===============================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                         ------------------------------

                                   FORM 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                 OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       or

[ ]      Transition Report Under Section 13 or 15(d) of the Securities Exchange
                                   Act of 1934

                           COMMISSION FILE NO. 0-25530

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

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

        MINNESOTA                                         41-1682994
(State of Incorporation)                       (IRS Employer Identification No.)

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

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

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

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

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

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


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

       The Registrant's revenues for the fiscal year ended December 31, 1996
were $ 615,700.

       As of March 1, 1997, 3,819,708 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant as of that date (based upon the average between the closing bid and
asked prices for the Common Stock on that date), excluding shares owned
beneficially by executive officers, directors and greater-than-5% shareholders,
was approximately $6,702,045.

                       DOCUMENTS INCORPORATED BY REFERENCE

       Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its Annual Meeting to be held May 22, 1997 (the
"1997 Proxy Statement").

Transitional Small Business Disclosure Format (check one): YES ____  NO __X__

===============================================================================


                                     PART I


ITEM 1.    DESCRIPTION OF BUSINESS.

INTRODUCTION

         Today's healthcare environment requires that physicians and provider
organizations document and report clinical outcomes to prove to payors and
buyers of healthcare that they are delivering the highest quality care at the
most cost-effective price. LifeRate Systems, Inc. (the "Company" or "LifeRate")
has developed and is marketing a proprietary software system that stores,
retrieves, integrates and analyzes data necessary to prove the quality and value
of the care that healthcare providers deliver. The Company's system also allows
providers to operate more efficiently, to better manage and control internal
processes and to improve healthcare delivery in the face of widespread changes
in the healthcare environment. The Company believes that the need for such
systems will grow as providers and payors seek to compete effectively in this
rapidly changing market.

         The Company first installed its core software system at a customer site
for beta testing in April 1995. Following testing, the Company made a number of
improvements and enhancements to its core system and developed the
Cardiovascular Outpatient module. LifeRate released demonstration versions of
the core system, along with the Cardiovascular Outpatient module, in August 1995
and commercial versions in December 1995. The Company accepted its first orders
in the third quarter and began installation in the fourth quarter of 1995.

         During 1996 the Company continued its development activities focusing
on releasing two Cardiovascular Outpatient product enhancements designed to add
functionality to the core system to increase the operational benefits to users
of the system. In addition, the Company began modification to its core software
system to develop an Asthma and Allergy Outpatient module. Development also
continued on the Cath Lab module of the Cardiovascular system, which is now
scheduled for release in 1997.

         Also during 1996 the Company began to invest in the structure required
to support the commercial activities of the Company. Executive management
changed in the spring of 1996 to help the Company in this phase of its
development. During the course of the year, important investments were made in
technical support, customer service and field sales as the Company internalized
these functions. Prior to 1996, the Company contracted with an outside firm to
provide substantially all of these functions. In addition, marketing and
software quality assurance functions were established.

         In 1996, considerable effort was devoted to the commercial development
of the Company's products with emphasis on sales. To date, the Company has
entered into agreements for the sale and installation of its Cardiovascular
Outpatient system with seven cardiovascular practice groups and the sale and
installation of its Asthma and Allergy Outpatient system with three asthma and
allergy practice groups.

         As disclosed in Note 9 to the financial statements, included in this
report, in prior years the Company had entered into agreements with a physician
group, The Atlanta Cardiology Group, P.C. ("ACG") and an advisor, Anthony
Furnary, M.D., both of which had assisted the Company in developing its
products. The agreements called for the Company to pay the respective parties
royalties and other amounts based upon future product sales. Throughout 1996,
the Company was negotiating with the respective parties to allow for the Company
to better position itself for future growth.

         In March 1997, the Company and ACG canceled the agreement in place
between the parties and entered into a new agreement that called for the Company
to issue ACG a $2,250,000 convertible subordinated note bearing interest at 10%
per year. The note matures on April 1, 2002. The note replaces all future
royalty payments and other amounts due under the previous agreement for services
provided by ACG. Under the new agreement, the Company will pay to ACG 50% of the
interest accrued each year with the remainder due on the note's maturity date.
Under the terms of the convertible subordinated note, ACG may convert up to
$2,000,000 into shares of the Company's common stock at a conversion rate of
$3.60 per share. In addition, ACG is entitled to have a designated individual
attend all of the Company's Board of Director meetings.

         Also in March 1997, the Company and Dr. Furnary modified the existing
agreement between the parties. Under the terms of the modified agreement,
beginning in 1999 (or sooner if the Company reaches $20,000,000 of cumulative
revenues) the Company will pay royalties in the amount of 3% on all gross
revenues (as defined in the agreement) up to $100,000,000, and thereafter, 3.6%
on all gross revenues. The existing royalty rate of 7.5% of gross revenues
remained in place through March 31, 1997. In addition, among other things, under
the modification the Company agreed (i) to make certain milestone payments
totaling $450,000 when the Company reaches certain revenue levels; (ii) to issue
options to Dr. Furnary, for services previously rendered, to purchase 550,000
shares of the Company's common stock at an exercise price of $2.625; (iii) to
enter into a 5-year consulting agreement with Dr. Furnary, including the payment
of fees of $100,000 per year, and (iv) to appoint Dr. Furnary to the Company's
Board of Directors within 90 days.

         The Company was incorporated in Minnesota on July 18, 1990. The
Company's offices are located at 7210 Metro Boulevard, Minneapolis, Minnesota
55439; its telephone number is (612) 844-0599.

BACKGROUND

         Propelled by the rapid transition to managed care, the Health Care
Information Systems ("HCIS") market is already well in excess of $5 billion and
is expected to be one of the fastest growing sectors of the healthcare market by
the year 2000. This market sector is fragmented with many computer-based systems
performing a range of different functions; for example, billing, scheduling or
patient satisfaction assessment.

         In an effort to control healthcare spending, a shift in the marketplace
has occurred away from the traditional cost plus system driven by the provider
(rewarding more rather than less care) to a managed care environment driven by
the payor (rewarding controlled use of healthcare resources and moving towards
capitation (a fixed amount paid per person). Healthcare decision-making is
shifting from the provider (physician) to the payor and/or intermediaries
representing the payor (insurer, managed care company, third party
administrator). With the emphasis on controlling costs, both healthcare
purchasers and providers are consolidating, and the need for improved
computer-based communications and information systems is becoming more urgent.
Initially, computer-based systems focused on transactional and administrative
applications (billing, accounting, scheduling and purchasing). Now, due to the
increase in managed care and capitated contracts, the focus of healthcare has
shifted to total disease management controlled from the outpatient setting. This
has caused an overall shift in the emphasis of computer-based systems from
administrative to clinical, and from hospital to outpatient.

         Specialty physicians are being required by payors to provide care that
achieves the best possible clinical outcome at the lowest appropriate costs. To
do so, physician groups need to be able to define and prove the lowest price and
document cost-effective outcomes. The new requirements have increased the need
for structured clinical information systems capable of integrating and managing
complex clinical and financial data collected across the continuum of care. To
accomplish this, the Company believes that healthcare providers need a clinical
information system that links three measures:

          *    patient reported data (functional status, patient satisfaction)
          *    detailed clinical data (patient history and procedures,
               laboratory test and pharmacy data)
          *    financial data (including charges and costs)

         The Company believes that doctors and hospitals need patient centered
information, captured throughout the entire continuum of care, to convincingly
demonstrate that their healthcare services deliver positive medical outcomes in
a cost effective manner. Thus came the concept for unique computer-based tools
that would integrate medical data and be capable of producing meaningful,
applicable and, most importantly, useful information to providers of care.

LIFERATE CLINICAL INFORMATION SYSTEM

         LifeRate's Clinical Information System is a patient centered,
point-of-care data collection and analysis tool that follows a patient
throughout the complete continuum of care. The system's data collection tools
populate a vast relational data repository that can be queried to analyze the
quality and effectiveness of patient care including: morbidity and mortality,
repeat procedures, functional status, utilization data, and more, with an
extensive interface capability, making it truly unique in the healthcare
information management marketplace.

         LifeRate has created a versatile computer based patient record (CPR)
and outcomes management tool that assists clinical professionals and healthcare
administrators with a real time point-of-care information system which allows
providers to collect, store, retrieve, and analyze patient centered clinical and
financial information. LifeRate's CPR is built on a powerful relational database
that provides a unique longitudinal view of each patient through the patient's
continuum of care. A key related capability is the ability to integrate and
interface data, regardless of the source of that data. LifeRate's outcomes tools
aid healthcare providers in accurately measuring the cost-effectiveness and
quality of the care that they deliver, in demonstrating their value to payor
organizations, and in providing an edge in an ever-growing competitive market.

         The LifeRate Clinical Information System currently has three unique
applications: Cardiovascular Outpatient; Reports & Guidelines; and Asthma &
Allergy Outpatient. Two additional applications, Cath Lab and Noninvasive
Cardiac Tests, are scheduled for release in 1997.

The following table depicts how the Company believes that the information
provided by its system can be made to work for healthcare providers:

<TABLE>
<CAPTION>

--------------------------------------- -------------------------------------- ----------------------------------
               REVENUE                                PROVIDERS                             OPERATIONS
               -------                                ---------                             ----------

      GAIN COMPETITIVE EDGE WHEN         INCREASE PATIENT VOLUMES TO OFFSET       MAXIMIZE PROFITS FOR CAPITATED
        NEGOTIATING CONTRACTS                  DECLINING REIMBURSEMENT                       PATIENTS
      OBTAIN REFERRING PHYSICIAN             PROVIDE BETTER PATIENT CARE          REDUCE OPERATIONAL FTES (FULL
              BUSINESS                                                                   TIME EQUIVALENTS)
<S>                                     <C>                                    <C> 
 *   Provide quality and cost data       *   Reduced dictation and              *   Clinically relevant data for
     to contracting entities                 transcription                          comprehensive and comparable
 *   Timely referring physician note     *   Fast time on-site and remote           outcome reporting
 *   Powerful decision support tools         access to patient information      *   Reduce medical record and
     that are capable of processing      *   Monitor patient status                 transcription FTEs
     practice guidelines, clinical       *   Freedom from the paper chart       *   Interfacing capabilities to
     trial protocols, outcomes, and                                                 external systems
     strategic operational and                                                  *   Complete and accurate
     quality improvement reports                                                    documentation
 *   Increased accuracy of                                                      *   Reduce duplicate data entry
     information

--------------------------------------- -------------------------------------- ----------------------------------
</TABLE>


Product features which support the above benefits include:
*    Point-of-care data entry
*    Codified data elements
*    ICD9 and CPT4 coding
*    Customizable Visit Note
*    Flexible guidelines engine
*    Total disease state management
*    Interfacing capabilities to external systems
*    Quality and cost data for contracting entities

     LifeRate's technical architecture is industry standard and state of the
art. LifeRate's technology plan is also compatible with Microsoft's products for
healthcare including:
*    Relational database: Microsoft SQL Server
*    Robust operating system: Microsoft Windows NT
*    Windows environment
*    Data integration capabilities
*    Intuitive graphical user interface written in PowerBuilder, the market
     leader for client/server tools
*    Comprehensive set of data elements exceeding 5,000 data points. The data
     points are also compatible with certain national registries including ACC,
     MCR/MAR and SCAI.


SALES AND MARKETING STRATEGY

MARKETING FOCUS

         LifeRate's initial marketing strategy is to target the specialty
physician practice which treats patients with high cost chronic diseases that
have increasingly become the focus of cost containment. These specialty
physician groups direct medical practice patterns, drive hospital referrals and
account for the majority of healthcare claims dollars. To date, physicians in
the clinical outpatient environment have had little access to the kind of
sophisticated clinical information systems being developed for the hospital
market. The Company believes that an effective computer based system that can
determine clinical outcomes based on monitoring and quantifying both the cost
and quality of care is becoming critical in competing for managed care
contracts. More and more, managed care payors are demanding objective data to
evaluate provider performance with respect to both the quality and cost of care.

         The Company's initial product focus is on providing a specialty
oriented clinical software system for cardiology and pulmonology. These medical
specialties accounted for more than half of the $1 trillion spent on healthcare
in 1995.

         LifeRate's decision to concentrate on the specialty physician practice
was driven by several factors:

          *    The focus of cost containment on the effective management of high
               cost chronic diseases, for which treatment patterns are directed
               primarily in the outpatient environment. A study published in the
               "Journal of The American Medical Association" in November 1996
               estimates that non-institutionalized Americans with chronic
               conditions account for three-quarters of U.S. health
               expenditures. The study estimated total costs for these chronic
               conditions were $659 billion in 1990.

          *    Increasing competition for managed care contracts, which is
               forcing physicians to recognize the need to quantify outcomes
               (both quality and cost) not just to win a contract, but to be
               able to assess its economic consequences.
 
          *    The lack of real-time clinical data in the practice management
               environment and the growing need for access to clinical data
               repositories for routine and ad hoc analysis of treatment
               patterns. Although some products on the market purport to offer
               clinical data analyses, often the analysis is derived from claims
               data that has previously been stripped of its clinical integrity.

          *    The increasing need to share real-time clinical and financial
               data across networks as physicians consolidate into larger group
               practices, forging alliances with management services
               organizations (MSOs) and playing an increasingly important role
               in the formation and management of integrated delivery networks
               (IDN's).

STRATEGIC ALLIANCES

         MEDTRONIC, INC. In December 1995, the Company entered into an
Investment Agreement, Licensing and Development Agreement, and a Shareholder
Voting Agreement with Medtronic, Inc. Pursuant to the Investment Agreement, the
Company privately sold to Medtronic 600,000 shares of its common stock for $4.8
million. Pursuant to the License and Development Agreement, the Company granted
to Medtronic a 30 year worldwide, fully paid, royalty free license granting
Medtronic certain rights relating to the sale and use of the Company's system in
the cardiovascular and neurological fields. In addition, the Company agreed to
install the system at certain clinical sites specified by Medtronic on a
preferred pricing basis, and to install the system at one site specified by
Medtronic, at no cost. The LifeRate system can be used to assist Medtronic in
its internal clinical outcomes measurement efforts, and to augment value-added
programs and services that Medtronic provides to its customers. The LifeRate
System can also be used by Medtronic to assist in its clinical/economic value
analysis of products and therapies as well as assisting in automating its
internal clinical research processes.

         PFIZER, INC. In January 1996, Pfizer, Inc. entered into a three year
agreement with LifeRate for a pilot program to begin using LifeRate's
Cardiovascular System at five cardiology practices in the U.S. Under the
agreement, LifeRate received $125,000 initially. The Company received an
additional $125,000 when the five sites were selected. To date, all five sites
have been identified and two sites are installed and producing data. Pfizer's
interest in the LifeRate system is to test its effectiveness and utilization in
Pfizer's efforts to explore ways to capture clinical and financial data.
Internally, Pfizer could use the data to bring new products to market more
swiftly through more efficient clinical trials, as well as helping Pfizer to
assess product utilization. Externally, Pfizer will be assessing the usefulness
of the LifeRate system in improving access to customers who make decisions on
the utilization of Pfizer products.

         NATIONAL ASTHMA AND ALLERGY SYSTEM (NAAS) The National Allergy and
Asthma System (NAAS) is a partnership of leading asthma and allergy group
practices including the National Jewish Respiratory Center in Denver and several
other sites across the country. The business objectives of NAAS are to provide
disease management services and MSO services which include an information system
to members and customers. In February 1996, NAAS entered into an agreement with
LifeRate to partner in the development of an asthma and allergy specific
clinical information system. Development of the initial system was successfully
completed in October of 1996 and installed for beta testing at three sites in
the last quarter of 1996. The initial phase of the agreement calls for an
additional five sites to be installed in 1997. NAAS has paid LifeRate $250,000
and is obligated to pay LifeRate an additional $250,000 as the initial eight
sites are installed. Each site will commit to a three year technical support
agreement that will generate ongoing revenue to LifeRate and NAAS. NAAS provides
access to LifeRate to a membership which includes 37 asthma and allergy
practices across the U.S. The NAAS relationship also provides LifeRate with an
opportunity to expand the application of its core system to another specialty,
in this case asthma and allergy.

         NATIONAL JEWISH MEDICAL AND RESEARCH CENTER In January 1997, National
Jewish Medical and Research Center entered into an agreement with LifeRate to
develop a computerized patient record to expand their disease management
programs in respiratory medicine and immunology. The system being developed will
allow National Jewish to evaluate and scrutinize the data needs for a variety of
unique patient and physician situations within National Jewish. LifeRate will
also integrate the data from other existing systems at National Jewish into a
Master Patient Index. The collaboration between National Jewish and LifeRate is
expected to result in a system that will more efficiently manage National
Jewish's patient and physician data throughout the world, including the medical
specialties of Pulmonology, Immunology, Rheumatology, Infectious Disease and
Allergy and Asthma. LifeRate views this agreement as a significant step in the
adaptation of its core technology into these other medical specialties.

CUSTOMER CONTRACTS

         In the fourth quarter of 1995, the Company began marketing commercial
versions of the Outpatient module of the LifeRate Cardiovascular System. These
marketing efforts have continued throughout 1996. In addition to Atlanta
Cardiology Group, the beta site, the Company to date has entered into agreements
with six additional cardiovascular practices for the sale and installation of
its Cardiovascular Clinical Information System. The agreements are with the
following cardiovascular practice groups:

          *    South Carolina Heart Center (formerly Cardiovascular Associates,
               P.A.) of Columbia, South Carolina, a practice providing full
               cardiology services at 13 locations and the four hospitals in
               Columbia, South Carolina.

          *    Buffalo Cardiology and Pulmonary, a 24 member practice providing
               full services in cardiology and pulmonology in Western New York
               for over 20 years.

          *    Central Cardiovascular Clinic, a four physician practice serving
               four hospitals in San Antonio, Texas. 

          *    Cardiovascular Consultants, P.A., and eight physician practice
               with two locations in Tacoma Park, Maryland.

          *    Southeastern Cardiology Consultants, P.C. of Montgomery, Alabama,
               a cardiology group with eight locations serving 10 hospitals in
               central Alabama.

          *    Savannah Cardiology (Savannah Heart and Lung), a full-service
               cardiac and pulmonary practice providing cardiac and pulmonary
               rehabilitation services at several hospitals in Georgia.

         Since introducing the Asthma and Allergy product in October of 1996,
the Company has entered into three contractual agreements for the implementation
of the Asthma and Allergy Outpatient module with:

          *    Asthma Alliance, P.A., Houston, Texas, a
               multi-site/multi-physician practice specializing in the treatment
               of pediatric and adult asthma and allergy patients in the Houston
               area.
 
          *    Allergy & Asthma Medical Group and Research Center of San Diego,
               California, a multi-physician practice managing pediatric and
               adult patients with asthma and allergic diseases, and conducting
               clinical trials for major drug companies.

          *    Aaronson Asthma & Allergy Associates, Ltd., a Chicago, IL group
               serving adult and pediatric allergy and asthma patients.

COMPETITION

         From an information need perspective, physician practices can be
divided into two sectors: practices with a primary care focus looking for
practice management systems (e.g., billing and scheduling); and specialty
practices looking for clinically-oriented software to demonstrate practice
quality and cost effectiveness. The HCIS market initially developed satisfying
the need for computer-based systems focused largely on transactional and
administrative applications (e.g., billing, accounting, scheduling and
purchasing). As the HCIS market has evolved, more companies have begun to build
integrated systems that extend automation to departments including pharmacies,
clinical laboratories, radiology departments and operating rooms. Some vendors
are attempting to add the clinical capability to their practice management
systems.

         LifeRate's product has been designed specifically as a clinically
oriented outcomes based information system. While there are numerous companies
competing in the HCIS marketplace, ranging from HBO & Company, SMS and Cerner to
many niche players, the Company does not believe that competing products can
provide the relational database, patient centered information that can integrate
clinical devices and diverse software applications in a product such as the one
offered by LifeRate. The following products, while not directly competing on a
per product capability basis, are potential competitors: Health Point's ACS,
Medical Logic's Logician, Cerner and Clinitec's Next Gen. These products are
generally considered to be electronic medical record systems. The Company
believes that its system has the following competitive advantages over these
systems:

          *    In-depth clinical data collection points in the specialty
               practice areas of cardiology and pulmonology.

          *    Access to comprehensive and comparable outcomes.

          *    Guidelines embedded in the system that can be used to validate,
               update and quantify outcomes. This allows for the analysis of
               extremely complex queries, and the generation in minutes of
               reports covering entire practice populations that would otherwise
               require months of personnel time spent in abstracting paper
               charts.

          *    Easy to use data entry.

          *    Capture and reporting capability of more than 6500 data
               collection points.

          *    Leading edge technology including a relational database that is
               patient-centered and problem oriented, which offers scalability,
               remote management, fault tolerance and file security.

         In general, the Company's competitors have greater financial, research,
development, and personnel resources and more extensive business experience than
the Company. Although the Company believes that its system has advantages over
competing products currently being marketed, there can be no assurance that the
Company will be able to compete effectively in the marketplace as its present
and potential competitors are able to duplicate or improve upon its products,
marketing strategy or other services.

RESEARCH AND DEVELOPMENT

         During 1996, LifeRate completed development of its core software
system, including outpatient modules for Cardiovascular and Asthma and Allergy
specialists. The software was released in two phases, Version 1.1 in February,
1996 and Version 1.2 in October, 1996. Work on Version 1.3, scheduled for
release in April, 1997, was started in October, 1996. The goal of these releases
was to add functionality to the core system and to increase the operational
benefit of using the system. Especially important was the development of a
Clinical Note which summarizes the activities that take place during a clinic
visit, and can be used in place of the traditional physician dictation method.

         During 1997 the Company plans to continue dedicating significant
resources to research and development activities. The Company anticipates that
these research and development activities will focus on enhancing the existing
Cardiovascular and Asthma and Allergy outpatient products, completion of the
Cardiac Catheterization laboratory product, adaptation of the core system for
specialties such as Pulmonology and Immunology in conjunction with the Company's
contract with National Jewish Medical Research Center, and the development of
significant outcomes and guidelines reports.

         The Company spent $5,309,900, $2,104,500 and $215,800 respectively on
research and development in the years ended December 31, 1996, 1995 and 1994.

PROPRIETARY PROTECTION

         The Company currently relies solely on common law copyrights and trade
secrets for proprietary protection of its system. LifeRate does not currently
have patent protection with respect to any aspect of its system, although it has
filed one patent application and may file additional applications on certain
aspects of its system. The current patent application was filed in March 1997
and is for a proprietary data entry method. There can be no assurance that the
Company's measures to protect its proprietary information will be successful,
that it will be granted any patents or that any patents that may be granted will
be of value to the Company. In the absence of meaningful intellectual property
protection, the Company may be vulnerable to competitors who could lawfully
attempt to copy the Company's products. Moreover, there can be no assurance that
other competitors may not independently develop the same or similar technology.
Similarly, while LifeRate believes that it has all rights necessary to market
and sell its system without infringement of intellectual property rights held by
others, the Company has not conducted a formal infringement search and there can
be no assurance that such conflicting rights do not exist.

         The Company has entered into an agreement with Anthony Furnary, MD
under which the Company has acquired certain software technology developed by
Dr. Furnary and engaged Dr. Furnary as a consultant. The Company is obligated to
pay certain royalties to Dr. Furnary. See "Description of Business -
Introduction" and Note 9 to the Company's financial statements included in this
Report.

EMPLOYEES

         As of March 1, 1997, the Company had 46 full-time employees, including
9 in management and administration, 19 in software development, 7 in sales and
marketing and 11 in customer support.

ITEM 2.    DESCRIPTION OF PROPERTY.

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

ITEM 3.    LEGAL PROCEEDINGS.

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

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

           No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.

ITEM 4A.   EXECUTIVE OFFICERS OF THE REGISTRANT.

           The executive officers of the Company, their ages, and the offices
held as of March 31, 1997 are as follows:

Name                       Age                         Position
----                       ---                         --------
William W. Chorske          60        President and Chief Executive Officer
Paul D. Benson              50        Senior Vice President, Strategic Business
                                      Development
Thomas M. Niccum            39        Vice President, Product Development
Ken C. Thoreson             46        Vice President, Sales

WILLIAM W. CHORSKE, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr. Chorske joined
LifeRate as the President and Chief Executive Officer in April, 1996 following
nearly a decade as a senior executive at Medtronic, Inc., an international
medical device company. He served as President, Medtronic Europe, following his
initial assignment as Senior Vice President and Chief Financial Officer from
1987 to 1991. Prior to joining Medtronic, Mr. Chorske was employed for 19 years
with the Perkin-Elmer Corporation, where he held several senior operating and
financial positions including Group Executive, Data Systems Group and Executive
Vice President, Chief Financial Officer. He received his bachelors and masters
degrees in electrical engineering from the University of Minnesota and an MBA
from Harvard University.

PAUL D. BENSON, SENIOR VICE PRESIDENT, STRATEGIC BUSINESS DEVELOPMENT. Mr.
Benson joined LifeRate Systems in 1993 with more than 25 years of experience in
sales and marketing, primarily in the financial services and insurance
industries. Mr. Benson is responsible for the strategic development and
management of new markets and key accounts. Prior to joining the Company, Mr.
Benson's career included five years as a consultant to the financial services
industry in the areas of marketing and database management. He also spent 18
years in sales and management positions with Minnesota Mutual Life Insurance
Company. Mr. Benson received his bachelors degree in economics from Concordia
College and an MBA from the University of Wisconsin.

THOMAS M. NICCUM, VICE PRESIDENT, PRODUCT DEVELOPMENT. Mr. Niccum joined the
Company in June 1995 as Chief Technologist and was promoted to Vice President,
Product Development in December 1995. From 1991 to 1995, he was a consultant to
the Company. Mr. Niccum has almost 20 years experience in software design,
development and engineering. His experience includes graduate work in
high-performance computing and advanced database design. As the principal
architect of LifeRate's software based solutions, he also works directly with
the Company's physician advisors on all issues regarding product design,
database construction and data integrity. Mr. Niccum received both his bachelors
and masters degrees in computer science from the University of Minnesota, and
has authored numerous articles in advanced computer science publications.

KEN C. THORESON, VICE PRESIDENT, SALES. Mr. Thoreson joined the Company in
February 1997 as Vice President, Sales and is responsible for the overall
direction and performance of the Company's field sales organization. In that
role, he has primary responsibility for the sales strategy and resources
required to deliver sales results. Prior to joining LifeRate, Mr. Thoreson
served in executive sales positions for Medvision Corporation., J3 Learning and
Versyss Corporation resulting in twenty years of experience in sales and
national sales management achievement in computer and software related
businesses including 10 years with medical software applications. Mr. Thoreson
received his bachelors degree in economics and business administration from the
University of Wisconsin.

                                     PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
           MATTERS.

           The Company's Common Stock has been traded on the Nasdaq SmallCap
Market System under the symbol "LRSI" since March 16, 1995, the date of the
Company's initial public offering. Prior to that time, there was no public
trading market for the Company's Common Stock. The following table sets forth,
for each of the calendar periods indicated, the quarterly high and low bid
quotations for the Company's Common Stock as reported by the Nasdaq SmallCap
Market System. The prices in the table represent prices between dealers, and do
not include adjustments for retail mark-ups, mark-downs or commissions and may
not represent actual transactions.

                                                               COMMON STOCK
                                                               ------------
                                                            HIGH           LOW
                                                            ----           ---
           1995:
                  First quarter (since March 16, 1995)      5 1/2         5 1/8
                  Second quarter                            6 1/4             5
                  Third quarter                             7 7/8        6 5/32
                  Fourth quarter                           11 1/8         7 1/8

           1996:
                  First quarter                            11 7/8         9 5/8
                  Second quarter                           10 1/4       7 15/32
                  Third quarter                                 8         3 7/8
                  Fourth quarter                            5 1/8         1 3/4

           As of March 1, 1997, there were approximately 130 record holders of
the Company's Common Stock.

           No cash dividends were declared or paid by the Company during 1994,
1995 or 1996.


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

RESULTS OF OPERATIONS

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

         Revenues in 1995 were $263,300, a $143,600 increase from 1994. The 1995
revenues consisted of $57,500 generated from the beta site installation of
LifeRate's Cardiovascular Outpatient product, $31,000 from evaluation sites of
the Cardiovascular Outpatient product and $30,000 from Pfizer-related
Cardiovascular Outpatient installations. The remaining $144,800 in 1995 revenue
represent contract fees for other development work. Revenues of $119,700 in 1994
primarily reflect contract work related to the definition of system
requirements.

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

         Cost of revenues in future periods will continue to be affected by
royalty payments. As described in Notes 9 to the financial statements, in March
1997, the Company completed a modified agreement with Anthony Furnary, M.D.
Beginning in 1999 (or sooner if the Company reaches $20,000,000 of cumulative
revenues) the Company is obligated to pay royalties in the amount of 3.0% on all
gross revenues (as defined in the agreement) up to $100,000,000 and, thereafter,
3.6% on all gross revenues. Through March 31, 1997, the Company was obligated to
pay royalties of 7.5% of gross revenues under the prior agreement with Dr.
Furnary. In March 1997, the Company also issued a convertible subordinated note
to The Atlanta Cardiology Group, P.C. ("ACG") in the principal amount of
$2,250,000 in exchange for the cancellation of the royalty agreement with ACG
which required the Company to pay royalties to ACG at the rate of 10% of gross
sales of the Company's cardiology system and 2% of all database sales. The
Company incurred royalty expenses of $46,100 and $0 in 1996 and 1995,
respectively, under these agreements.

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations since inception primarily
through private and public placement of Common Stock.

         At December 31, 1996, the Company had $2,072,000 in cash and cash
equivalents, a $5,678,500 decrease from December 31, 1995. In January 1996, an
additional 295,546 shares of Common Stock were sold in a private placement at a
price of $6.50 per share raising net proceeds of $1,667,200. During 1996, the
Company also received $235,400 from the exercise of 41,665 stock options. In
1996 the Company used $6,955.600 to fund operations and $602,600 to purchase
furniture and equipment.

         In March 1997, the Company issued a convertible subordinated note to
ACG in the principal amount of $2,250,000, maturing on April 1, 2002. The note
accrues interest at the rate of 10% per year and interest is payable at the rate
of 5% per year, with the remainder payable at the maturity date. Up to
$2,000,000 of the principal amount of the note is convertible by ACG into common
stock at the rate of $3.60 per share, subject to adjustment in certain cases to
protect ACG from certain dilutive events. The note was issued in exchange for
the cancellation of a royalty agreement with ACG.

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

         The Company estimates that its current cash balances will enable it to
continue operations through some time in the second quarter of 1997. Thereafter,
the Company will require significant additional capital in order to continue
operations. Accordingly, the report of the independent auditor's on the
Company's 1996 financial statements contains an explanatory paragraph regarding
the Company's ability to continue as a going concern. The Company is currently
exploring its options to raise additional capital to fund operations. There can
be no assurance that the Company will be able to obtain additional financing on
satisfactory terms, or at all. If the Company is unable to obtain additional
financing it will be forced to cease operations and may be forced to seek
protection under bankruptcy laws.

ITEM 7.    FINANCIAL STATEMENTS

                          INDEX TO FINANCIAL STATEMENTS

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

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

Report of Independent Auditors............................................  17

Balance Sheets as of December 31, 1996 and 1995...........................  18

Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 and the period
from July 18, 1990 (date of inception) to December 31, 1996...............  20

Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994..........................................  21

Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 and the period
from July 18, 1990 (date of inception) to December 31, 1996...............  24

Notes to Financial Statements.............................................  26


ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.

           None.


                                    PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

(a)        DIRECTORS OF THE REGISTRANT.

           The information under the Captions "Election of
Directors--Information About Nominees" and "Election of Directors--Other
Information About Nominees" in the Company's 1997 Proxy Statement is
incorporated herein by reference.

(b)       EXECUTIVE OFFICERS OF THE REGISTRANT.

          The information concerning Executive Officers of the Company is
included in this Report under Item 4A, "Executive Officers of the Registrant."

(c)       COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

          The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1997 Proxy Statement is incorporated
herein by reference.

ITEM 10.   EXECUTIVE COMPENSATION.

           The information under the captions "Election of Directors -- Director
Compensation" and "Compensation and Other Benefits" in the Company's 1997 Proxy
Statement is incorporated herein by reference.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

           The information under the caption "Principal Shareholders and
Beneficial Ownership of Management" in the Company's 1997 Proxy Statement is
incorporated herein by reference.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          The information under the captions "Election of Directors -- Director
Compensation" and "Certain Transactions" in the Company's 1997 Proxy Statement
is incorporated herein by reference.

ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K.

(a)        EXHIBITS

           Reference is made to the Exhibit Index hereinafter contained, on
pages 39 to 43 of this Report.

           A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 5, 1997, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to LifeRate Systems,
Inc., 7210 Metro Boulevard, Minneapolis, MN 55439, Attention: Chief Financial
Officer.

           The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an Exhibit to this Report, the
location of which is indicated in the Exhibit Index of this Report:

          (1)  Employee Stock Purchase Plan.

          (2)  LifeRate Systems, Inc. 1993 Stock Option Plan, as amended.

          (3)  Form Incentive Stock Option Agreement for Employees.

          (4)  Form Non-Statutory Stock Option Agreement for Non-Employees.

          (5)  Employment Agreement, dated April 29, 1996, between the Company
               and William W. Chorske.

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

          (7)  Agreement, dated September 1, 1996, between the Company and
               William Knopf, M.D.

          (8)  Consulting and Advisory Agreement, dated September 1, 1996,
               between the Company and William Knopf, M.D.

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

          (10) Consulting Agreement, dated March 25, 1997, between the Company
               and Anthony Furnary, M.D.

(b)      REPORTS ON FORM 8-K

           The Company did not file any Current Reports on Form 8-K during the
fourth quarter of fiscal 1996.



                         Report of Independent Auditors

Board of Directors
LifeRate Systems, Inc.

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

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

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

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

                                               /s/ Ernst & Young LLP

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



<TABLE>
<CAPTION>
                             LifeRate Systems, Inc.
                          (A Development Stage Company)

                                 Balance Sheets

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

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



Total assets                                              $  3,076,300     $  8,403,700
                                                          =============================



                                                                   DECEMBER 31
                                                              1996             1995
                                                          -----------------------------

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

Convertible subordinated note                                2,250,000             --
Notes payable                                                    1,800           12,600
Capitalized lease obligation                                      --              1,000
Deferred rent                                                   16,800           28,700
Deferred revenue                                               151,800           60,900
Shareholders' equity
   Preferred stock, no par value:
     Authorized shares - 1,000,000
     Issued and outstanding shares - none in 1996
       and 1995
   Common stock, no par value:
     Authorized shares - 10,000,000
     Issued and outstanding shares - 3,811,639 in 1996
       and 3,474,428 in 1995                                17,260,700       14,384,100
   Deficit accumulated during the development stage        (17,108,300)      (7,234,800)
                                                          -----------------------------
                                                               152,400        7,149,300
Less stock subscriptions receivable                               --              5,000
                                                          -----------------------------
Total shareholders' equity                                     152,400        7,144,300
                                                          -----------------------------
Total liabilities and shareholders' equity                $  3,076,300     $  8,403,700
                                                          =============================

SEE ACCOMPANYING NOTES.

</TABLE>


<TABLE>
<CAPTION>
                             LifeRate Systems, Inc.
                          (A Development Stage Company)

                            Statements of Operations

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

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

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

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

SEE ACCOMPANYING NOTES.

</TABLE>


<TABLE>
<CAPTION>
                             LifeRate Systems, Inc.
                          (A Development Stage Company)

                       Statements of Shareholders' Equity

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

</TABLE>


<TABLE>
<CAPTION>
                             LifeRate Systems, Inc.
                          (A Development Stage Company)

                 Statements of Shareholders' Equity (continued)

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

</TABLE>


<TABLE>
<CAPTION>
                             LifeRate Systems, Inc.
                          (A Development Stage Company)

                 Statements of Shareholders' Equity (continued)

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

SEE ACCOMPANYING NOTES.

</TABLE>


<TABLE>
<CAPTION>
                             LifeRate Systems, Inc.
                          (A Development Stage Company)

                            Statements of Cash Flows

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

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

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

SEE ACCOMPANYING NOTES.

</TABLE>



                             LifeRate Systems, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements

                                December 31, 1996

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND DESCRIPTION OF BUSINESS

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

CASH AND CASH EQUIVALENTS

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

FURNITURE AND EQUIPMENT

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

NET LOSS PER SHARE

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

INCOME TAXES

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

SOFTWARE DEVELOPMENT COSTS

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

REVENUE RECOGNITION

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

USE OF ESTIMATES

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

STOCK-BASED COMPENSATION

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

2. CONTINUED EXISTENCE

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

3. DEBT

NOTES PAYABLE - RELATED PARTY

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

NOTES PAYABLE - OTHER

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

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

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

4. COMMON STOCK

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

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

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

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

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

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

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

5. STOCK OPTIONS

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

Option activity is summarized as follows:

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

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

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

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

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

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

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

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

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

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

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

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

6. INCOME TAXES

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

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

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

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

7. COMMITMENTS

LEASES

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

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

8. MARKETING AGREEMENTS

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

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

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

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

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

9. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS

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

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

10. MEDTRONIC AGREEMENT

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

11. SUPPLEMENTAL CASH FLOW INFORMATION

The Company entered into the following non-cash transactions:

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

</TABLE>

12. SUBSEQUENT EVENTS

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

13. MAJOR CUSTOMERS

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



                                   SIGNATURES

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

                                   LIFERATE SYSTEMS, INC.


Dated:                             By: /s/ William W. Chorske
                                       -----------------------------------------
                                           William W. Chorske
                                           President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant on March 21, 1997 in the capacities indicated.

<TABLE>
<CAPTION>

NAME                                             TITLE
----                                             -----
<S>                                             <C> 
 /s/ William W. Chorske                          Chief Executive Officer, President and Director
------------------------------------             (principal executive officer, principal financial
William W. Chorske                               officer and principal accounting officer)

/s/ David D. Koentopf                            Chairman of the Board of Directors
-----------------------------------
David D. Koentopf

/s/ Stanley R. Cowle                             Director
-----------------------------------
Stanley R. Cowle

/s/ William D. Knopf, M.D.                       Director
-----------------------------------
William D. Knopf, M.D.

/s/ Daniel A. Pelak                              Director
-----------------------------------
Daniel A. Pelak

/s/ Kevin L. Roberg                              Director
-----------------------------------
Kevin L. Roberg

/s/ Donald C. Wegmiller                          Director
-----------------------------------
Donald C. Wegmiller

/s/ Carl J. Schramm, Ph.D.                       Director
-----------------------------------
Carl J. Schramm, Ph.D.

</TABLE>


<TABLE>
<CAPTION>
                             LIFERATE SYSTEMS, INC.

                  EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
                      FOR THE YEAR ENDED DECEMBER 31, 1996

   Item No.                            Item                                           Method of Filing
   --------                            ----                                           ----------------
<S>            <C>
   3.1          Amended and Restated Articles of Incorporation..........Incorporated by reference to Exhibit 3.1 of the
                                                                        Company's Registration Statement on Form SB-2
                                                                        (File No. 33-89016C).

   3.2          Amended and Restated Bylaws, as amended.................Incorporated by reference to Exhibit 3.2 of the
                                                                        Company's Annual Report on Form 10-KSB, dated
                                                                        March 29, 1996 (File No. 0-25530)

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

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

   10.2         Employment Agreement, dated April 29, 1996,
                between the Company and William W. Chorske..............Incorporated by reference to Exhibit 10.1 of
                                                                        the Company's Quarterly Report on Form 10-QSB,
                                                                        dated May 15, 1996 (File No. 0-25530).

   10.3         Stock Option Agreement, dated April 29, 1996,
                between the Company and William W. Chorske..............Incorporated by reference to Exhibit 10.1 of
                                                                        the Company's Quarterly Report on Form 10-QSB,
                                                                        dated May 15, 1996 (File No. 0-25530).

   10.4         Employee Stock Purchase Plan, as amended................Incorporated by reference to Exhibit 10.27 of
                                                                        the Company's Annual Report on Form 10-KSB/A
                                                                        (Amendment No. 1), dated April 30, 1996 (File
                                                                        No. 0-25530)

   10.5         1993 Stock Option Plan, as amended......................Incorporated by reference to Exhibit 99.1 to
                                                                        the Company's Registration Statement on Form
                                                                        S-8 as filed on March 29, 1995.

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

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

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

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

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

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

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

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

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

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

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

   10.17        Computer Software Purchase Agreement, dated July
                2, 1995, between the Company, Anthony Furnary,
                M.D. and APF, LLC.......................................Incorporated by reference to Exhibit 10.28 of
                                                                        the Company's Annual Report on Form 10-KSB,
                                                                        dated March 29, 1996 (File No. 0-25530).

   10.18        Sales and Marketing Services Agreement, dated as
                of September 18, 1995, between the Company and
                Clinical Sales and Services, Inc........................Incorporated by reference to Exhibit 10.29 of
                                                                        the Company's Annual Report on Form 10-KSB,
                                                                        dated March 29, 1996 (File No. 0-25530).

   10.19        Separation Agreement and Release, dated as of
                February 2, 1996 between the Company and Donald B.
                Olson...................................................Incorporated by reference to Exhibit 10.30 of
                                                                        the Company's Annual Report on Form 10-KSB,
                                                                        dated March 29, 1996 (File No. 0-25530).

   10.20        Separation Agreement and Release, dated as of
                February 2, 1996 between the Company and Merry M.
                Olson...................................................Incorporated by reference to Exhibit 10.31 of
                                                                        the Company's Annual Report on Form 10-KSB,
                                                                        dated March 29, 1996 (File No. 0-25530).

   10.21        Agreement, dated June 4, 1996, between the Company
                and Jeffrey B. Comer....................................Filed herewith electronically.

   10.22        Consulting Agreement, dated June 4, 1996, between
                the Company and Jeffrey B. Comer........................Filed herewith electronically.

   10.23        Non-Statutory Stock Option Agreement, dated June
                6, 1995, between the Company and Jeffrey B. Comer.......Filed herewith electronically.

   10.24        Agreement, dated June 5, 1996, between the Company
                and David W. Haskin.....................................Filed herewith electronically.

   10.25        Agreement, dated September 1, 1996, between the
                Company and William Knopf, M.D..........................Incorporated by reference to Exhibit 10.1 of
                                                                        the Company's Quarterly Report on Form 10-QSB,
                                                                        dated November 14, 1996 (File No. 0-25530).

   10.26        Consulting and Advisory Agreement, dated September
                1, 1996, between the Company and William Knopf,
                M.D.....................................................Incorporated by reference to Exhibit 10.2 of
                                                                        the Company's Quarterly Report on Form 10-QSB,
                                                                        dated November 14, 1996 (File No. 0-25530).

   10.27        Non-Statutory Stock Option Agreement dated
                September 1, 1996, between the Company and William
                Knopf, M.D..............................................Incorporated by reference to Exhibit 10.3 of
                                                                        the Company's Quarterly Report on Form 10-QSB,
                                                                        dated November 14, 1996 (File No. 0-25530).

   10.28        Agreement, dated September 25, 1996, between the
                Company and Donna J. Edmonds............................Filed herewith electronically.

   10.29        Non-Statutory Stock Option Agreement, dated
                September 1, 1996, between the Company and Donna
                J. Edmonds..............................................Filed herewith electronically.

   10.30        Software Development Agreement, dated December 18,
                1996, between the Company and National
                Jewish Center(1)........................................Filed herewith electronically.

   10.31        Technical Support Agreement, dated December 18,
                1996, between the Company and National Jewish Center....Filed herewith electronically.

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

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

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

   10.35        Master Agreement, dated March 25, 1997, among the
                Company, Anthony Furnary, M.D. and APF, LLC.............Filed herewith electronically.

   10.36        Modification Agreement, dated March 25, 1997,
                among the Company, Anthony Furnary, M.D. and APF,
                LLC ....................................................Filed herewith electronically.

   10.37        Consulting Agreement, dated March 28, 1997,
                between the Company and Anthony Furnary, M.D............Filed herewith electronically.

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

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

   10.40        Non-Statutory Stock Option Agreement, dated March
                4, 1997, covering 10,333 shares between the
                Company and Anthony Furnary, M.D........................Filed herewith electronically.

   23.1         Consent of Independent Auditors.........................Filed herewith electronically.

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

(1)      Confidential treatment has been requested with respect to designated
         portions of this document. Such portions have been omitted and filed
         separately with the Commission pursuant to Rule 24b-2 of the Securities
         and Exchange Act of 1934, as amended.

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