731,938        $       -
                                                                  ==============      ===========        =========

Acquisition of businesses:
    Contingent common stock issued for prior year acquisition     $      500,000      $         -        $       -
                                                                  ==============      ===========        =========

    Common stock issued for businesses acquired                   $    5,345,332      $ 2,056,452        $       -
    Debt issued for businesses acquired                                        -        1,649,555                -
    Other acquisition costs accrued                                      328,433        1,131,759                -
    Details of acquisitions:
       Working capital components, other than cash                    (1,378,851)        (688,757)               -
       In-process research and development technology                          -       (8,467,098)               -
       Property and equipment                                         (1,432,331)        (485,517)               -
       Goodwill                                                      (15,226,365)      (4,641,746)               -
       Capitalized software and technology                           (11,000,000)        (473,574)               -
       Notes and loans payable                                         3,429,860            9,375                -
                                                                  --------------           ------        ---------
          Net cash used in acquisitions                           $  (19,933,922)    $ (9,909,551)       $       -
                                                                  ==============     ============        =========
</TABLE>

(12) SIGNIFICANT CUSTOMERS

    Approximately 32% and 65% of ProxyMed's revenues for 1998 and 1997,
respectively, were from the State of Florida or agencies thereof. Approximately
50% of ProxyMed's revenues for 1996 were from another customer.

                                      F-22
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(13) STOCK OPTIONS

    ProxyMed has three stock option plans for executives, directors and other
key personnel, under which both incentive stock options and non-qualified
options may be issued. Under such plans, options to purchase up to 1,237,250
shares of common stock may be granted. Options may be granted at prices equal to
the fair market value at the date of grant, except that incentive stock options
granted to persons owning more than 10% of the outstanding voting power must be
granted at 110% of the fair market value at the date of grant. ProxyMed also has
a stock option plan for outside directors under which options to purchase up to
303,000 shares of common stock may be granted at prices and with vesting periods
as may be determined by the Board of Directors or the Compensation Committee
thereof. In addition, as of December 31, 1998, options for the purchase of
672,700 shares were granted to newly-hired employees. Stock options issued by
ProxyMed generally vest within three years, and expire up to ten years from the
date granted. Stock option activity was as follows for the three years ended
December 31, 1998:

<TABLE>
<CAPTION>
                              Options                     Weighted average
                             available      Options        exercise price
                             for grant     outstanding       of options
                             ---------     -----------    ---------------
<S>                            <C>           <C>            <C>
 Balance, January 1, 1996      115,875       934,125        $3.73
 Options authorized            532,500             -          -
 Options granted              (875,250)      875,250        $5.20
 Options exercised                   -      (139,601)       $4.22
 Options expired/forfeited    231,124       (231,124)       $4.00
                              --------     ----------
 Balance, December 31, 1996      4,249     1,438,650        $4.59
 Options authorized            457,200             -          -
 Options granted              (291,368)      291,368        $8.51
 Options exercised                   -       (87,900)       $6.22
 Options expired/forfeited           -       (14,000)       $7.04
                              --------     ----------
 Balance, December 31, 1997    170,081     1,628,118        $4.59
 Options authorized            184,500             -          -
 Options granted              (389,000)      389,000        $7.80
 Options exercised                   -      (319,166)       $4.08
 Options expired/forfeited      57,083      (123,583)       $9.50
                              --------     ---------
 Balance, December 31, 1998     22,664     1,574,369        $5.79
                              ========     =========
</TABLE>

                                      F-23
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

    The following table summarizes information regarding outstanding and
exercisable options as of December 31, 1998:

<TABLE>
<CAPTION>

                                         Options Outstanding                                Options Exercisable
                     ---------------------------------------------------------------  -----------------------------------
 Range of exercise      Number       Weighted average remaining    (Weighted average     Number          Weighted average
      prices         outstanding      contractual life (years)       exercise price   exercisable         exercise price
 -----------------   -----------     --------------------------    -----------------  -----------        ----------------
<S>                     <C>                    <C>                         <C>           <C>                    <C>
 $3.17 - 5.00           741,500                1.78                        $3.60         741,500                $3.60
 $5.01 - 8.00           617,452                8.12                        $6.95         327,553                $6.91
 $8.01 - 13.63          215,417                3.81                        $9.96          90,093               $10.00
                      ---------                                                        ---------
                      1,574,369                                                        1,159,146
                      =========                                                        =========
</TABLE>

    The following table summarizes information regarding options exercisable at
of December as of each year:

<TABLE>
<CAPTION>
                                                1998      1997      1996
                                             ---------  ---------  -------
<S>                                          <C>        <C>        <C>
    Number exercisable                       1,159,146  1,213,751  822,234
    Weighted average exercise price            $5.03      $4.40     $4.10
</TABLE>

    ProxyMed applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans for options issued to employees. Had compensation
cost for such options been recorded based upon the fair value at the grant date
consistent with the methodology prescribed in SFAS No. 123, "Accounting for
Stock-Based Compensation," ProxyMed's net loss and net loss per share would have
been $(12,760,615) and $(0.82) for 1998, $(19,269,832) and $(1.82) for 1997, and
$(3,723,924) and $(.49) for 1996, respectively. The weighted average grant date
fair value of options granted ($3.26 in 1998, $3.13 in 1997, and $2.31 in 1996)
was estimated using the Black-Scholes option pricing model with the following
weighted average assumptions:

<TABLE>
<CAPTION>
                                              1998        1997       1996
                                            --------    --------   ---------
<S>                                           <C>         <C>        <C>
                Risk-free interest rate       5.19%       6.33%      6.08%
                Expected life               8.4 years   5.3 years  7.0 years
                Expected volatility           73.9%       74.7%      65.1%
                Expected dividend yield        0.0%        0.0%       0.0%
</TABLE>

                                      F-24
<PAGE>


                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(14) SEGMENT INFORMATION

    In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ProxyMed has classified the following
reportable segments which are separately managed: healthcare electronic
transaction processing (referred to as EDI below) and communication devices;
network engineering services; and prescription drug dispensing. Intersegment
sales are not material and there were no foreign sales for any years presented.

<TABLE>
<CAPTION>
                                             1998              1997               1996
                                         ------------       ------------       -----------
<S>                                      <C>                <C>                <C>
Net revenues:
       Healthcare EDI and
         communication devices           $ 22,229,326       $  1,817,122       $ 1,886,007
       Network integration services        13,855,458          7,779,787                 -
       Prescription drug dispensing         1,682,893          1,335,060         1,168,144
                                         ------------       ------------       -----------
                                         $ 37,767,677       $ 10,931,969       $ 3,054,151
                                         ============       ============       ===========
Operating income (loss):
       Healthcare EDI and
         communication devices           $ (7,236,218)      $(11,669,360)      $(1,596,925)
       Network integration services          (539,118)        (3,942,151)                -
       Prescription drug dispensing           (35,452)            18,050            36,063
       Corporate                           (3,870,826)        (3,190,801)       (2,744,431)
                                         ------------       ------------       -----------
                                         $(11,681,614)      $(18,784,262)      $(4,305,293)
                                         ============       ============       ===========

Depreciation and amortization:
       Healthcare EDI and
         communication devices           $  8,369,528       $    873,924       $   209,681
       Network integration services           215,606             69,373                 -
       Prescription drug dispensing            19,414             15,003            12,907
       Corporate                              276,725            120,000           100,000
                                         ------------       ------------       -----------
                                         $  8,881,273       $  1,078,300       $   322,588
                                         ============       ============       ===========

Capital expenditures and capitalized software:
       Healthcare EDI and
         communication devices           $  1,234,321       $  4,297,152       $ 1,106,448
       Network integration services           386,674            155,026                 -
       Prescription drug dispensing             6,303             16,264            10,000
       Corporate                              408,894            100,000           120,000
                                         ------------       ------------       -----------
                                         $  2,036,192       $  4,568,442       $ 1,236,448
                                         ============       ============       ===========

Total assets:
       Healthcare EDI and
         communication devices           $ 36,758,590       $ 12,228,222      $  1,952,686
       Network integration services         4,886,152          2,402,150                 -
       Prescription drug dispensing         1,032,414            996,545           910,685
       Corporate                            6,159,418          3,976,204        12,831,684
                                         ------------       ------------       -----------
                                         $ 48,836,574       $ 19,603,121      $ 15,695,055
                                         ============       ============       ===========
</TABLE>

                                      F-25
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(15) EMPLOYEE BENEFIT PLANS

    ProxyMed has two 401(k) retirement plans, including one plan which was
acquired in its merger with Key Communications, for substantially all employees
who meet certain minimum lengths of employment and minimum age requirements.
Contributions are made by employees based on up to 15% of their annual
compensation. For the plan acquired from Key Communications, ProxyMed makes
matching contributions of up to 5% of participant's salary or $1,000, whichever
is less. These matching contributions are vested after 5 years of employment.
Estimated matching contributions for the period May 1 to December 31, 1998 have
been expensed in the amount of $100,000.

(16) COMMITMENTS AND OTHER

    (a) LEASES - ProxyMed leases certain premises, operating and office
        equipment, and vehicles under operating leases which expire on various
        dates through 2005. The leases for the premises contain renewal options,
        and require ProxyMed to pay such costs as property taxes, maintenance
        and insurance. At December 31, 1998, future minimum lease payments under
        noncancelable operating leases with initial or remaining lease terms in
        excess of one (net of payments to be received under subleases) are as
        follows: $1,146,000 in 1999, $869,000 in 2000, $781,000 in 2001,
        $698,000 in 2002, $372,000 in 2003, and $469,000 thereafter.

        ProxyMed's obligations under capital leases are not material. Total rent
        expense for all operating leases amounted to $1,064,000 in 1998,
        $372,000 in 1997, and $119,000 in 1996.

    (c) DUE FROM OFFICERS - Included in other assets at December 31, 1998 and
        1997 is a demand loan in the amount of $350,000, plus accrued interest
        at 7-3/4% per annum, due from ProxyMed's chief executive officer. The
        officer has agreed to collateralize the loan pursuant to pledges of
        securities, including shares of ProxyMed's common stock, satisfactory to
        ProxyMed's Board of Directors.

        Additionally, included in stockholder's equity at December 31, 1998, is
        a promissory note in the amount of $259,800, plus accrued interest at 5%
        per annum, from another officer. This note is collateralized by 60,000
        shares of ProxyMed's common pursuant to a stock pledge agreement.

(17) SUBSEQUENT EVENT

    In January 1999, ProxyMed acquired the electronic transaction processing
business and assets of Specialized Medical Management, Inc. of Dallas, Texas, a
provider of healthcare financial electronic transaction processing services
primarily in the Southwestern United States for $1,000,000 in cash. The
acquisition is being accounted for as a purchase.

                                      F-26
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

February 19, 1999

To the Stockholders of ProxyMed, Inc.

Our audits of the consolidated financial statements referred to in our report
dated February 19, 1999 appearing on page F-2 of this Form 10-K also included an
audit of the Financial Statement Schedules listed in Item 14(a)(2) of this Form
10-K. In our opinion, these Financial Statement Schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Miami, Florida

                                      F-27
<PAGE>

                         PROXYMED, INC. AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                         Allowance for Doubtful Accounts
                  --------------------------------------------------------------------------------------------
                                                  Additions
                                       -------------------------------------
   Year ended        Balance at           Charged to         Charged to                           Balance at
  December 31,    beginning of period  costs and expenses  other accounts (1)   Deductions (2)   end of period
---------------   -------------------  ------------------  ------------------   --------------   -------------
      <S>             <C>                 <C>                 <C>                 <C>             <C>
      1998            $  242,549           368,207            333,579             349,481         $ 594,854
                      ==========          ========            =======             =======         =========

      1997            $   16,712           121,771            138,630              34,564         $ 242,549
                      ==========          ========            =======             =======         =========

      1996            $  106,625             8,105                  -              98,018         $  16,712
                      ==========          ========            =======             =======         =========
</TABLE>

(1) Includes amounts acquired through acquisitions
(2) Primarily write-off of bad debts

                                      F-28


<PAGE>

                                 EXHIBIT INDEX


EXHIBIT                  DESCRIPTION
-------                  -----------

 23        Consent of PricewaterhouseCoopers LLP