FORM 10-K. - ANNUAL REPORT PURSUANT TO SECTION 13
                 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                                   (Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

                  For the fiscal year ended December 31, 1997

                                       or

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

For the transition period from to

Commission file number 333-07643

                            PATIENT INFOSYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

Delaware                                               16-1476509
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

46 Prince Street, Rochester, NY                        14607
(Address of principal executive offices)             (Zip Code

Registrant's telephone number, including area code   (716) 242-7200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class registered                Name of each exchange on which
                                                       registered
                                                          None

           Securities registered pursuantto Section 12(g) of the Act:

                     Common Stock, $.01 Par Value Per Share
                                (Title of Class)

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

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

     As of February 28, 1998, 8,012,842 shares of common stock were outstanding,
and the aggregate market value of the common shares of Patient Infosystems, Inc.
held by non-affiliates was approximately $15 million.


                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders  to be filed prior to April 30, 1998 are  incorporated by reference
in Part III.

<PAGE>

                                     PART I


Item 1.   Description of Business.

General

     Patient  Infosystems,  Inc. (the  "Company" or "Patient  Infosystems")  was
incorporated  in the State of Delaware on February  22, 1995 under the name DSMI
Corp.,  changed its name to Disease State Management,  Inc. on October 13, 1995,
and then changed its name to Patient  Infosystems,  Inc. on June 28,  1996.  The
Company's   principal  executive  offices  are  located  at  46  Prince  Street,
Rochester, New York 14607 and its telephone number is 716-242-7200.

     Patient  Infosystems  provides  patient-centered  health  care  information
systems and  services to manage,  collect  and  analyze  information  to improve
patient compliance with prescribed treatment  protocols,  to improve the process
of off-site patient management and to enhance patient and provider  information.
The  Company's  technology  platform  integrates an advanced  voice  recognition
telephone system, high speed data processing and analysis capability, and demand
publishing  and  information  distribution  capabilities.  The  system  utilizes
trained  telephone   operators  and  computerized   interactive  voice  response
technology  and  behavior   modification  based  treatment  to  communicate  via
telephone  directly with the patient at home in order to gather relevant patient
data.  This data is  subsequently  evaluated and  automatically  transmitted via
computer generated reports to health care payors,  providers and patients,  with
these  reports  being  tailored to the  specific  needs of each  recipient.  The
Company markets its services to pharmaceutical  manufacturers,  pharmacy benefit
managers  ("PBMs")  and health care payors,  such as managed care  organizations
("MCOs") and  insurance  companies  and health care  providers,  to collect data
outside of the physician office and institutional  setting to enhance compliance
by patients with prescribed treatment protocols.  The Company`s systems may also
be used to address  the full  spectrum  of health  care  information  needs with
respect  to  care  quality,   patient  satisfaction  and  patient  and  provider
education.
         During its first two years of  operations,  the Company has  emphasized
the  development  of  disease  management   programs,   which  accounted  for  a
substantial  portion of its revenue  during  1997.  However,  during  1997,  the
Company devoted increased  resources to the development of other applications of
its  technology  platform,  including  demand  management,  patient  surveys and
outcomes analysis.

Information Capture, Delivery and Analysis Technologies

         The  Company's   technology   platform  integrates  an  advanced  voice
recognition   telephone   system,   high  speed  data  processing  and  analysis
capability,  demand  publishing and information  distribution  capabilities  and
behavior modification based compliance  algorithms.  The system utilizes trained
telephone  operators and computerized  interactive voice response  technology to
communicate  via telephone  directly with the patient at home in order to gather
relevant patient data. In order to minimize costly live operator interaction,  a
computer  initiates  each  call to the  patient,  which  call  is  automatically
transferred  to  an  operator  and  finally   routed  to  an  automated   speech
application.  Patients  respond to the recorded  speech  application by speaking
normally.  This  approach  is  designed  to enable a wider  variety of  possible
responses than is achievable  via telephone key pad.  Depending on the patient's
response,  situation-specific  algorithms are applied to modify future questions
and thus help customize the collection of data.

         The  Company's  system  analyzes and  prepares  the  captured  data for
automatic  delivery to the payor,  provider and patient using demand publishing.
Demand  publishing  technology  enables the  creation  of highly  individualized
reports by inserting  stored graphic images and text which can be customized for
race,  gender  and age.  These  reports  are also  customized  to the  patient's
specific  situation,  and the system  utilizes the  information  received during
contacts with the patient to further  customize  the content of the report.  The
data relevant to the separate report for health care providers is formatted in a
customized report to be automatically transmitted via mail, fax or on-line.

         Each  contact  with a patient  contributes  to the  establishment  of a
longitudinal  data base  which can be  analyzed  to  provide  information  about
treatment modalities for patients, providers and payors. The Company's system is
designed to analyze  patient  compliance  to prescribed  treatment  regimens and
gather additional clinical information so that improvements in such regimens can
be developed.

Integrated Disease State Management System

         The Company's first application of its integrated  information  capture
and delivery  technology is its integrated disease state management system. This
system is designed  to provide  caregivers  with the  ability to  monitor,  on a
cost-effective  basis,  patient  condition  and  behavior  while the  patient is
between  physician  consultations.  The Company  believes  that this will permit
caregivers to improve patient compliance and, as a consequence,  improve patient
outcomes.

         The  Company's  disease  state  management  system  has  three  primary
components. First, using a panel of recognized medical and clinical experts, the
Company develops a disease-specific  patient intervention and compliance program
that includes a template for the integration of each patient's history,  current
medical status and treatment  protocol.  If the program is being  developed on a
custom basis for a particular customer, the program is developed in consultation
with  the  customer's  clinical  staff  and  consultants.  Second,  the  Company
establishes  periodic  telephone  contacts  with each  patient  to  monitor  the
patient's  compliance  with  prescribed  therapies  as  well  as  the  patient's
treatment progress.  Third, using the information obtained from patient contacts
and other available  information regarding the patient and his or her treatment,
such as physician  records and pharmacy  information,  personalized  reports are
prepared,  typically  following  each patient  contact,  for  evaluation  by the
patient, the patient's health care provider and, on a periodic basis, payors.

         Development of Disease-Specific Protocols

         The Company's  disease-specific  compliance  programs are developed for
targeted  diseases  either on a customized or  standardized  basis.  The Company
retains  an  internal  clinical  staff and  panels of  independent  medical  and
clinical  experts  to  identify   guidelines  of  generally  accepted  treatment
protocols and diagnostic interventions for particular diseases. These guidelines
serve as a template for  information  to be gathered from each  patient.  If the
program is being  developed  on a custom basis for a  particular  customer,  the
program is developed in  consultation  with the  customer's  clinical  staff and
consultants.  In  addition,  the  Company's  internal  clinical  staff  conducts
research of  available  databases  and gathers  information  provided by medical
experts, insurance providers,  governmental agencies,  Medicare and Medicaid and
other sources to develop with the medical experts the  disease-specific  program
structure. The resulting compliance protocols are designed to enable the Company
to gather  the  necessary  patient  information  to  determine  the  extent of a
patient's compliance with his or her prescribed treatment,  the effectiveness of
treatment and the progress of the patient's  disease.  As the Company's database
of disease-specific  treatments expands, the Company intends to use that data to
modify,  update and enhance its own disease state management compliance programs
and assist health care providers in improving treatment protocols.

         Patient Enrollment

         When a  patient  is  enrolled  in one of the  Company's  disease  state
management  programs a patient  history is obtained,  including the histories of
the chronic  illness,  medications,  and  surgical  procedures  as well as other
information deemed relevant by the  disease-specific  compliance  program.  This
information  is included in the Company's  database for each patient and is used
to create  customized  reports for  distribution to each of the patient's health
care provider and payor as well as the patient.  The patient  report can include
information on the prescribed  treatment of the patient's disease as well as the
use of the program and social support  services to improve  compliance  with the
patient's  treatment  regimen.  In addition,  the  Company's  demand  publishing
technology provides personalized behavior modification and educational materials
for the patient.  The health care provider report contains the relevant clinical
and behavioral information gathered from the patient.

         The Company has found patient  enrollment to be one of the particularly
challenging components to establishing effective programs.  Although the Company
has  completed the  development  of several  disease  management  programs,  the
Company's customers have been able to provide only limited patients to enroll in
the  programs.  To the extent that the Company's  revenue is dependent  upon the
number of contacts it is able to  achieve,  it will be required to work  closely
with its customers to develop methods to increase patient enrollment.

         Patient Contacts

         In accordance  with a designated  patient contact  schedule,  a patient
will  periodically  receive  telephone  calls from a live  operator  who,  after
confirming  the  identity  of the  patient,  will  transfer  the  patient  to an
automated system that will ask specific questions  determined in accordance with
the disease-specific compliance program and provide information and motivational
feedback.  Patient  contact  schedules  are  established  for each disease state
management  program,  with the  frequency  of patient  contact  varying with the
disease under management and the goal of the applicable  treatment and occurring
as often as daily or as infrequently as on a quarterly  basis. The data gathered
from the patient  during each contact is processed  and stored in the  Company's
database.

         The  compliance   program  takes  into  account  patient  responses  to
treatment follow-up questions and initiates specific courses of action which can
include   positive   reinforcement   messages,   confirmation   of  prescription
instructions  and scheduled  callbacks to remind the patient of the need to take
prescribed  medication.  In addition,  questions to be asked in future calls are
modified based upon the patient's responses during previous calls.

         The Company's  disease state  management  system captures and processes
the information obtained from the patient during the contact and integrates this
information  with the other data  maintained  by the  Company,  including  prior
patient responses,  patient medical history, treatments administered to date and
the mandated  treatment  protocols  for the disease.  This system  automatically
prepares distinct reports using the Company's demand publishing technologies for
the patient and for the  physician or other  caregiver.  Each report is tailored
for the particular  requirements of each recipient.  The patient's  report,  for
example, may include pictures,  diagrams and informative discussions relating to
the treatment  course  intended to modify or reinforce  certain  behaviors.  The
physician's  report would likely be more  factual and direct and  summarize  the
clinical and behavioral information that has been gathered.

         On a periodic  basis the Company  will  provide  data to the  patient's
health care payor with respect to that patient's  progress.  The Company will be
able to include  information  from various data sources in these reports for the
purpose of  providing  additional  information  with  respect to a patient.  For
example, the Company may be able to interact with the pharmacy services division
of a payor to determine the renewal frequency of  prescriptions,  which provides
an indication of whether a patient is taking his or her medication. In addition,
the system provides the flexibility to allow other  information from physicians'
reports and hospital tests to be included in the periodic reports.

         Compliance Assistance

         The Company  assists  payors and health care  providers  in  monitoring
patient  compliance and works with health care  providers to develop  compliance
and education programs that can be implemented through the Company's system. The
Company's   publishing   technology  enables   production  of   patient-specific
compliance  and  education  literature  that  is  customized  for an  individual
patient.  Once this  literature  is prepared it may be delivered to a patient by
mail, facsimile or on-line. In addition,  the Company can implement a variety of
procedures including medication reminders via wireless two-way communication and
more frequent telephone  communications  for non-compliant  patients or patients
with more  difficult  treatment  regimens.  The Company  can provide  additional
support services,  such as an 800 number that will provide recorded  information
with respect to a variety of patient education topics or other support messages.

Patient Infosystems Programs

         The Company is developing  customized disease state management and risk
assessment  programs  in  conjunction  with a number  of  customers,  as well as
standardized  disease  state  management  programs  in the areas of  asthma  and
diabetes.  Each of the Company's customer agreements for its customized programs
provide for  development  fees to be paid to the Company upon the achievement of
certain  milestones.  In addition,  the agreements for customized  disease state
management  programs  all provide for some form of  exclusivity  period,  during
which the Company is prohibited from engaging or participating in other projects
involving the specific  disease target that is the subject of that program.  The
exclusivity  periods extend until, in general,  a certain date or certain period
(ranging  from eight to 24 months)  following  the  achievement  of a  specified
milestone in the  development  or  implementation  of the  program.  The Company
enrolled its first  patients in a disease  state  management  program in October
1996, and has only a limited number of persons enrolled to date.

         All  of  the  Company's  customer   agreements,   which  are  typically
terminable  without  cause by either  party,  require  payment to the Company of
operational  fees per enrolled  patient.  The amount of the per patient  program
operational  fee varies with the length,  complexity  and  frequency  of patient
contacts as dictated by the respective program protocols.  Patient enrollment in
each of the Company's  programs will depend upon the identification and referral
by the Company's  customers of patients to the Company's  system which will vary
from program to program.

         The Company has  developed or is  developing  programs in the following
areas:

         Asthma

         The Company has completed the development of a disease state management
program  for  asthmatic  patients  that has been  marketed  to payors  and other
participants in the health care industry,  and such program has been provided to
patients  since  January  1997.  Through  February  1998,  the  Company  has had
approximately 2,900 interventions with patients participating in these programs.
American   HomePatient,   Inc.  ("American   HomePatient"),   Centra  Healthcare
Adminstrative Services,  Inc. ("Centra"),  Harris Methodist Health Plan ("Harris
Methodist")  and Health  Alliance,  a Division  of Astra  Pharma  Inc.  ("Health
Alliance")  have  retained  the  Company to  provide  disease  state  management
programs for patients who are  suffering  from asthma and are enrolled in health
care programs for which these companies provide services.

         Congestive Heart Failure

         The Company has a services  agreement  with  Bristol-Myers  to develop,
implement and operate a disease state management program to aid in the treatment
of patients  suffering from congestive heart failure.  The Company has completed
the  development  of the  program in  congestive  heart  failure in the  English
language, and is currently developing the program in the Spanish language.  This
program has been  provided to patients  since April 1997,  and through  February
1998,  the Company  has had  approximately  6,000  interventions  with  patients
participating in this program.

         Diabetes

         The Company has completed the development of a disease state management
program  for  diabetic  patients  that has been  marketed  to  payors  and other
participants  in the  health  care  industry.  Bristol-Myers,  Centra and Health
Resources  have  retained the Company to provide this disease  state  management
program for patients who are suffering  from diabetes and are enrolled in health
care programs for which these companies  provide  services.  These programs have
been provided to patients since August of 1997,  and through  February 1998, the
Company has had approximately 760 interventions  with patients  participating in
these programs.

         Secondary Cardiovascular Disease

         The Company has entered into a services agreement with Bristol-Myers to
develop,  implement and operate a disease state  management  program relating to
the  prevention  of  cardiovascular  sequelae  in  patients  who  have  recently
experienced  certain  cardiovascular  illnesses  or  treatments  such as angina,
cardiac bypass surgery or myocardial  infarction.  The Company has completed the
development of this program in the English language and is continuing to develop
the program in the Spanish language.  This program has been provided to patients
since  January  1997,  and  through  February  1998,  the  Company  has  had  30
interventions with patients participating in this program.

         Additional Disease Targets

         The Company has identified  additional  opportunities  in large chronic
disease markets, including in the treatment of hypertension, chronic obstructive
pulmonary disease, depression,  cancer,  osteoporosis,  arthritis, HIV infection
and high risk  pregnancy.  Each of these  targets has been  identified as having
characteristics   which  make  them  attractive  candidates  for  the  Company's
programs.  The Company is currently  involved in discussions  with customers for
the development of programs in a variety of these areas.

         Significant Customer Concentration

         The Company's  current  contracts are concentrated in a small number of
customers,  with several of the Company's most significant  contracts being with
Bristol-Myers.   The  Company  expects  that  its  sales  of  services  will  be
concentrated  in a  small  number  of  customers  for  the  foreseeable  future.
Consequently, the loss of any one of its customers could have a material adverse
effect  on the  Company  and its  operations.  There  can be no  assurance  that
customers will maintain their  agreements with the Company,  enroll a sufficient
number of patients in the  programs  developed by the Company for the Company to
achieve or maintain profitability,  or that customers will renew their contracts
upon expiration or on terms favorable to the Company.

         Relationship with Bristol-Myers

         The  Company  has  entered  into  several   service   agreements   with
Bristol-Myers  relating to the development,  implementation and operation by the
Company of disease state management programs for certain specified diseases, and
the  development  and operation of a patient  satisfaction  survey and a general
medication compliance program (collectively the "Service Agreements").

         Each of the Service Agreements  provides for an exclusivity period (the
"Exclusivity Period"), during which time the Company is prohibited from engaging
or  participating  in any other projects  involving the specific  disease target
that is the subject of the Service  Agreements.  The Exclusivity  Periods extend
from the effective dates of the Service  Agreements until, in general, a certain
date or a  certain  period  (ranging  from  eight to 24  months)  following  the
achievement of a specified milestone in the development or implementation of the
program  (such as the  completion  of the pilot  program).  Three of the Service
Agreements   provide  that  upon   conclusion  of  the   Exclusitivity   Period,
Bristol-Myers  has the right to  negotiate  with the  Company  for an  exclusive
arrangement  for the  administration  of the disease state  management  program,
provided  that  Bristol-Myers  has enrolled a certain  number of patients in the
program to date. The Company is currently  involved in  discussions  relating to
the continuation of these programs.  In the event that such  negotiations  prove
unsuccessful, Bristol-Myers retains a right of first refusal with respect to any
other offers made to the Company for such  arrangements  for a period of nine or
12 months following the Exclusivity Period.

     The  Service  Agreements  generally  provide  that  Bristol-Myers   retains
ownership to certain  materials  and other work  product  created by the Company
pursuant to the Service Agreements and that the Company is entitled to use other
materials and data. The extent of these rights varies by agreement.  The Company
and  Bristol-Myers  have agreed to  indemnify  each other with respect to losses
arising from  willful or negligent  acts or omissions or breaches of the Service
Agreements by the  indemnifying  party  pursuant to the Service  Agreement.  The
Service  Agreements are terminable  without cause by either party with either 30
or 90 days'  notice.  The Company  has  entered  into  Service  Agreements  with
Bristol-Myers  in the  disease  areas of  congestive  heart  failure,  secondary
cardiovascular  disease,  chronic  pain  and  weight  management,  diabetes  and
hypertension compliance program.


Other Applications of the Integrated Information Capture and Delivery Technology

         Demand Management

     Demand  management  involves  assisting  providers  in  evaluating  patient
treatment  needs to identify  those  patients  who may not require  immediate or
intensive services.  The goal of demand management is to reduce the need for and
use of costly,  often  clinically  unnecessary,  medical  services and arbitrary
managed-care  interventions  while  improving  the  overall  quality  of life of
patients.  The Company believes that its system can be used to provide automated
or semi-automated demand management services. The Company is currently providing
demand  management  services in  connection  with  programs that are intended to
reach approximately 40,000 patients.

         Outcomes Analysis

         The  Company  intends to utilize  information  gathered  from  patients
enrolled in its programs to serve two  purposes.  First,  information  regarding
treatment  results,  success of the compliance  program and patient  reaction to
differing  treatments  or  compliance  protocols  may be used by the  Company to
further  improve  each   disease-specific   compliance  program.   Second,  this
information  may be used by payors,  pharmaceutical  companies  and health  care
providers to assist in the  development of improved  treatment  modalities.  The
Company has developed  analytical  methodologies  using database  management and
information  technologies.  The  Company  intends  to use  these  data  analysis
technologies to predict the best treatment methodologies for patients.

         Clinical Studies

         Many pharmaceutical  companies and contract research  organizations are
seeking more  economical,  efficient  and  reliable  methods for  compiling  and
analyzing clinical data in conducting  clinical trials.  Furthermore,  many drug
development  protocols have begun to emphasize  subjective criteria and outcomes
information.  The  Company  believes  that its  system  will allow it to develop
programs tailored to the measurement of outcomes data relating to the conduct of
later  stage  clinical  trials.  The Company  believes  that its system can also
assist  pharmaceutical  companies  in studying and  documenting  the efficacy of
approved  products  in  order  to  provide  ongoing  information  to  FDA or for
marketing purposes.

         Patient Surveys

         Organizations  in many  different  areas of the  health  care  industry
survey  users  regarding  their  products  and services for a variety of reasons
including regulatory, marketing and research purposes. The Company's information
systems,  with their ability to proactively contact patients in a cost-efficient
manner,  may be used for this type of  application.  The Company is developing a
series of 10 automated  surveys ranging from general health to disease  specific
instruments.   The  product  line  includes  surveys  for  SF-12;  child  health
questionnaire;  patient satisfaction;  asthma;  diabetes; back pain; depression;
prostatis; maternity; and the Pra Plus for elderly populations.

         Case Management

         Patients who are prescribed complex or high cost treatment regimens may
require  a  higher  level  of   monitoring,   interaction,   care  planning  and
reassessment than patients with less complicated treatment regimens. The Company
believes that its system is capable of providing these enhanced services to such
patients to eliminate or minimize the  unnecessary  costs and medical  attention
that result from a patient's  lack of  compliance  with a  prescribed  treatment
regimen.

Sales and Marketing

         Through  1997,  the  Company's   efforts   focused   primarily  on  the
development  of disease  management  programs.  During 1997,  the Company  began
aggressively  marketing  the other  services  that its  technology  platform can
provide including demand management,  patient surveys and outcomes analysis. The
Company markets its integrated  disease state management system to organizations
within the health care industry that are involved in the treatment of disease or
payment of medical  services  for  patients  who  require  complex or  long-term
medical therapies.  These industry  organizations  include five distinct groups:
pharmaceutical  companies,  medical service companies,  PBMs, health care payors
and employer  groups.  The Company  employs a sales and marketing staff of eight
persons to market the Company's systems. In addition,  the senior members of the
Company's management are actively engaged in marketing the Company's programs.

         The Company has expanded its marketing  efforts by  conducting  patient
surveys,  clinical studies and implementing  other measures designed to document
the clinical and cost benefits it believes will result from the  application  of
its integrated  information  capture and delivery system. In collaboration  with
the members of its expert panels who are retained to develop  program  protocols
and other research and clinical technicians,  the Company intends to promote the
benefits  of  its  system   through   publication   in  clinical   journals  and
presentations  at scientific  conferences of the results of these  studies.  The
Company is conducting such studies  designed to produce  significant  short-term
data with respect to its asthma and cardiac programs.

Research and Development

         Research and  development  expenses  consist  primarily of salaries and
related benefits and  administrative  costs allocated to the Company's  research
and  development   personnel  for  development  of  certain  components  of  its
integrated  information  capture and delivery system,  as well as development of
the Company's  standardized  disease  state  management  programs.  Research and
development  expenses  were $489,115 for the year ended  December 31, 1997,  and
$310,552  for the year ended  December  31, 1996 and $89,909 for the period from
February 1995 (inception) to December 31, 1995. The increase in these costs from
1995 to 1997 reflects  initiation of development  of the Company's  standardized
disease  state  management  programs  for  patients  suffering  from  asthma and
diabetes.

         The development and maintenance of the  telecommunications and computer
publishing systems through which the Company operates its integrated information
capture  and  delivery  system  is  a  major  component  of  its  business.  The
communications  and information  technology  industries are subject to rapid and
significant  technological change, and the ability of the Company to operate and
compete is  dependent in  significant  part on its ability to update and enhance
its system continuously.  In order to do so, the Company must be able to utilize
effectively  its  research  and  development   capabilities  and  implement  new
technology in order to enhance its systems.  At the same time,  the Company must
not  jeopardize  its  ability to contact  patients  and to process  and  publish
patient information or adapt to customer  preferences or needs. The Company will
maintain a significant investment in its technology, and therefore is subject to
the risk of technological obsolescence.

Competition

         The  market  for health  care  information  products  and  services  is
intensely  competitive.  Competitors  vary in size and in scope and  breadth  of
products and services  offered,  and the Company competes with various companies
in each of its disease target markets.  Many of the Company's  competitors  have
significantly  greater financial,  technical,  product development and marketing
resources than the Company. Furthermore, other major information, pharmaceutical
and health care  companies not presently  offering  disease state  management or
other  health  care  information  services  may enter the  markets  in which the
Company intends to compete.  In addition,  with  sufficient  financial and other
resources,  many of these  competitors may provide  services similar to those of
the Company  without  substantial  barriers.  The  Company  does not possess any
patents with respect to its integrated  information capture and delivery system,
and although it has filed a patent  application  with respect to certain aspects
of its  integrated  information  capture and delivery  system and its integrated
disease state management system, there can be no assurance that this application
will  result in the  issuance  of a patent,  or if issued,  that a patent  would
provide the Company with any competitive advantage.

         The  Company's  potential  competitors  include  specialty  health care
companies,  health care  information  system and software  vendors,  health care
management  organizations,  pharmaceutical companies and other service companies
within the health care  industry.  Many of these  competitors  have  substantial
installed  customer  bases in the health care  industry  and the ability to fund
significant product development and acquisition  efforts.  The Company will also
compete  against other  companies that provide  statistical  and data management
services, including clinical trial services to pharmaceutical companies.

         The  Company  is aware of  several  large  pharmaceutical  and  medical
service  companies that have publicly  stated that they intend to be involved in
providing  comprehensive disease state management services. The Company believes
that the  principal  competitive  factors in its market are the  ability to link
patients, health care providers and payors, and provide the relevant health care
information at an acceptable  cost. In addition,  the Company  believes that the
ability to anticipate  changes in the health care industry and identify  current
needs are important competitive factors.

Quality Control

         The Company has developed  quality control measures  designed to insure
that information obtained from patients is accurately transcribed,  that reports
covering  each  patient  contact  are  delivered  to health care  providers  and
patients and that the  Company's  personnel  and  technologies  are  interacting
appropriately  with patients and health care providers.  Quality control systems
include random monitoring of telephone calls, patient surveys to confirm patient
participation  and  effectiveness  of the particular  program,  and  supervisory
reviews of telephone agents.

Government Regulation

         The health care industry,  including the current and proposed  business
of the Company, is subject to extensive regulation by both the Federal and state
governments.  A number of states have extensive  licensing and other  regulatory
requirements   applicable  to  companies  that  provide  health  care  services.
Additionally,  services  provided to health  benefit  plans in certain cases are
subject  to the  provisions  of the  Employee  Retirement  Income  Security  Act
("ERISA")  and may be affected by other state and Federal  statutes.  Generally,
state laws prohibit the practice of medicine and nursing without a license. Many
states  interpret  the practice of nursing to include  health  teaching,  health
counseling,  the provision of care supportive to or restorative of life and well
being  and  the  execution  of  medical  regimens  prescribed  by  a  physician.
Accordingly,  to the extent  that the Company  assists  providers  in  improving
patient  compliance by publishing  educational  materials or providing  behavior
modification training to patients, such activities could be deemed by a state to
be the practice of medicine or nursing. Although the Company has not conducted a
survey  of the  applicable  law in all 50  states,  it  believes  that it is not
engaged in the  practice  of medicine  or  nursing.  There can be no  assurance,
however,  that the Company's  operations  will not be challenged as constituting
the  unlicensed  practice of medicine or nursing.  If such a challenge were made
successfully  in any state,  the Company  could be subject to civil and criminal
penalties  under such  state's  law and could be  required  to  restructure  its
contractual  arrangements  in that  state.  Such  results  or the  inability  to
successfully  restructure  its  contractual  arrangements  could have a material
adverse effect on the Company.

         The  confidentiality of patient information is subject to regulation by
state law. A variety of statutes and regulations exist safeguarding  privacy and
regulating the disclosure and use of medical  information.  State  constitutions
may provide  privacy rights and states may provide  private causes of action for
violations  of an  individual's  "expectation  of privacy."  Tort  liability may
result from unauthorized access and breaches of patient confidence.  The Company
intends to comply with state law and regulations  governing medical  information
privacy.

         In addition,  on August 21, 1996 Congress  passed the Health  Insurance
Portability and  Accountability  Act of 1996,  P.L.  104-191.  This  legislation
requires the Secretary of Health and Human Services to adopt national  standards
for  electronic  health   transactions  and  the  data  elements  used  in  such
transactions.  The  Secretary  is  required  to adopt  safeguards  to ensure the
integrity  and  confidentiality  of such health  information.  Violation  of the
standards  is  punishable  by fines and, in the case of wrongful  disclosure  of
individually  identifiable  health information,  imprisonment.  The Secretary is
required to issue the standards  not later than  February 21, 1998.  The Company
cannot predict what  requirements  will  ultimately be adopted by the Secretary,
however,  such  requirements  could  have an  adverse  effect  on the  Company's
business.

         The Company and its  customers may be subject to Federal and state laws
and regulations  which govern  financial and other  arrangements  between health
care providers.  These laws prohibit certain fee splitting  arrangements between
health care  providers,  as well as direct and indirect  payments,  referrals or
other  financial  arrangements  that are  designed  to induce or  encourage  the
referral of patients to, or the  recommendation  of, a  particular  provider for
medical  products  and  services.  Possible  sanctions  for  violation  of these
restrictions include civil and criminal penalties.  Further, criminal violations
may result in mandatory exclusions of up to five years and additional permissive
exclusions from participation in Medicare and Medicaid programs.

         Regulation in the health care field is constantly evolving. The Company
is unable to predict what government regulations, if any, affecting its business
may be  promulgated  in the future.  The Company's  business  could be adversely
affected by the failure to obtain required licenses and governmental  approvals,
comply with applicable regulations or comply with existing or future laws, rules
or regulations or their interpretations.

Intellectual Property

         The Company considers its  methodologies,  processes and know-how to be
proprietary.  The Company seeks to protect its proprietary  information  through
confidentiality  agreements with its employees.  The Company's policy is to have
employees   enter  into   confidentiality   agreements   containing   provisions
prohibiting  the  disclosure of  confidential  information to anyone outside the
Company,  requiring  employees  to  acknowledge,  and, if  requested,  assist in
confirming the Company's ownership of any new ideas,  developments,  discoveries
or inventions  conceived  during  employment,  and  requiring  assignment to the
Company of proprietary  rights to such matters that are related to the Company's
business.

         The  Company  has filed a patent  application  with  respect to certain
aspects of its  integrated  information  capture  and  delivery  and  integrated
disease state management  systems.  No assurance can be given that a patent will
issue or that if issued such patent will provide the Company with a  competitive
advantage.

Employees

         As of  February  28,  1998,  the  Company  had 67  full  and  part-time
employees.


Item 2.   Description of Properties.

         The Company's executive and corporate offices are located in Rochester,
New York in  approximately  13,000  square feet of leased  office space under an
operating lease that expires on November 30, 1999.

Item 3.    Legal Proceedings.

         The Company is not a party to any material legal proceedings.

Item 4.    Submission of Matters To A Vote Of  Security Holders.

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter ended December 31, 1997.


<PAGE>



                                     PART II


Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.

(a)  Market Information

         The  Company's  common  stock is traded on the NASDAQ  National  Market
System under the symbol "PATI".  The following table sets forth, for the periods
indicated,  the range of the high and low sales prices for the Company's  Common
Stock as reported on the Nasdaq National Market  beginning in the fourth quarter
of 1996.

                                                 High              Low
                      1996
                      Fourth Quarter            $9.25             $8.00

                      1997
                      First Quarter             $9.25             $6.38
                      Second Quarter            $6.25             $4.50
                      Third Quarter             $5.00             $2.88
                      Fourth Quarter            $4.38             $2.63


(b)  Holders

      The  approximate  number of holders of the  Company's  common  stock as of
February 28, 1998 is 99. However,  the Company believes that there are in excess
of 400 beneficial holders of Common Stock of the Company.

(c)  Dividends

      The Company has never paid cash  dividends  on its capital  stock and does
not anticipate paying any cash dividends in the foreseeable  future. The Company
currently intends to retain all future earnings, if any, to fund the development
and growth of its business.  Any future determination to pay cash dividends will
be at the discretion of the Board of Directors.


<PAGE>




Item 6. Selected Financial Data.
<TABLE>
<CAPTION>

                                                                                       Period from
                                                                                     February 22, 1995
                                            Year Ended              Year Ended         (Inception) to
                                            December 31,           December 31,        December 31,
                                                1997                   1996                1995
                                                ----                   ----                ----
<S>                                         <C>                    <C>                 <C>
Statement of Operations Data:

Revenues                                   $ 2,062,373           $  845,412           $  113,000
                                            ----------            ---------            ---------

Costs and Expenses:
  Cost of Sales                              1,629,128              748,322              111,870
  Sales and Marketing                        1,609,837              913,547              375,384
  General and Administrative                 2,432,760            1,760,760              678,498
  Research and Development                     489,115              310,552               89,909
                                               -------              -------               ------

    Total Costs and Expenses                 6,160,840            3,733,181            1,255,661
                                             ---------            ---------             --------

Operating Loss                              (4,098,467)          (2,887,769)          (1,142,661)

Interest Income                                835,116               81,333               26,009
                                               -------               ------               ------

Net Loss                                   $(3,263,351)         $(2,806,436)         $(1,116,652)
                                           ===========          ===========          ===========

Net Loss Per Share - Basic and Diluted     $      (.41)         $      (.44)         $     (0.18)
                                           ===========          ===========          ===========

Weighted Average Common
  and Potential Common Shares                7,980,094            6,347,716            5,954,299
                                             =========            =========            =========


                                                                December 31,
                                                1997                 1996                1995
                                                ----                 ----                ----
Balance Sheet Data:

Cash and Cash Equivalents                  $   779,317          $15,666,609          $ 1,182,080
Working Capital                             13,242,387           14,591,700              611,655
Total Assets                                15,036,473           17,085,387            1,763,629
Total Liabilities                              587,728            1,631,650              598,464
Total Stockholders' Equity                  14,448,745           15,453,737            1,165,165
</TABLE>


<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
 of Operations.

         Management's discussion and analysis provides a review of the Company's
operating  results for the years ended December 31, 1997 and 1996 and the period
from  inception on February 22, 1995 to December  31,  1995,  and its  financial
condition at December 31,  1997.  The focus of this review is on the  underlying
business reasons for significant changes and trends affecting the revenues,  net
earnings,  and financial condition of the Company. This review should be read in
conjunction with the accompanying financial statements.

         In an effort to give  investors a  well-rounded  view of the  Company's
current  condition  and future  opportunities,  this Annual  Report on Form 10-K
includes  forecasts by the Company's  management  about future  performance  and
results.   Because   they   are   forward-looking,   these   forecasts   involve
uncertainties.  They include risks of market acceptance of or preference for the
Company's systems and services,  competitive  forces, the impact of, and changes
in, government regulations, general economic factors in the healthcare industry,
and other factors  discussed in the Company's  filings with the  Securities  and
Exchange Commission.

Overview

     The  Company was formed on  February  22, 1995 and has a limited  operating
history  from which to  evaluate  its  performance.  Although  the  Company  has
completed the  development  of its integrated  information  capture and delivery
system and is developing several disease state management  programs for specific
diseases,  further  development  activities may be necessary to implement  these
programs.  In October  1996 the Company  began  enrolling  patients in its first
disease state management  program,  and even though over a year has passed,  the
Company  currently  has  patients  enrolled  in  four  of  its  disease-specific
programs.  The enrollment of patients in the Company's programs has been limited
by several  factors,  including  the  limited  ability of clients to provide the
Company  with  accurate   information  with  respect  to  the  specific  patient
populations,    including   coding   errors   that   necessitated    significant
labor-intensive  data processing prior to program  implementation.  In addition,
the  Company has  encountered  resistance  from  patients  and other  sources of
information to the Company's systems.

     In  response  to these  market  dynamics,  the  Company  has taken  several
tactical  and  strategic  steps:  formal  designation  of internal  personnel at
customer  sites to assist  clients with  implementation;  closer  integration of
Company  systems  personnel with clients to facilitate  accurate data transfers;
and most  importantly,  promotion of a broader product line to enable clients to
enter the Company's disease  management  programs through a variety of channels.
The Company now sells two additional  services,  demand management  services and
automated  surveys  (general  health  and  disease-specific),  both of which can
provide mechanisms for enrollment to the Company's disease management  programs.
Through  February  1998,  an  aggregate  of  approximately  38,000  persons have
enrolled and participated in Company programs.

         The Company has entered into services agreements to develop,  implement
and operate  programs  for: (i) patients who have recently  experienced  certain
cardiovascular  events;  (ii)  patients  who have been  diagnosed  with  primary
congestive  heart failure;  (iii)  patients  suffering from anorexia or cachexia
secondary to diagnosis of cancer or AIDS;  (iv) patients  suffering from chronic
pain, and (v) patients who are at increased risk of suffering from epilepsy.  In
addition,  the Company  has  entered  into  services  agreements  to operate its
disease  management  programs  for patients  suffering  from asthma or diabetes.
These contracts provide for, and the Company  anticipates  future contracts will
provide  for,  fees paid by its  customers  based  upon the  number of  patients
participating  in each of its programs,  as well as initial program  development
fees from customers for the development of a  disease-specific  program.  To the
extent that the Company has had limited  enrollment of patients in its programs,
the  Company's  operations  revenue  has been,  and may  continue to be limited.
Moreover,  as the Company has completed the  development of its primary  disease
management  programs,  it anticipates that development revenue will also decline
over the next  twelve  months  unless  and until  the  Company  enters  into new
development  agreements.  The Company's program development  contracts typically
require  payment  from the  customer at the time that the  contract is executed,
with  additional  payments  made as  certain  development  milestones  are  met.
Development  contract revenue is recognized on a percentage of completion basis,
in accordance with the ratio of total development cost incurred to the estimated
total  development  costs for the entire  project.  Losses,  if any,  related to
program  development  will be  recognized in full as  identified.  The Company's
contracts  call for a fixed program  operational  fee to be paid by the customer
for each  patient  enrolled  for a series of program  services as defined in the
contract.  The timing of customer  payments for the delivery of program services
varies by contract.  Revenues from program  operations are recognized ratably as
the program  services  are  delivered.  The amount of the per patient fee varies
from program to program depending upon the number of patient contacts  required,
the complexity of the interventions and the detail of the reports generated. The
Company has not capitalized any costs related to the development of software for
use in its disease state management programs since all of such software has been
developed for internal use.

         The sales  cycle for the  Company's  programs is expected to extend for
periods of six to nine months from initial contact to contract execution. During
these  periods,  the Company may expend  substantial  time,  effort and funds to
prepare a contract  proposal  and  negotiate  the  contract.  The Company may be
unable to consummate a commercial  relationship  after the  expenditure  of such
time, effort and financial resources.

         The  Company  began to  provide  other  services  to  customers  in the
healthcare   industry  during  1997  which  included  new  applications  of  its
information  capture and delivery  system.  These consisted of patient  surveys,
health risk assessments,  nursing support lines and marketing support functions.
It is  anticipated  that the revenues  generated  from services other than those
provided in conjunction with disease state management programs will represent an
increasing  percentage of total revenues as the Company  continues to expand the
systems and services that it makes available to its customers.


Results of Operations

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

         Revenues

         Revenues are comprised of revenues  from  development  fees,  licensing
fees and operational  fees.  Revenues  increased 144% from $845,412 for the year
ended  December 31, 1996 to $2,062,373  for the year ended  December 31, 1997. A
summary of these revenues by category is as follows:

                                    Year Ended                 Year Ended
                                    December 31,               December 31,
                                      1997                       1996
                                      ----                       ----
         Revenues
         --------
         Development Fees          $   826,532                  $798,138
         Licensing Fees                500,000                    35,556
         Operational Fees              735,841                    11,718
                                       -------                    ------

         Total Revenues             $2,062,373                  $845,412
                                    ==========                  ========

         Revenues from  development  fees  increased  3.6% from $798,138 for the
year ended  December 31, 1996 to $826,532 for the year ended  December 31, 1997.
The  Company  received  $826,532  in  development  revenues  for the year  ended
December  31,  1997,  primarily  related  to  fees  from  Bristol-Myers  for the
development of six disease state management contracts. The Company also received
development  revenues  from a small number of other  customers  related to other
disease-specific  programs. The Company has completed substantially all services
under these  agreements and is currently  receiving  revenues in connection with
only the development of three  programs.  The Company  anticipates  that revenue
from  development  fees will decline as the Company develops more programs using
its own resources.

         The Company's  development contracts generally require that payments be
made by the customer at the time of contract execution and at the achievement of
certain  milestones  in the  development  process.  These  payments are normally
received in advance of the Company's  recognition of the associated revenue. The
timing of customer payments for program  operation  services varies by contract,
but  typically  occurs prior to the  associated  services  being  provided.  The
Company  recognizes  deferred  revenue for amounts  billed for these services in
advance of the  rendering  of the  services.  The advance  payments  have been a
source of liquidity for the Company.  The Company  anticipates  that its billing
practices are likely to continue in this manner in the foreseeable future.

     Revenues  from  licensing  fees  increased  1306% from $35,556 for the year
ended  December  31,  1996 to $500,000  for the year ended  December  31,  1997.
Licensing revenue  represents amounts that the Company charges its customers for
the right to enroll patients in or the right to market to other entities certain
of its  programs,  primarily  the  Company's  standardized  asthma and  diabetes
programs,  and the right to have access to data collected from patients enrolled
in such programs.  The Company did not initiate any licensing activity until the
second quarter of 1996, therefore licensing revenues for the year ended December
31, 1997 were  significantly  higher that those generated  during the year ended
December 31, 1996. In 1997, the Company received  licensing revenues of $150,000
from the  PulseGroup,  Inc. for a licensing  contract  related to the  Company's
asthma and diabetes programs.

     Revenues from  operations  increased  6180% from $11,718 for the year ended
December 31, 1996 to $735,841 for the year ended  December 31, 1997.  Operations
revenues are  generated as the Company  provides  services to its  customers for
their disease-specific programs.  Operations revenues increased significantly in
1997, as the Company began enrolling patients and implementing its disease state
management  programs  during 1997.  Operations  revenue  consisted  primarily of
$440,000  in  fees  received  from  Abbott  Laboratories  in  connection  with a
teleconference  program  completed  during the year ended December 31, 1997. The
Company is  currently  engaged in  discussions  with  Abbott  Laboratories  with
respect to providing additional services to Abbott Laboratories in the future.

         The  Company  began to  provide  other  services  to  customers  in the
healthcare   industry  during  1997  which  involve  new   applications  of  its
information capture and delivery system. These services include patient surveys,
health risk assessments,  nursing support lines and marketing support functions.
As the Company  expands  its  operations,  it intends to  continue to  emphasize
operations revenues to the exclusion of development revenues.

         Costs and Expenses

         Cost of sales include salaries and related benefits,  services provided
by third parties,  and other  expenses  associated  with the  development of the
Company's customized disease state management programs, as well as the operation
of each of its disease state management programs. In addition, cost of sales for
1997 and 1996 includes accrued losses on program  development in accordance with
the Company's policy of recognizing such losses,  if any, in full as identified.
The  accrued  loss for 1997 and 1996 is a result of a  particular  contract  for
which the amount of the program development fee is based upon the success of the
program,  and the fact that the guaranteed  development revenue for this program
is less than the  estimated  cost of its  development.  To the  extent  that the
Company  enters into any  contracts  of this type in the future,  and that those
contracts  provide for  guaranteed  development  revenue  which is less than the
estimated cost of program development, such losses will continue to be accrued.

         Cost of sales  increased 118% from $748,322 for the year ended December
31, 1996 to  $1,629,128  for the year ended  December 31, 1997.  The increase in
these costs  primarily  reflects an increased  level of program  development and
operational activities.

         Sales and marketing  expenses  increased 76% from $913,547 for the year
ended  December  31, 1996 to  $1,609,837  for the year ended  December 31, 1997.
These costs consist  primarily of salaries,  related  benefits and travel costs.
These expenditures allowed the Company to undertake initial marketing efforts to
pharmaceutical  companies,  payors and other health care services organizations.
The  increase in these costs  reflects an increase in the size of the  Company's
sales and marketing staff.

         General and  administrative  expenses  include  the costs of  corporate
operations,  finance and accounting, human resources and other general operating
expenses of the Company.  General and administrative expenses increased 38% from
$1,760,760 for the year ended December 31, 1996 to $2,432,760 for the year ended
December 31, 1997.  These  expenditures  were  incurred to develop the corporate
infrastructure   necessary  to  support   anticipated  program  development  and
operations.  The  increase  in these  costs  was  caused by an  increase  in the
Company's   level  of   business   activity,   and  the   addition  of  required
administrative  personnel.  The Company expects that general and  administrative
expenses will continue to increase in future periods.

         Research and  development  expenses  consist  primarily of salaries and
related benefits and  administrative  costs allocated to the Company's  research
and  development   personnel  for  development  of  certain  components  of  its
integrated  information  capture and delivery system,  as well as development of
the Company's  standardized  disease  state  management  programs.  Research and
development expenses increased 57% from $310,552 for the year ended December 31,
1996 to $489,115 for the year ended  December  31,  1997.  The increase in these
costs reflects initiation of development of the Company's  standardized  disease
state management programs for patients suffering from asthma and diabetes.

         The Company  generates net interest income primarily from cash balances
and  investments.  Interest  income  increased  to  $835,116  for the year ended
December  31,  1997 from  $81,333  for the year ended  December  31,  1996.  The
increase in interest  income  reflects  the  additional  funds  available to the
Company for  investment as a result of its initial  public  offering on December
19, 1996.

     The Company had a net loss of  $3,263,351  for the year ended  December 31,
1997  compared  to  $2,806,436  for the  year  ended  December  31,  1996.  This
represents a loss of $.41 per share for 1997 and $.44 for 1996.

Year  Ended  December  31,  1996  Compared  to the  Period  from  February  1995
(Inception) to December 31, 1995

Revenues

         The Company  generated  revenue of $845,412 for the year ended December
31, 1996, and $113,000  during the period from inception on February 22, 1995 to
December 31, 1995. A summary of these revenues by category is as follows:


                                                                Period from
                                                               February 1995
                                    Year Ended                (Inception) to
                                  December 31, 1996          December 31, 1995
                                  -----------------          -----------------
         Revenues
         --------
         Development Fees              $798,138                   $84,000
         Licensing Fees                  35,556                      -
         Operational Fees                11,718                    29,000
                                         ------                    ------

         Total Revenues                $845,412                  $113,000
                                       ========                  ========

         The increase in program  development  fees reflects the increase in the
level of  development  activities  for the Company's  customized  programs.  The
increase in program  licensing  fees reflects the initiation of licensing of the
Company's  standardized  programs.  Revenues  from  program  operations  are not
significant   because  patient   enrollments  in  the  Company's  disease  state
management programs were not initiated until October 1996.

         Costs and Expenses

         Cost of sales include salaries and related benefits,  services provided
by third parties,  and other  expenses  associated  with the  development of the
Company's customized disease state management programs, as well as the operation
of each of its disease state management programs. In addition, cost of sales for
1996 includes  accrued  losses on program  development  in  accordance  with the
Company's policy of recognizing such losses, if any, in full as identified.  The
accrued loss for 1996 is a result of a particular  contract for which the amount
of the program development fee is based upon the success of the program, and the
fact that the guaranteed  development  revenue for this program is less than the
estimated  cost of its  development.  To the extent that the Company enters into
any contracts of this type in the future,  and that those contracts  provide for
guaranteed  development revenue which is less than the estimated cost of program
development, such losses will continue to be accrued. Cost of sales was $748,322
for the year ended December 31, 1996, and $111,870 for the period from inception
on February 22, 1995 to December 31, 1995. The increase in these costs primarily
reflects an increased level of program development activities.

         Sales and marketing  expenses for the year ended December 31, 1996 were
$913,547,  and  $375,384  for the period from  inception on February 22, 1995 to
December 31, 1995. These costs consist  primarily of salaries,  related benefits
and travel costs.  These  expenditures  allowed the Company to undertake initial
marketing  efforts to  pharmaceutical  companies,  payors and other  health care
services organizations.  The increase in these costs reflects an increase in the
size of the Company's sales and marketing staff.

         General and  administrative  expenses  include  the costs of  corporate
operations,  finance and accounting, human resources and other general operating
expenses of the Company.  General and administrative expenses for the year ended
December 31, 1996 were $1,760,760, and $678,498 for the period from inception on
February 22, 1995 to December  31, 1995.  These  expenditures  were  incurred to
develop the corporate  infrastructure  necessary to support  anticipated program
development  and  operations.  The  increase  in these  costs  was  caused by an
increase  in the  Company's  level of  business  activity,  and the  addition of
required administrative personnel.

         Research and  development  expenses  consist  primarily of salaries and
related benefits and  administrative  costs allocated to the Company's  research
and  development   personnel  for  development  of  certain  components  of  its
integrated  information  capture and delivery system,  as well as development of
the Company's  standardized  disease  state  management  programs.  Research and
development  expenses for the year ended  December 31, 1996 were  $310,552,  and
$89,909 for the period from inception on February 22, 1995 to December 31, 1995.
The increase in these costs reflects  initiation of development of the Company's
standardized  disease  state  management  programs for patients  suffering  from
asthma and diabetes.

         During  1996 each of the  Company's  categories  of costs and  expenses
decreased as a percentage of revenues  from the prior  period,  despite the fact
that they increased in absolute dollars,  due to the significant increase in the
Company's revenues during 1996.

         Interest  income was $81,333 for the year ended  December 31, 1996, and
$26,009 for the period from inception on February 22, 1995 to December 31, 1995.
The increase in interest income  reflects the additional  funds available to the
Company for  investment as a result of its initial  public  offering on December
19, 1996.

         The Company had a net loss of  $2,806,436  for the year ended  December
31, 1996, and a loss of $1,116,652 for the period from inception on February 22,
1995 to December  31, 1995.  This  represents a loss of $.44 per share for 1996,
and a loss of $.18 per share for the period from  inception on February 22, 1995
to December 31, 1995.

         Liquidity and Capital Resources

         At December 31, 1997 the Company had working capital of $13,242,387, as
compared to  $14,591,700 at December 31, 1996 and $611,655 at December 31, 1995.
Since its  inception the Company has primarily  funded its  operations,  working
capital needs and capital  expenditures from the sale of equity securities.  The
Company's initial capitalization of $500,000 was completed in February 1995. The
Company  received  $1,800,000  from the sale of equity  securities  in a private
placement  during the third  quarter of 1995,  and  $3,000,000  from the sale of
additional equity securities in a private placement during the second quarter of
1996. On December 19, 1996 the Company  completed an initial public  offering of
its common stock which generated net proceeds to the Company of $14,082,048.  On
January 8, 1997, an additional 300,000 shares of common stock were sold pursuant
to an underwriters over-allotment provision, which generated net proceeds to the
Company of $2,232,000.

         Capital  expenditures  during  1997  were  $394,161,   as  compared  to
expenditures  of  $494,577  during  1996 and  $579,983  during the  period  from
inception on February 22, 1995 to December 31,  1995.  The  expenditures  during
these periods  represented the purchase of the significant  technology  platform
components of the integrated  information capture and delivery system as well as
purchases required to support the Company's growing employee base.

         The  Company  has been  substantially  dependent  upon the  public  and
private sale of securities to fund its research and  development  activities and
working capital requirements. In order to implement programs using the Company's
integrated information capture and delivery system, the Company will be required
to devote  substantial  additional assets to the development of technology,  the
construction  of  physical  facilities  and the  acquisition  of  telephone  and
computer equipment.  The Company will also be required to retain the services of
employees in advance of obtaining contracts to provide services.

         Inflation

         Inflation  did not have a  significant  impact on the  Company's  costs
during 1997,  1996 or the period from inception on February 22, 1995 to December
31, 1995.  The Company  continues to monitor the impact of inflation in order to
minimize its effects through pricing strategies,  productivity  improvements and
cost reductions.

         Recent Accounting Pronouncements

     In March 1997,  the  Financial  Accounting  Standards  Board (FASB)  issued
Statement  of  Financial  Accounting  Standards  (SFAS) No. 128,  "Earnings  Per
Share".  The new  standard  requires  dual  presentation  of basic  and  diluted
earnings per share (EPS) on the face of the statement of operations and requires
a  reconciliation  of the numerators and  denominators  of basic and diluted EPS
calculations.  The statement is effective for periods  ending after December 15,
1997.

     In June 1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income,"  which is  required  to be adopted  for fiscal  years  beginning  after
December 15, 1997.  This  statement  establishes  standards  for  reporting  and
display  of   comprehensive   income  and  its  components  in  a  full  set  of
general-purpose  financial  statements.  This statement  requires that all items
that are required to be recognized under  accounting  standards as components of
comprehensive  income to be reported in a financial  statement that is displayed
with the same prominence as other financial statements.  Comprehensive income is
defined as the change in equity of a business  enterprise  during a period  from
transactions and other events and circumstances  from non-owner  sources.  Items
considered  comprehensive income include foreign currency items, minimum pension
liability  adjustments and unrealized gains and losses on certain investments in
debt and equity securities. In the opinion of management, SFAS 130 will not have
a material effect on the Company's financial statements.

     In June 1997 the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  about  Segments of an
Enterprise and Related Information,"  effective for fiscal years beginning after
December 15, 1997. The statement requires that a public company report financial
and descriptive  information about its reportable  operating  segments using the
management  approach.  In the  opinion of  management,  SFAS 131 will not have a
material effect on the Company's financial statements.

     In October  1997,  the  Accounting  Standards  Executive  Committee  issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on applying  generally  accepted  accounting  principles in recognizing
revenue on software  transactions and is effective for transactions entered into
in fiscal years  beginning after December 15, 1997. The Company does not believe
that the  implementation  of SOP 97-2 will have a  material  effect on  expected
revenues or earnings.

         Year 2000

         The Company has conducted a review of its computer  systems to identify
those areas that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Company currently  believes,  with
planned  modifications to existing software and converting to new software,  the
Year 2000  problem  will not pose  significant  operational  problems and is not
anticipated to be material to its financial position or results of operations in
any given year.  The Company has received  confirmation  from vendors of certain
purchased  software  that  current  releases or  upgrades,  if  installed,  will
eliminate any issues.

         Forward Looking Statements

         When  used in this  and in  future  filings  by the  Company  with  the
Securities and Exchange Commission,  in the Company's press releases and in oral
statements  made with the  approval of an  authorized  executive  officer of the
Company,  the words or phrases "will likely result,"  "expects,"  "plans," "will
continue,"  "is  anticipated,"  "estimated,"  "project," or "outlook" or similar
expressions  (including  confirmations by an authorized executive officer of the
Company  of any such  expressions  made by a third  party  with  respect  to the
Company)  are  intended  to  identify  "forward-looking  statements"  within the
meaning of the Private  Securities  Litigation  Reform Act of 1995.  The Company
wishes  to  caution   readers   not  to  place   undue   reliance  on  any  such
forward-looking  statements,  each of which speak only as of the date made. Such
statements  are  subject to certain  risks and  uncertainties  that could  cause
actual results to differ materially from historical earnings and those presently
anticipated or projected.  The Company has no obligation to publicly release the
result of any revisions which may be made to any  forward-looking  statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such statements.



<PAGE>



2


         Item 8.  Financial Statements And Supplemental Data




         Index to Financial Statements                     Page

         Independent Auditors' Report                        24
         Balance Sheets                                      25
         Statements of Operations                            26
         Statements of Stockholders' Equity                  27
         Statements of Cash Flows                            28
         Notes to Financial Statements                       29-34

<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders
  of Patient Infosystems, Inc.:

     We have audited the  accompanying  balance  sheets of Patient  Infosystems,
Inc. as of December 31, 1997 and 1996 and the related statements of operations,
stockholders'  equity,  and cash flows for the years ended December 31, 1997 and
1996 and for the period from February 22, 1995 (Inception) to December 31, 1995.
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.






Deloitte & Touche LLP
Rochester, New York
January 30, 1998



<PAGE>



PATIENT INFOSYSTEMS, INC.

BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS                                                 1997               1996
<S>                                                    <C>                <C>
CURRENT ASSETS:
  Cash and cash equivalents ........................ $   779,317     $15,666,609
  Available-for-sale securities ....................  12,232,335            --
  Accounts receivable ..............................     412,956         386,215
  Prepaid expenses and other current assets ........     405,507         170,526
                                                      ----------     -----------
        Total current assets .......................  13,830,115      16,223,350

PROPERTY AND EQUIPMENT, net ........................     958,965         862,037

OTHER ASSETS .......................................     247,393            --
                                                     -----------     -----------

TOTAL ASSETS ....................................... $15,036,473     $17,085,387
                                                     ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable ................................. $    89,674    $    196,674
  Accrued salaries and wages .......................     320,272         127,029
  Accrued initial public offering costs ............        --           446,568
  Accrued expenses .................................      79,236         211,457
  Deferred revenue .................................      67,549         582,783
  Accrued loss on development contracts ............      30,997          67,139
                                                    ------------    ------------
        Total current liabilities ..................     587,728       1,631,650
                                                    ------------    ------------

COMMITMENTS  (Note 7)

STOCKHOLDERS' EQUITY:
  Common stock - $.01 par value:  shares - authorized:
    20,000,000; issued and outstanding:  1997 - 8,011,522
    1996 - 7,653,202 ...............................      80,115          76,532
  Additional paid-in capital .......................  21,550,009      19,300,293
  Unrealized gain on available-for-sale securities .       5,060            --
  Accumulated deficit during the development stage .  (7,186,439)     (3,923,088)
                                                     -----------     -----------
        Total stockholders' equity .................  14,448,745      15,453,737
                                                     -----------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $ 15,036,473    $ 17,085,387
                                                    ============    ============

</TABLE>

See notes to financial statements.

<PAGE>

PATIENT INFOSYSTEMS, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                        1997           1996          1995

<S>                                <C>            <C>            <C>

REVENUES .......................   $ 2,062,373    $   845,412    $   113,000
                                   -----------    -----------    -----------

COSTS AND EXPENSES:
  Cost of sales ................     1,629,128        748,322        111,870
  Sales and marketing ..........     1,609,837        913,547        375,384
  General and administrative ...     2,432,760      1,760,760        678,498
  Research and development .....       489,115        310,552         89,909
                                   -----------      ---------      ---------

        Total costs and expenses     6,160,840      3,733,181      1,255,661
                                   -----------    -----------      ---------

OPERATING LOSS .................    (4,098,467)    (2,887,769)    (1,142,661)

INTEREST INCOME ................       835,116         81,333         26,009
                                    ----------     ----------     ----------

NET LOSS .......................   $(3,263,351)   $(2,806,436)   $(1,116,652)
                                   ===========    ===========    ===========

NET LOSS PER SHARE - BASIC
   AND DILUTED .................   $      (.41)   $      (.44)   $     (.18)
                                   ===========    ===========    ===========


WEIGHTED AVERAGE COMMON
   AND POTENTIAL COMMON SHARES .     7,980,094      6,347,716      5,954,299
                                   ===========    ===========    ===========

</TABLE>


See notes to financial statements.

<PAGE>

PATIENT INFOSYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                        Unrealized
                                                                          Additional   Gains/Losses on                   Total
                                    Preferred Stock        Common Stock    Paid-in   Available-for-sale  Accumulated  Stockholders'
                                    Shares   Amount     Shares    Amount   Capital      Securities          Deficit     Equity

<S>                                  <C>      <C>        <C>       <C>       <C>           <C>               <C>          <C>
Sale of common stock, substantially
 all of which was issued on February
 22, 1995 at $0.14 per share           -      $   -     3,602,880   $36,029  $  464,371   $    -            $    -       $  500,400

Sale of Series A convertible preferred
 stock at $1.00 per share in August
 and September 1995 (net of issuance
 costs of $18,583)                 1,800,000   18,000       -          -      1,763,417        -                 -        1,781,417

Net loss for the period from
 Inception to December 31, 1995        -          -         -          -          -            -            (1,116,652)  (1,116,652)
                                   ---------   ------   ---------   ------- -----------    ------          ----------     ----------
Balances, December 31, 1995        1,800,000   18,000   3,602,880    36,029   2,227,788        -            (1,116,652)   1,165,165

Sale of Series B convertible
 preferred stock at $5.00 per share
 in May and June 1996 (net of
 issuance costs of $3,250)           600,000    6,000       -          -      2,990,750        -                  -       2,996,750
Compensation expense related to
 issuance of stock warrants            -          -         -          -         13,208        -                  -          13,208

Exercise of stock warrants             -          -         4,322        43       2,959        -                  -           3,002

Sale of common stock at $8.00 per
 share in December 1996 (net of
 issuance costs of $1,917,952)         -          -     2,000,000    20,000  14,062,048        -                  -      14,082,048

Conversion of Series A and B
 convertible preferred stock
 to common stock                  (2,400,000) (24,000)  2,046,000    20,460       3,540        -                  -            -

Net loss for the year end
 December 31, 1996                     -          -         -          -        -              -            (2,806,436)  (2,806,436)
                                   ---------   ------   ---------    ------  ----------      ------          ---------    ---------

Balances, December 31, 1996            -          -     7,653,202    76,532  19,300,293        -            (3,923,088)  15,453,737

Sale of common stock at $8.00 per
 share in January 1997
 (net of issuance costs of $168,000)   -          -       300,000     3,000   2,229,000        -                  -       2,232,000

Compensation expense related to
 issuance of stock warrants            -          -         -          -          8,283        -                  -           8,283

Exercise of stock warrants             -          -        58,320       583      12,433        -                  -          13,016

Unrealized gain on investments
 available for sale                    -          -         -          -        -            5,060                -           5,060

Net loss for the year end
 December 31, 1997                     -          -         -          -        -              -            (3,263,351)   3,263,351)
                                   ---------  ------   ---------   -------  -----------     ------           ----------  ----------
Balances, December 31, 1997            -      $   -    8,011,522   $80,115  $21,550,009     $5,060         $(7,186,439) $14,448,745
                                   =========  ======   =========   =======  ===========     ======         ============ ===========

</TABLE>

See notes to financial statements.

<PAGE>

PATIENT INFOSYSTEMS, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

<S>                                                                   <C>             <C>               <C>
                                                                      1997            1996              1995
OPERATING ACTIVITIES:
  Net loss .......................................................   $(3,263,351)   $(2,806,436)   $(1,116,652)
  Adjustments to reconcile net loss to net cash used in
    operating  activities:
      Depreciation and amortization ..............................       293,763        186,050         26,473
      Loss on sale of property ...................................         2,171           --             --
      Amortization of premiums and discounts on available-for-sale
           marketable securities .................................      (209,832)          --             --
      Compensation expense related to issuance of
        stock warrants ...........................................         8,283         13,208           --
      Increase in accounts receivable ............................       (26,741)      (382,160)        (4,055)
      Increase in prepaid expenses and other current assets ......      (234,980)      (146,542)       (23,984)
      (Decrease) increase in accounts payable ....................      (107,000)      (166,095)       362,769
      Increase in accrued salaries and wages .....................       193,243         78,770         48,259
      (Decrease) increase in accrued expenses ....................      (132,221)       192,076         19,381
      (Decrease) increase in deferred revenue ....................      (515,234)       414,728        168,055
      (Decrease) increase in accrued loss on development contracts       (36,142)        67,139           --
                                                                       ---------      ---------       ---------

            Net cash used in operating activities ................    (4,028,041)    (2,549,262)      (519,754)
                                                                       ---------      ---------       ---------

INVESTING ACTIVITY:
  Property and equipment additions ...............................      (394,161)      (494,577)      (579,983)
  Proceeds from sale of property .................................         1,299           --             --
  Purchases of available-for-sale marketable securities ..........   (18,121,444)          --             --
  Maturities of available for-sale marketable securities .........     6,104,000           --             --
  Increase in other assets .......................................      (247,393)          --             --
                                                                      ---------       ---------       ---------

           Net cash used in investing activities .................   (12,657,699)      (494,577)      (579,983)
                                                                      ----------      ---------       ---------

FINANCING ACTIVITIES:
  Proceeds from issuance of common and preferred
    stock, net ...................................................     2,245,016     17,081,800      2,281,817
  (Decrease) increase in accrued initial public offering costs ...      (446,568)       446,568           --
                                                                       ---------     ----------      ----------

            Net cash provided by financing activities ............     1,798,448     17,528,368      2,281,817
                                                                       ---------     ----------      ----------


INCREASE (DECREASES) IN CASH AND CASH  EQUIVALENTS ...............   (14,887,292)    14,484,529      1,182,080

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF PERIOD ............................................    15,666,609      1,182,080           --
                                                                      ----------     ----------      ---------

CASH AND CASH EQUIVALENTS AT
  END OF PERIOD ..................................................   $   779,317    $15,666,609    $ 1,182,080
                                                                     ===========    ===========    ===========


Supplemental disclosures of cash flow information
   Cash paid and received for income taxes, net ..................   $    (9,509)   $     1,716    $     --
                                                                     ===========    ===========    ===========
</TABLE>

See notes to financial statements ................................



<PAGE>



PATIENT INFOSYSTEMS, INC.


NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND
PERIOD FROM FEBRUARY 22, 1995 (INCEPTION) TO DECEMBER 31, 1995
--------------------------------------------------------------------------------


1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Organization  - Patient  Infosystems,  Inc.  designs  and  develops  health care
information systems and services to manage, collect and analyze  patient-related
information to improve patient compliance with prescribed  treatment  protocols.
Through its various patient  compliance  programs for disease state  management,
the  Company  provides  important  benefits  for the  patient,  the health  care
provider and the payor. The Company was incorporated in Delaware on February 22,
1995 under the name DSMI Corp.,  changed its name to Disease  State  Management,
Inc.  on October  13,  1995,  and on June 28,  1996  changed its name to Patient
Infosystems,   Inc.  Prior to January 1, 1997,  the Company  was  a  development
stage enterprise.

Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual amounts could differ
from those estimates.

Fair  Value of  Financial  Instruments  - The  Company's  financial  instruments
consist of cash and equivalents and available-for-sale  securities. The carrying
values of cash and  equivalents  and  available-for-sale  marketable  securities
approximate fair value.

Revenue  Recognition and Deferred  Revenue - The Company's  principal  source of
revenue to date has been from  contracts with a  pharmaceutical  company for the
development and operation of disease  management  programs for chronic diseases,
disease   management   programs  and  other  health  care   information   system
applications.  Deferred revenue represents amounts billed in advance under these
contracts.

Development  Contracts - The Company's program  development  contracts typically
require  payment  from the  customer at the time that the  contract is executed,
with  additional  payments  made as  certain  development  milestones  are  met.
Development  contract revenue is recognized on a percentage of completion basis,
in accordance with the ratio of total development cost incurred to the estimated
total development costs for the entire project.
Losses, if any, are recognized in full as identified.

Program  Operations - The Company's program  operation  contracts call for a per
enrolled patient fee to be paid by the customer for a series of program services
as defined in the contract.  The timing of customer payments varies by contract,
but  typically  occurs in advance of the  associated  services  being  provided.
Revenues from program  operations are recognized ratably as the program services
are delivered.

Cash and Cash Equivalents - Cash and cash equivalents  include all highly liquid
debt instruments with original maturities of three months or less.

Concentrations of Credit Risk - Financial  instruments which potentially subject
the Company to concentration of credit risk consist principally of cash and cash
equivalents  and  accounts  receivable.  The  Company  places  its cash and cash
equivalents with high credit quality institutions.

The Company's current contracts are concentrated in a small number of customers,
consequently, the loss of any one of its customers could have a material adverse
effect on the Company and its  operations.  During the years ended  December 31,
1997 and 1996, approximately $925,800 (45%) and $834,000 (99%), respectively, of
the Company's  revenues arose from contracts with one customer.  At December 31,
1997 and 1996,  accounts  receivable included balances of $231,484 and $265,940,
respectively, from contracts with that customer.

Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using the  straight-line  method over the estimated  useful lives of
the assets, which range from 3 to 10 years.

The Company  regularly  assesses all of its long lived assets for impairment and
recognizes  a loss when the carrying  value of an asset  exceeds its fair value.
The Company determined that no impairment loss need be recognized for applicable
assets in 1997 or 1996.

Research and Development - Research and development costs consist principally of
compensation  and  benefits  paid  to  Company   employees.   All  research  and
development costs are expensed as incurred.

Income Taxes - The Company uses the asset and liability method of accounting for
income taxes in accordance with Statement of Financial  Accounting Standards No.
109,  "Accounting  for  Income  Taxes".  Under the asset and  liability  method,
deferred  income tax assets and  liabilities  are  recognized for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and net operating loss and tax credit carryforwards.

Net Loss Per Share - Net loss per share is based on the weighted  average number
of common shares outstanding subsequent to the Company's initial public offering
in 1996.  Pursuant to rules of the Securities and Exchange Commission Staff, all
common and  potential  common  shares issued by the Company at a price less than
the initial public  offering  price during at least the 12 months  preceding the
offering  date (using the  treasury  stock  method until shares are issued) have
been  included  in  the  calculation  of  common  and  potential  common  shares
outstanding for all periods  presented prior to the December 1996 initial public
offering.

Retirement  Plan - The  Company  has a  retirement  plan which  qualifies  under
Section 401(k) of the Internal Revenue Code This retirement plan allows eligible
employees to contribute 1% to 15% of their income on a pretax basis to the plan.
The Company's annual  contribution to the plan is at the discretion of the Board
of Directors. The Company made no contributions to this plan in 1997 or 1996.

Stock Split - On November 22,  1996,  the Company  effected a .72-for-1  reverse
stock split of all outstanding shares of common stock.

Statement  of  Financial  Accounting  Standards  No.  128 - In March  1997,  the
Financial  Accounting  Standards  Board  (FASB)  issued  Statement  of Financial
Accounting  Standards  (SFAS) No. 128,  "Earnings  Per Share".  The new standard
requires dual  presentation of basic and diluted earnings per share (EPS) on the
face of the  statement  of  operations  and  requires  a  reconciliation  of the
numerators and denominators of basic and diluted EPS calculations. The statement
is effective for periods  ending after December 15, 1997.   The   Company   has
calculated and presented basic and  diluted  earnings per share  on the face of
the statement of operations for  the years ended December 31, 1997  and 1996 and
from the period of February 1995 (inception) to December 31, 1995.

Statement  of  Financial  Accounting  Standards  No.  130 - In  June  1997,  the
Financial  Accounting  Standards  Board  (FASB)  issued  Statement  of Financial
Accounting  Standards  No.  130,  "Reporting  Comprehensive  Income,"  which  is
required to be adopted for fiscal years  beginning after December 15, 1997. This
statement  establishes  standards  for  reporting  and display of  comprehensive
income and its components in a full set of general-purpose financial statements.
This statement  requires that all items that are required to be recognized under
accounting  standards as components of comprehensive  income to be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial statements.  In the opinion of  management, SFAS 130  will not have a
material effect on the Company's financial statements.

Statement of Financial Accounting Standards No. 131 - In June 1997 the Financial
Accounting  Standards Board issued Statement of Financial  Accounting  Standards
No. 131,  "Disclosures about Segments of an Enterprise and Related Information,"
effective  for fiscal years  beginning  after  December 15, 1997.  The statement
requires that a public  company  report  financial and  descriptive  information
about its reportable operating segments using the management approach.  In  the
opinion of management, SFAS 131 will not have a material effect on  the Company'
financial statements.

Statement of Position 97-2 - In October 1997, the Accounting Standards Executive
Committee   issued   Statement  of  Position  (SOP)  97-2,   "Software   Revenue
Recognition,"  which provides guidance on applying generally accepted accounting
principles in recognizing revenue on software  transactions and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company  does not  believe  that the  implementation  of SOP  97-2  will  have a
material effect on expected revenues or earnings.


2.    AVAILABLE -FOR-SALE SECURITIES

The following is a summary of  available-for-sale  securities as of December 31,
1997:

U.S. Government securities            $12,232,335
                                      ===========

Realized and unrealized gains and losses on  available-for-sale  securities were
immaterial as of and for the year ended December 31, 1997.

The cost and  estimated  fair  value of  marketable  securities  by  contractual
maturity at December 31, 1997 are as follows:

                                            Amortized
                                               Cost              Fair Value
                                               ----              ----------
Due in one year or less                   $  2,824,280         $  2,823,704
Due after one year through two years         9,400,389            9,408,631
                                             ---------            ---------
                                           $12,224,669          $12,232,335
                                           ===========          ===========


3.    PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows at December 31:

<TABLE>
<CAPTION>

                                                            1997          1996
                                                            ----          ----
<S>                                                         <C>           <C>

Computer software ...................................   $  380,831   $  307,735
Computer equipment ..................................      600,279      409,681
Telephone equipment .................................      189,479      134,656
Leasehold improvements ..............................       41,504       37,729
Office furniture and equipment ......................      249,291      184,708
                                                         ---------    ---------
                                                         1,461,384    1,074,509
Less accumulated depreciation and amortization ......      502,419      212,472
                                                           -------      -------


Property and equipment, net .........................   $  958,965   $  862,037
                                                        ==========   ==========
</TABLE>


4.    INCOME TAXES

The Company  has not  recorded  any  income  tax expense during  the period from
Inception  to   December 31,  1997 because of  operating  losses incurred  since
inception

As of December 31, 1997,  the Company  has net  operating loss carryforwards for
Federal income tax purposes of  approximately  $7,100,000 which are available to
offset future Federal  taxable  income.  These  carryforwards  expire in varying
amounts  through  2012.  No tax  benefit  relating  to the  net  operating  loss
carryforwards  has  been  reflected  in  the  financial  statements  due  to the
uncertainty  regarding  the  utilization  of any  such  benefit,  and  valuation
allowances of $2,414,000 for 1997 and  $1,326,000 for 1996 have been  recognized
to offset any deferred tax asset related to these carryforwards.  Future benefit
may occur to the extent  taxable income is earned prior to the expiration of the
carryforward period.


5.    PUBLIC OFFERING OF COMMON STOCK

In December 1996,  the Company sold 2,000,000  shares of common stock through an
initial  public  offering  which  generated  net proceeds of  $14,082,048  after
deducting  applicable  issuance  costs and  expenses.  On January  8,  1997,  an
additional  300,000 shares of common stock were sold pursuant to an underwriters
over-allotment  provision,  which  generated  net  proceeds  to the  Company  of
$2,232,000 after deducting underwriting discounts and commissions.

In connection  with this initial  public  offering,  the  Company's  outstanding
shares  of  Series A and B  convertible  preferred  stock  were  converted  into
2,046,000 shares of common stock.


6.    STOCK OPTIONS AND WARRANTS

The Company has an Employee  Stock Option Plan (the "Stock Option Plan") for the
benefit of certain  employees,  non-employee  directors,  and key advisors.  The
Company has adopted the  disclosures-only  provision  of  Statement of Financial
Accounting  Standards  No.  123,  "Accounting  for  Stock-Based   Compensation".
Accordingly,  no compensation cost has been recognized for the Stock Option Plan
as it relates to employees. Had compensation cost for the Company's stock option
plan been  determined  based on the fair  value at the date of grant for  awards
consistent  with the  provisions of SFAS No. 123, the Company's net loss and net
loss per share  would have been  increased  to the pro forma  amounts  indicated
below:



<TABLE>
<CAPTION>
                                                                                 Period from
                                                                               Feburary 22,1995
                                           Year ended          Year ended       (Inception) to
                                       December 31, 1997    December 31, 1996  December 31, 1995
<S>                                    <C>                  <C>                <C>


Net loss - as reported                    $(3,263,351)         $(2,806,43)       $(1,116,652)

Net loss - pro forma                      $(3,406,973)         $(2,879,457)      $(1,125,428)

Net loss per share - basic
  and diluted - as reported               $     (0.41)         $      (.44)      $      (.18)

Net loss per share - basic
  and diluted - pro forma                 $     (0.43)         $      (.46)      $      (.18)

</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes  option-pricing model using an assumed risk-free interest rates of
5.98% for the year ended  December  31, 1997 and 7% for the year ended  December
31, 1996 and an expected life of 7 years. As the Company was still  considered a
private  company for the  purposes of applying  SFAS No. 123 for the period from
Inception  to June 30,  1996,  the Company did not include a  volatility  factor
assumption in its fair value model.  For the options granted after July 1, 1996,
the Company has used a volatility factor of .53 for year ended December 31, 1997
and .60 for year ended December 31, 1996. For purposes of pro forma  disclosure,
the  estimated  fair value of each  option is  amortized  to  expense  over that
option's  vesting period.  The Stock Option Plan authorizes  1,080,000 shares of
common stock to be issued.

Stock  options  granted  under the Stock  Option  Plan may be of two types:  (1)
incentive stock options and (2) nonqualified stock options.  The option price of
such grants shall be  determined  by a Committee of the Board of Directors  (the
"Committee"),  but shall not be less than the estimated fair market value of the
common stock at the date the option is granted. The terms of the grants shall be
fixed by the Committee,  with no term lasting longer than ten years. The ability
to exercise such options  shall be determined by the Committee  when the options
are  granted.  All of the  outstanding  options vest at the rate of 20% per year
with the exception of 36,000 options which were vested as of the date of grant.

A summary of stock option activity follows:
<TABLE>
<CAPTION>

                                                                                             Weighted-
                                                                              Outstanding     Average
                                                                                Options   Exercise Price
                                                                                -------   --------------
<S>                                                                             <C>       <C>

Options granted during the period from Inception
  to December 31, 1995 (weighted average fair value of $.13) ...................658,800    $   0.35

Options forfeited by holders during the period
  from Inception to December 31, 1995 ..........................................(65,520)   $   0.54

Options exercised during the period form Inception
  to December 31, 1995 ......................................................... (2,880)   $   0.14
                                                                                -------


Options outstanding at January 1, 1996 .........................................590,400    $   0.33

Options granted during the year ended December 31, 1996
  (weighted average fair value of $3.24) .......................................365,400    $   5.32

Options forfeited by holders during the year
  ended December 31, 1996 ......................................................(63,840)   $   0.87
                                                                                -------

Options outstanding at December 31, 1996 .......................................891,960    $   2.34

Options granted during the year ended December 31, 1997
  (weighted average fair value of $5.16) .......................................307,000    $   4.39

Options forfeited by holders during the year
  ended December 31, 1997 .....................................................(342,580)   $   4.83

Options exercised during the year ended December 31, 1997 ......................(58,320)   $   0.22
                                                                                -------

Options outstanding at December 31, 1997 .......................................798,060    $   2.21
                                                                                =======

Options exercisable at December 31, 1997 .......................................212,928    $   0.82
                                                                                =======

Options available for grant at December 31, 1997 ...............................281,940
                                                                                =======
</TABLE>



<PAGE>


The  following  table   summarizes   information   concerning   outstanding  and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>


                                  Options Outstanding                Options Exercisable
                                  -------------------                -------------------

                                       Weighted
                                        Average     Weighted                   Weighted
                                       Remaining     Average                    Average
   Range of                 Number    Contractual   Exercise         Number    Exercise
Exercise Price           Outstanding     Life        Price         Exercisable  Price
<S>                      <C>          <C>           <C>            <C>         <C>

  $.14 - $ .99             390,480       7.36       $  .29           177,792   $ 0.27

 $1.00 - $1.99              44,640       7.94       $ 1.57            13,968   $ 1.52

 $2.00 - $4.99             272,840       9.24       $ 2.95            13,608   $ 2.08

$5.00 - $10.00              90,100       9.08       $ 8.56             7,560   $10.00
                          --------                                   -------
                           798,060                                   212,928
                           =======                                   =======

</TABLE>

The Company also has outstanding stock purchase  warrants  entitling the holders
to  purchase a total of 23,400  shares of common  stock at prices  ranging  from
$2.08 to  $10.00  per share  (weighted  average  exercise  price of  $2.69).  At
December  31,  1997,  4,680 of these  warrants are  currently  vested,  with the
remaining  18,720  warrants  vesting at 20% per year.  The Company has  recorded
compensation cost of $8,283 for the year ended December 31, 1997 and $13,208 for
the year ended  December  31,  1996 in  connection  with the  issuance  of these
warrants.

7.    COMMITMENTS

The  Company  leases  office  space  for its main  operating  facility  under an
operating  lease agreement  expiring in November 1999.  Rental expense from this
lease for the years  ended  December  31,  1997,  1996 and for the  period  from
February 22, 1995  (inception) to December 31, 1995,  was $154,907,  $70,479 and
$40,375 respectively.

At  December  31,  1997,  future  minimum  lease  payments  under this lease are
summarized as follows:


                      1998              $180,523
                      1999               173,100
                                         -------
                                        $353,623
                                        ========

8.    EARNINGS PER SHARE

Net loss  per share  is based on  the weighted  average number of common  shares
outstanding subsequent to the Company's initial public offering in 1996.Pursuant
to rules of the  Securities  and  Exchange  Commission  Staff, all  common  and
potential  common  shares issued by the Company at a price less than the initial
public offering  price during at least the 12 months preceding the offering date
(using the  treasury  stock  method until shares are issued) have been  included
in  the  calculation  of  common  and  potential  common  shares outstanding for
all  periods  presented  prior to the  December  1996 initial  public  offering.
Because th  Company  is  in a loss position  at  December 31,1997,  options  to
purchase 798,060 shares  of common   stock at   $.14 to $10.00    per share were
outstanding as of December 31, 1997 but were not included in the computation  of
diluted EPS as they would be dilutive.

                                                              Per Share
                                    Net Loss      Shares        Amount
                                    --------      ------        ------
1997
----
Basic and Diluted EPS             $(3,263,351)   7,980,094      $(.41)

1996
----
Diluted EPS                       $(2,806,436)   6,347,716      $(.44)

1995
----
Diluted EPS                       $(1,116,652)   5,954,299      $(.18)
<PAGE>

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.

None
                                    PART III


Item 10. Directors and Executive Officers of the Registrant.

Incorporated by reference to the Company's Proxy Statement for
Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year
ended December 31, 1997.


Item 11. Executive Compensation.

Director Compensation

     Incorporated  by  reference to the  Company's  Proxy  Statement  for Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
within 120 days after the close of the fiscal year ended December 31, 1997.

Executive Compensation

     Incorporated  by  reference to the  Company's  Proxy  Statement  for Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
within 120 days after the close of the fiscal year ended December 31, 1997.


Item 12. Security Ownership of Certain Beneficial Owners and Management.

     Incorporated  by  reference to the  Company's  Proxy  Statement  for Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
within 120 days after the close of the fiscal year ended December 31, 1997.

Item 13. Certain Relationships and Related Transactions

     Incorporated  by  reference to the  Company's  Proxy  Statement  for Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
within 120 days after the close of the fiscal year ended December 31, 1997.


                                     PART IV


Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Financial Statements:

The financial statements of the Company are included in Part II, Item
8.

(b) Reports on Form 8 - K:

No reports on Form 8-K were filed during the fourth quarter of
the year ended December 31, 1997.

( c) Exhibits:

Exhibit # Description of Exhibits

(3) Articles of Incorporation and By-Laws:

     Certificate of Incorporation  Incorporated herein by reference from Exhibit
3.1 on Form S-1 Registration Statement of the Company, filed with the Commission
on December 17, 1996. By-Laws  Incorporated herein by reference from Exhibit 3.3
on Form S-1 Registration  Statement of the Company, filed with the Commission on
December 17, 1996.

(10)     Material contracts:

     10.1  Employment  agreement  with Donald A.  Carlberg,  President and Chief
Executive Officer,  dated March 1, 1995,  incorporated by reference from Exhibit
10.1  on  Form  S-1  Registration  Statement  of the  Company,  filed  with  the
Commission on December 17, 1996.

     10.2 Patient Infosystems, Inc. Stock Option Plan, incorporated by reference
from Exhibit 10.2 on Form S-1 Registration  Statement of the Company, filed with
the Commission on December 17, 1996. 10.3 Patient Infosystems, Inc. Stock Option
Agreement,  incorporated by reference from Exhibit 10.3 on Form S-1 Registration
Statement of the Company, filed with the Commission on December 17, 1996.

     10.4 Services  Agreement  dated  September 18, 1995 between the Company and
Bristol-Myers  Squibb U.S.  Pharmaceuticals,  a division of Bristol-Myers Squibb
Company,  incorporated  by reference from Exhibit 10.4 on Form S-1  Registration
Statement of the Company, filed with the Commission on December 17, 1996.

     10.5  Services  Agreement  dated  February 1, 1996  between the Company and
Bristol-Myers  Squibb U.S.  Pharmaceuticals,  a division of Bristol-Myers Squibb
Company,  incorporated  by reference from Exhibit 10.5 on Form S-1  Registration
Statement of the Company, filed with the Commission on December 17, 1996.

     10.6  Services  Agreement  dated  March 30,  1996  between  the Company and
Bristol-Myers  Squibb  Oncology,  a division of  Bristol-Myers  Squibb  Company,
incorporated by reference from Exhibit 10.6 on Form S-1  Registration  Statement
of the Company, filed with the Commission on December 17, 1996.

     10.7  Services  Agreement  dated  April 23,  1996  between  the Company and
Bristol-Myers  Squibb  Oncology/Immunology,  a division of Bristol-Myers  Squibb
Company,  incorporated  by reference from Exhibit 10.7 on Form S-1  Registration
Statement of the Company, filed with the Commission on December 17, 1996.

     10.8  Services  Agreement  dated  October 16, 1995  between the Company and
Bristol-Myers  Squibb U.S.  Pharmaceuticals,  a division of Bristol-Myers Squibb
Company,  incorporated  by reference from Exhibit 10.8 on Form S-1  Registration
Statement of the Company, filed with the Commission on December 17, 1996.

     10.9  Services  Agreement  dated June 24,  1996  between  the  Company  and
American HomePatient,  Inc., incorporated by reference from Exhibit 10.9 on Form
S-1 Registration Statement of the Company, filed with the Commission on December
17, 1996.

     10.10  Services  Agreement  dated June 21,  1996  between  the  Company and
Equifax  Healthcare  Administrative  Services,  a  division  of  Equifax,  Inc.,
incorporated by reference from Exhibit 10.10 on Form S-1 Registration  Statement
of the Company, filed with the Commission on December 17, 1996.

     10.11  Services  Agreement  dated July 28,  1996  between  the  Company and
Equifax  Healthcare  Administrative  Services,  a  division  of  Equifax,  Inc.,
incorporated by reference from Exhibit 10.11 on Form S-1 Registration  Statement
of the Company, filed with the Commission on December 17, 1996.

     10.12 Services  Agreement  dated September 13, 1996 between the Company and
Health Resources, Inc.(Asthma),  incorporated by reference from Exhibit 10.12 on
Form S-1  Registration  Statement of the Company,  filed with the  Commission on
December 17, 1996.

     10.13 Services  Agreement  dated September 13, 1996 between the Company and
Health Resources Inc.(Diabetes), incorporated by reference from Exhibit 10.13 on
Form S-1  Registration  Statement of the Company,  filed with the  Commission on
December 17, 1996.

     10.14 Services  Agreement  dated September 13, 1996 between the Company and
Harris  Methodist  Health Plan,  incorporated by reference from Exhibit 10.14 on
Form S-1  Registration  Statement of the Company,  filed with the  Commission on
December 17, 1996.

(11) Statement of Computation of Per Share Earnings See page
38 of this Annual report on Form 10-K.

(27) Financial Data Schedule
Filed electronically

All other exhibits are omitted because they are not applicable or the
required information is shown elsewhere in this Annual Report on Form 10-K.