FORM 10-K
              ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
                OR 15(d) FOR 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, 1998
                                   
                                       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              0-22319                                     

                            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 pursuant to 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 [X]     No

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K 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, 1999, 8,020,042 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 $8 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, 1999 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, utilizing the Internet and
Internet  technologies.  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"),  integrated  delivery
networks ("IDNs") 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  emphasized  the
development of disease  management  programs,  which accounted for a substantial
portion of its revenue during 1997.  However,  during 1997 and 1998, 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 Utilizing the Internet

     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  with a real time Internet  on-line  communication
system . The  system  utilizes  trained  telephone  operators  and  computerized
interactive voice response technology to communicate via telephone directly with
the patient at home as well as with payors and  providers in order to gather and
deliver  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 the  Internet  and demand
publishing  capabilities.  The Company's new Internet capabilities acquired with
the  HealthDesk  purchase  enables the Company's  systems to interface on a real
time basis with patients,  payors and providers.  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.

Internet Capabilities

     On February 26, 1999, the Company,  through its newly formed,  wholly-owned
subsidiary, Patient Infosytems Acquisition Corp., acquired substantially all the
assets of HealthDesk Corporation ("HealthDesk"),  a consumer healthcare software
company that focuses on general health and chronic  disease  management  through
ongoing  targeted  support for patients,  families and caregivers.  The acquired
assets include  HealthDesk OnLine and HealthDesk OnLine for Diabetes,  which are
both  accessible  through the Internet and on CD-ROM.  The Company also acquired
HealthDesk's  Care Team Connect  product,  which is accessible over the Internet
and provides a communication  mechanism  between patients and their  caregivers.
The Company uses the core technologies associated with these products to support
the Company's other programs which include disease management,  case management,
demand  management,  patient  surveys  and  clinical  studies.  (See  Note 10 to
financial statements)

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 routine 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 routine  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,  diabetes
and hypertension.  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  may 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 less than 20,000  patients  currently  enrolled in those
programs.

     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 developed 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  1999,  the  Company  has  had   approximately   4,100
interventions   with  patients   participating   in  these  programs.   American
HomePatient,  Inc. ("American  HomePatient"),  Centra Healthcare  Administrative
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
1999,  the Company  has had  approximately  9,900  interventions  with  patients
participating in this program.

     Diabetes

     The Company has developed 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  1999,  the Company has had  approximately
2,600 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  1999,  the  Company  has  had 115
interventions with patients participating in this program.

     Hypertension

     The Company has  completed  the  development  of a  compliance  program for
patients  with   hypertension  that  has  been  marketed  to  payors  and  other
participants in the health care industry. Bristol-Myers has retained the Company
to  provide  this  compliance  program  for  patients  who  are  suffering  from
hypertension  and are enrolled in health care programs for which these companies
provide services. Patients are currently being enrolled into this program. 

     Additional Disease Targets

     The  Company  has  identified  additional  opportunities  in large  chronic
disease markets,  including in the treatment of, 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 and Aetna U.S.  HealthCare.  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. 

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 to approximately  150,000 patients for Kentucky Medicaid,  CHA
HMO, Inc. and Managed Care Assistance Corporation.

     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 has developed 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. The Company has
completed approximately 125,000 surveys during 1998 through February 1999.

     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  1998,  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 twelve
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, diabetes and cardiac programs.

     The Company  entered into a joint  venture  agreement  with MacLean  Hunter
Publishing Limited, an Ontario,  Canada corporation,  in November 1998 to market
and sell, on an exclusive  basis in Canada,  products and services  developed by
the Company and to manage  jointly,  finance  and  operate the  business  entity
Patient  Infosystems  Canada,  Inc.,  which is dedicated to the development of a
commercially viable business built around the sale, marketing and service of the
Company's products and services.

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 costs
have  decreased  as the Company has  completed  the  development  of its primary
disease  management   programs.   The  Company  anticipates  that  research  and
development expenses will continue to decrease in future periods, as the Company
continues to expand its operations.

     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  ("HIPAA"),  P.L.  104-191.  This
legislation  requires  the  Secretary  of the  Department  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  has  promulgated  and  published  proposed  rules
addressing  the  standards,  however,  no final rules have been adopted to date.
Final rules may be adopted during 1999.

     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.  Specifically,  HIPAA increased the amount
of civil monetary  penalties from $2,000 to $10,000.  Criminal  penalties  range
from  misdemeanors,  which carry fines of not more than $10,000 or  imprisonment
for not more than one year, or both, to felonies,  which carry fines of not more
than $25,000 or  imprisonment  for not more than five years,  or both.  Further,
criminal violations may result in permanent mandatory  exclusions and additional
permissive exclusions from participation in Medicare and Medicaid programs.

     Furthermore,  the Company and its  customers  may be subject to federal and
state laws and regulations  governing the submission of false healthcare  claims
to the government and private payers. Possible sanctions for violations of these
laws and regulations include minimum civil penalties between  $5,000-$10,000 for
each false claim and treble damages.

     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.

Employees

     As of February 28, 1999, the Company had 121 full and part-time employees.

Financial Information

         For financial  information  concerning  the Company,  see the financial
statements and the notes thereto included elsewhere herein.


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.  The Company  leases  office
space  for  its  Demand  Management  call  center  in  Wayne,   Pennsylvania  in
approximately  2,047 square feet of leased office space under a lease  agreement
that expires in May 2001.  The Company  leases  office  space for its  Berkeley,
California office in approximately  2,800 square fee of lease office space under
a lease agreement that expires in October 1999.

     The Company  believes its plants and  facilities are suitable and adequate,
and have sufficient productive capacity, to meet its current needs.


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, 1998.
<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 closing  sale price for the  Company's
Common Stock as reported on the NASDAQ National Market.

                                        High              Low

       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

       1998
       First Quarter                    $4.50             $2.63
       Second Quarter                   $5.00             $2.50
       Third Quarter                    $3.44             $1.81
       Fourth Quarter                   $1.88             $1.00


(b)  Holders

     The approximate  record number of holders of the Company's  common stock as
of February  28, 1999 is 87.  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.

(d)  Use of Proceeds

     The Company has used and  continues  to use the  proceeds  from its initial
public  offering of common stock in December 1996 for capital  improvements  and
expansion of its telephone and computer capabilities for sales and marketing and
for general corporate  purposes as more fully discussed in financial  statements
and notes  thereto  appearing  elsewhere  herein.  Recently,  the  Company  used
$761,000 in connection with the acquisition of the assets of HealthDesk.

<PAGE>

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

                                                                                     Period from
                                                                                  February 22, 1995
                                                                                   (Inception) to
                                               Year Ended December 31,               December 31,
                                               -----------------------               ------------
                                          1998            1997            1996            1995
                                          ----            ----            ----            ----
<S>                                       <C>             <C>             <C>              <C>
                              

Statement of Operations Data:

Revenues ........................... $ 2,344,072    $  2,062,373    $    845,412    $    113,000

Costs and Expenses:
  Cost of Sales .....................  2,529,619       1,629,128         748,322         111,870
  Sales and Marketing ...............  1,795,921       1,609,837         913,547         375,384
  General and Administrative ........  3,062,204       2,442,269       1,759,044         678,498
  Research and Development ..........    298,686         489,115         310,552          89,909
                                         -------         -------         -------          ------

    Total Costs and Expenses ........  7,686,430       6,170,349       3,731,465       1,255,661
                                       ---------       ---------       ---------       ---------

Operating Loss ...................... (5,342,358)     (4,107,976)     (2,886,053)     (1,142,661)

Other Income and Expenses ...........    556,592         835,116          81,333          26,009

Provision for taxes .................     43,701          (9,509)          1,716            --
                                          ------          ------           -----          -----

Net Loss ..........................  $(4,829,467)   $ (3,263,351)   $ (2,806,436)   $ (1,116,652)
                                     ============    ============    ============    ============ 


Net Loss Per Share - Basic 
and Diluted ........................$      (0.60)   $      (0.41)   $      (0.44)   $      (0.18)
                                    ============    ============    ============    ============ 

Weighted Average Common
  and Potential Common Shares ......   8,018,398       7,980,094       6,347,716       5,954,299
                                       =========       =========       =========       =========
</TABLE>

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                                              
                                          1998            1997            1996            1995
                                          ----            ----            ----            ----
<S>                                       <C>             <C>             <C>             <C> 

Balance Sheet Data:

Cash and Cash Equivalents .......   $  6,316,955    $    779,317    $ 15,666,609    $  1,182,080
Working Capital .................      7,992,894      13,242,387      14,591,700         611,655
Total Assets ....................     10,519,727      15,036,473      17,085,387       1,763,629
Total Liabilities ...............        894,339         587,728       1,631,650         598,464
Total Stockholders' Equity ......      9,625,388      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, 1998, 1997 and 1996, and its
financial  condition at December  31,  1998.  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 has developed several disease state management  programs for specific
diseases, the  Company is  continuing  to refine its  products  for  additional
applications.  In October 1996 the Company began enrolling patients in its first
disease state  management  program and only began  substantial  patient contacts
during  1998.  The  Company  currently  has  patients  enrolled  in  five of its
disease-specific  programs. Through February 1999, an aggregate of approximately
350,000  persons  have  enrolled  and  participated  in  Company  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  extensive 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 including, 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 markets 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.
Nevertheless,  no assurance can be given that the Company's efforts will succeed
in increasing patient enrollment 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,  diabetes and
hypertension.  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. 

     Revenues from  Operations,  which includes fees received by the Company for
operating  its  programs  has  increased  substantially  and has become the most
significant  source of the  Company's  revenues.  Furthermore,  as enrollment in
Company operated disease management programs continues to increase,  the Company
anticipates  that these  revenue  sources will become the primary  source of the
Company's revenues. Currently, the Company's demand management programs generate
more  revenue than the  Company's  disease  management  programs.  However,  the
Company is continuing to devote significant  marketing efforts to increasing the
number of disease management programs that are in operation.  Nevertheless,  the
Company is still  supporting a substantial  infrastructure  in  maintaining  the
capacity  necessary  to deliver its  services  and to offer its  services to new
customers. Therefore, the Company will be required to increase substantially the
number of patient contacts and management  programs to cover the costs necessary
to maintain the  capability  to service its  customers.  In that the Company has
only begun substantial  patient contacts during 1998, the Company is continually
examining its costing  structures to determine the levels that will be necessary
to achieve profitability.

     The sales cycle for the  Company's  programs may be extensive  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.  

     In February,  1999,  the Company,  through its newly  formed,  wholly-owned
subsidiary, Patient Infosystems Acquisition Corp., acquired substantially all of
the assets of HealthDesk  Corporation,  a consumer  healthcare software company,
primarily  engaged in the business of designing and  developing  Internet  based
products in the  healthcare,  wellness  and disease  management  industries  for
$761,463.  The Company  obtained funds for the HealthDesk  acquisition  from its
available cash. The assets that were acquired by the Company included inventory,
intellectual property, hardware and software.

Results of Operations

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

     Revenues

     Revenues are comprised of revenues from operations  fees,  development fees
and licensing  fees.  Revenues  increased 14% from $2,062,373 for the year ended
December 31, 1997 to $2,344,072  for the year ended December 31, 1998. A summary
of these revenues by category is as follows:
                                                                December 31,
                                                                ------------
                                                             1998         1997
                                                             ----         ----
Revenues 
-------- 
Operations Fees ......................................   $1,385,720   $  735,841
Development Fees .....................................      689,157      826,532
Licensing Fees .......................................      269,195      500,000
                                                            -------      -------

Total Revenues .......................................   $2,344,072   $2,062,373
                                                         ==========   ==========

     Revenues  from  operations  increased  88% from $735,841 for the year ended
December 31, 1997 to $1,385,720 for the year ended December 31, 1998. Operations
revenues are  generated as the Company  provides  services to its  customers for
their disease-specific programs.  Operations revenues increased significantly in
1998,  as the  Company  continues  to  increase  the  membership  levels  in the
Company's  disease state  management  programs and primarily  from the Company's
demand  management  programs.  The demand  management  programs operate from the
Company's  medical  call center  which was  established  in May 1998,  in Wayne,
Pennsylvania  The medical  call center is staffed by  registered  nurses on a 24
hour, 7 day a week schedule.

     Revenues  from  development  fees  decreased 17% from $826,532 for the year
ended  December 31, 1997 to $689,157 for the year ended  December 31, 1998.  The
Company  received  $689,157 in development  revenues for the year ended December
31, 1998, related almost entirely to fees from Bristol-Myers for the development
of disease state management  agreements.  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.  Development  revenues include clinical,
technical  and  operational  design or  modification  of the  Company's  primary
disease management  programs.  Development  revenue declined from the year ended
December  31, 1997 to December 31, 1998 as the Company  reduced its  development
fees charged to certain  customers.  The Company  anticipates  that revenue from
development  fees will  continue to decline  unless the Company  enters into new
development agreements.

     Revenues from licensing fees decreased 46% from $500,000 for the year ended
December  31, 1997 to $269,195 for the year ended  December 31, 1998.  Licensing
revenue represents amounts that the Company charges its customers, on a one-time
fee basis,  for the right to enroll  patients  in or the right to license  other
entities  certain of its  programs,  primarily but not limited to, the Company's
standardized  asthma and diabetes  programs.  The Company had licensing  fees of
$99,750 from the sale of consumer  healthcare  software which are Internet based
products. 

     The Company also  provides  other  services to customers in the  healthcare
industry which involve new applications of its information  capture and delivery
system. These services include patient surveys, health risk assessments, patient
satisfaction  surveys,   physician  education  programs  and  marketing  support
functions.

     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. 

     Cost of sales increased 55% from $1,629,128 for the year ended December 31,
1997 to $2,529,619  for the year ended  December 31, 1998. The increase in these
costs  primarily  reflects  an  increased  level  of  program   development  and
operational  activities,  as  well as the  Company's  creation  of the  capacity
necessary to handle  anticipated  increases in the number of individuals to whom
the Company provides services.

     Sales and marketing  expenses  increased 12% from  $1,609,837  for the year
ended  December  31, 1997 to  $1,795,921  for the year ended  December 31, 1998.
These costs consist  primarily of salaries,  related  benefits and travel costs,
sales materials and other marketing related expenses.  Spending in this area has
remained  consistent as the Company's sales and marketing staff has not expanded
during  the  twelve  month  period  ended  December  31,  1998.  However,  it is
anticipated  that the Company will continue to invest in the sales and marketing
process, and that such expenses will increase in future periods.

     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 25% from
$2,442,269 for the year ended December 31, 1997 to $3,062,204 for the year ended
December 31, 1998.  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  decreased  39% from  $489,115 for the year ended  December 31, 1997 to
$298,686  for the year ended  December  31,  1998.  The decrease in research and
development expenses reflects the Company's completion of the development of its
primary disease management  programs.  

     The Company  generates net investment  income  primarily from cash balances
and  investments.  Investment  income  decreased  to $556,592 for the year ended
December  31, 1998 from  $835,116  for the year ended  December  31,  1997.  The
decrease in interest  income  reflects  the use by the Company of its  available
cash and the reduction of proceeds that can earn interest.

     The Company had a net loss of  $4,829,467  for the year ended  December 31,
1998  compared  to  $3,263,351  for the  year  ended  December  31,  1997.  This
represents a loss of $.60 per share for 1998 and $.41 for 1997. 

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

     Revenues

     Revenues are comprised of revenues from development  fees,  operations fees
and licensing  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:

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

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'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.  

     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. 

     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.

     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.  

     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 39% from
$1,759,044 for the year ended December 31, 1996 to $2,442,269 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.  

     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. 


     Liquidity and Capital Resources

     At December  31, 1998 the Company  had working  capital of  $7,992,894,  as
compared to  $13,242,387  at December 31, 1997.  Since its inception the Company
has  primarily  funded  its  operations,   working  capital  needs  and  capital
expenditures  from the sale of  equity  securities.  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. The Company has continued to expend increasing amounts to expand its
operational  capabilities  including increasing its administrative and technical
costs.  To the extent that revenues do not increase,  the Company's  losses will
increase,  creating an increased burden on the Company's  available capital.  If
the  Company  is  not  able  to  operate  profitably  or to  reduce  its  losses
significantly,  it will be  required  to seek  additional  capital or reduce its
operations.

     Capital expenditures during 1998 were $594,663, as compared to expenditures
of $394,161 during 1997 and $494,577 during 1996. 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
1998, 1997 or 1997. 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 June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activity, which is required to
be adopted by the Company in 2001.  The  Statement  will  require the Company to
recognize all derivatives on the balance sheet at fair value.  Derivatives  that
are not hedges of underlying transactions must be adjusted to fair value through
income.  If the  derivative  is a hedge,  depending  on the nature of the hedge,
changes in the fair  value of  derivatives  will  either be offset  against  the
change in fair  value of the  hedged  assets,  liabilities  or firm  commitments
through  earnings or recognized in other  comprehensive  income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Management has not yet
determined  the  effect  SFAS  No.  133  will  have,  if any,  on the  Company's
consolidated financial position, results of operations or cash flows.
     Year 2000 Issues

     The Year 2000 issue  refers to the  inability of  computerized  systems and
technologies  to  recognize  and process  dates beyond  December  31, 1999.  The
Company has reviewed the Company's information technology systems, cable network
equipment  and  other  embedded  technologies.  A  significant  portion  of  the
Company's  computerized systems and technologies have been developed,  installed
or upgraded in recent years and are generally more likely to be Year 2000 ready.
The Company is also evaluating the potential  impact as a result of its reliance
on third-party systems that may have year 2000 issues.

     Computerized  business applications that could be adversely affected by the
year 2000 issue include:

* information  processing and financial reporting systems,
* customer  billing  systems,  
* customer  service  systems, 
* telecommunication transmission and reception systems, and
* facility systems.

     System  failure or  miscalculation  could result in an inability to process
transactions,  send invoices,  accept customer orders or provide  customers with
products and services.  Customers could also experience a temporary inability to
receive or use the Company's products and services.

     The  Company  has  developed  a program to assess and address the year 2000
issue. This program consists of the following phases:

* inventorying  and assessing the impact on affected  technology and systems, 
* developing  solutions  for  affected  technology  and  systems,  
* modifying  or replacing  affected  technology and systems
* testing and verifying  solutions 
* implementing solutions, and
* developing contingency plans.

     The Company has  substantially  completed  inventorying  and  assessing the
affected computerized systems and technologies. The Company is in various stages
of its year 2000 compliance  program with respect to the remaining  phases as it
relates to the  affected  systems and  technologies.  The Company has  completed
adaptation  of all  internally  created  systems  and has  begun  surveying  its
customers  and suppliers  regarding  their  readiness  for the year 2000.  Final
testing to  independently  validate  readiness  will begin when the  Company has
received all third party hardware and software promised to date.

     Costs  incurred to date directly  related to  addressing  the year 2000 are
approximately  $50,000.  The Company  currently  estimates the total cost of its
year 2000 remediation program to be approximately $60,000.  Although the Company
will continue to incur substantial  capital  expenditures in the ordinary course
of meeting its telecommunications  system upgrade through the year 2000, it will
not specifically  accelerate its expenditures to facilitate year 2000 readiness,
and accordingly such expenditures are not included in the above estimate.

     The  Company  has  begun  communicating  with  others  with  whom  it  does
significant business to determine their year 2000 readiness and to determine the
extent to which the Company is vulnerable  to year 2000 issues  related to those
third parties.  The Company purchases much of its technology from third parties.
There can be no  assurance  that the  systems  of other  companies  on which the
Company's  systems rely will be year 2000 ready or timely converted into systems
compatible with the Company's systems.  The Company's failure or a third party's
failure  to  become  year  2000  ready  or the  Company's  inability  to  become
compatible   with  third   parties   with  which  the  Company  has  a  material
relationship,  may have a  material  adverse  effect on the  Company,  including
significant  service  interruption  or  outages,  however,  the  Company  cannot
currently estimate the extent of any such adverse effects.

     The Company is in the process of  identifying  secondary  sources to supply
its systems or services in the event it becomes probable that any of its systems
will not be year 2000 ready prior to the end of 1999. The Company is also in the
process of identifying  secondary vendors and service providers to replace those
vendors and service  providers whose failure to be year 2000 ready could lead to
a  significant  delay in the  Company's  ability to provide  its  service to its
customers.

     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.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

     The Company is exposed to changes in interest  rates  primarily in its cash
transactions.  The Company  does not believe it is exposed to changes in foreign
currently  exchange  rates  because  it does not  currently  invest  in  foreign
currency  instruments.  A discussion  of the Company's  accounting  policies for
financial  instruments  is  included in the  Summary of  Significant  Accounting
Policies in the Notes to the Financial  Statements.  The Company  currently does
not have  any  international  operations  nor does  invest  its cash in  foreign
currency  instruments.  The balances the Company has in cash or cash equivalents
are generally  available  without legal  restrictions to fund ordinary  business
operations.  The Company regularly invests excess operating cash in certificates
of deposit and U.S. government bonds and other bonds that are subject to changes
in short-term interest rates. Accordingly,  the Company believes that the market
risk arising from its holding of these  financial  instruments  is minimal.  The
Company  made  purchases  of  available-for-sale  securities  in the  amounts of
$7,826,910 in 1998 and $18,121,444 in 1997.

<PAGE>

Item 8. Financial Statements And Supplemental Data




         Index to Financial Statements                         Page

         Independent Auditors' Report                            26
         Balance Sheets                                          27
         Statements of Operations                                28
         Statements of Stockholders' Equity                      29
         Statements of Cash Flows                                30
         Notes to Financial Statements                           31-40

<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,  1998 and  1997  and the  related  statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1998. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the financial position of Patient  Infosystems,  Inc. at December 31,
1998 and 1997,  and the results of its operations and its cash flows for each of
the three  years in the  period  ended  December  31,  1998 in  conformity  with
generally accepted accounting principles.





Deloitte & Touche LLP
Rochester, New York
February 5, 1999
(February 26, 1999 as to Note 10)



<PAGE>

<TABLE>
<CAPTION>

PATIENT INFOSYSTEMS, INC 

BALANCE SHEETS
DECEMBER 31, 1998 AND 1997


                                                                           

                                                                 1998             1997
                                                                 ----             ----
<S>                                                              <C>             <C>  
ASSETS ..................................................          

CURRENT ASSETS:
  Cash and cash equivalents .............................   $  6,316,955    $    779,317
  Available-for-sale securities .........................      1,029,674      12,232,335
  Accounts receivable, net ..............................      1,320,626         412,956
  Prepaid expenses and other current assets .............        219,978         405,507
                                                                 -------         -------
                                                                            
        Total current assets ............................      8,887,233      13,830,115

PROPERTY AND EQUIPMENT, net .............................      1,182,494         958,965

OTHER ASSETS ............................................        450,000         247,393
                                                                 -------         -------
                                                                          
TOTAL ASSETS ............................................   $ 10,519,727    $ 15,036,473
                                                            ============    ============
                                                                           

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable ......................................   $    304,436    $     89,674
  Accrued salaries and wages ............................        277,931         320,272
  Accrued expenses ......................................         58,904          79,236
  Deferred revenue ......................................        253,068          67,549
  Accrued loss on development contracts .................           --            30,997
                                                                 -------          ------
                                                                 
        Total current liabilities .......................        894,339         587,728

COMMITMENTS  (Note 7)

STOCKHOLDERS' EQUITY:
  Common stock - $.01 par value:  shares - authorized:
    20,000,000; issued and outstanding:  1998 - 8,020,042
    1997 - 8,011,522 ....................................         80,200          80,115
  Additional paid-in capital ............................     21,561,094      21,550,009
  Other comprehensive income ............................           --             5,060
  Accumultated deficit ..................................    (12,015,906)     (7,186,439)
                                                             -----------      ---------- 
                                                                            
        Total stockholders' equity ......................      9,625,388      14,448,745
                                                               ---------      ----------
                                                              
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..............   $ 10,519,727    $ 15,036,473
                                                            ============    ============
                                                                            
</TABLE>

See notes to financial statements.
<PAGE>

<TABLE>
<CAPTION>

PATIENT INFOSYSTEMS, INC 

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                                                             

                                                   1998           1997           1996
                                                   ----           ----           ----

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

REVENUES ...................................   $ 2,344,072    $ 2,062,373    $   845,412
                                               -----------    -----------    -----------
                                                                             

COSTS AND EXPENSES:
  Cost of revenue ..........................     2,529,619      1,629,128        748,322
  Sales and marketing ......................     1,795,921      1,609,837        913,547
  General and administrative ...............     3,062,204      2,442,269      1,759,044
  Research and development .................       298,686        489,115        310,552
                                                   -------        -------        -------
                                                                          
        Total costs and expenses ...........     7,686,430      6,170,349      3,731,465
                                                 ---------      ---------      ---------
                                                                          
OPERATING LOSS .............................    (5,342,358)    (4,107,976)    (2,886,053)

Other income ...............................       556,592        835,116         81,333
                                                   -------        -------         ------
                                                                          
Loss before income taxes ...................    (4,785,766)    (3,272,860)    (2,804,720)

Income taxes ...............................        43,701         (9,509)         1,716
                                                    ------         ------          ----- 

NET LOSS ...................................   $(4,829,467)   $(3,263,351)   $(2,806,436)
                                               ===========    ===========    =========== 
                                                                           
NET LOSS PER SHARE - BASIC
   AND DILUTED .............................   $      (.60)   $      (.41)   $      (.44)
                                               ===========    ===========    =========== 
                                                                       
WEIGHTED AVERAGE COMMON
   AND POTENTIAL COMMON SHARES .............     8,018,398      7,980,094      6,347,716
                                                 =========      =========      =========
                                                                             
</TABLE>

See notes to financial statements 
<PAGE>

<TABLE>
<CAPTION>

PATIENT INFOSYSTEMS, INC

STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                                                                                                                 

                                                                         Additional     Other                         Total
                             Preferred Stock        Common Stock         Paid-in     Comprehensive    Accumulated   Stockholders'
                            Shares     Amount     Shares      Amount     Capital        Income          Defict        Equity
                            ------     ------     ------      ------     -------        ------          ------        ------

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

Balances, January 1, 1996   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        --              --              --

Comprehensive Income (loss)
   Net loss for the year end
       December 31, 1996       --        --         --         --             --          --       (2,806,436)     (2,806,436)
                                                                                                                                   
                              -----------------------------------------------------------------------------------------------
Total Comprehensive loss       --        --         --         --             --          --              --       (2,806,436)
                              -----------------------------------------------------------------------------------------------     
  
Balances, December 31, 1996    --        --     7,653,202    76,532     19,300,293        --       (1,116,652)     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 options      --        --        58,320       583         12,433        --              --           13,016

Comprehensive Income (loss)
   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)
                              -----------------------------------------------------------------------------------------------
Total Comprehensive loss       --        --         --          --            --          --              --       (3,258,291)
                              -----------------------------------------------------------------------------------------------
                                                                                                                                   
Balances, December 31, 1997    --        --     8,011,522    80,115     21,550,009       5,060     (1,116,652)     14,448,745

Compensation expense related
to issuance of stock warrants  --        --         --          --           7,388        --              --            7,388

Exercise of stock options      --        --         8,520        85          3,697        --              --            3,782

Comprehensive Income (loss)
   Unrealized loss on investments
      available-for-sale       --        --         --          --            --          --              --           (5,060)

   Net loss for the year end
      December 31, 1998        --        --         --          --            --          --       (4,829,467)     (4,829,467)
                                                                                                                                   
                              -----------------------------------------------------------------------------------------------
Total Comprehnsive loss        --        --         --          --            --        (5,060)           --       (4,834,527)
                              -----------------------------------------------------------------------------------------------       
Balances, December 31, 1998    --      $ --     8,020,042   $80,200    $21,561,094   $    --      $(1,116,652)    $ 9,625,388
                              ===============================================================================================
                             
</TABLE>
                                                                                
See notes to financial statements.
<PAGE>

<TABLE>
<CAPTION>

PATIENT INFOSYSTEMS, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                                                                      1998            1997            1996
                                                                                      ----            ----            ----
<S>                                                                                <C>           <C>             <C>
OPERATING :
  Net loss ..................................................................   $ (4,829,467)   $ (3,263,351)   $ (2,806,436)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization .........................................        366,474         293,763         186,050
      Loss on sale of property ..............................................          1,350           2,171            --
      Amortization of premiums and discounts on available-for-sale securities       (142,054)       (209,832)           --
      Compensation expense related to issuance of stock warrants ............          7,388           8,283          13,208
      Increase in accounts receivable .......................................       (907,670)        (26,741)       (382,160)
      Decrease (increase) in prepaid expenses and other current assets ......        185,529        (234,980)       (146,542)
      Increase (decrease) in accounts payable ...............................        214,762        (107,000)       (166,095)
      (Decrease) increase in accrued salaries and wages .....................        (42,341)        193,243          78,770
      (Decrease) increase in accrued expenses ...............................        (20,332)       (132,221)        192,076
      Increase (decrease) in deferre+d revenue ...............................        185,519        (515,234)        414,728
      (Decrease) increase in accrued loss on development contracts ..........        (30,997)        (36,142)         67,139
                                                                                     -------         -------          ------
                                                                             
            Net cash used in operating activities ...........................     (5,011,839)     (4,028,041)     (2,549,262)
                                                                                  ----------      ----------      ----------        
INVESTING:
  Property and equipment additions ..........................................       (594,663)       (394,161)       (494,577)
  Proceeds from sale of property ............................................          3,310           1,299            --
  Purchases of available-for-sale  securities ...............................     (7,826,910)    (18,121,444)           --
  Maturities of available-for-sale securities ...............................     19,166,565       6,104,000            --
  Increase in other assets ..................................................       (202,607)       (247,393)           --
                                                                                    --------        --------         --------      
                                                                                                             
          Net cash provided by (used in) investing activities ...............     10,545,695     (12,657,699)       (494,577)
                                                                                  ----------     -----------        -------- 
 FINANCING:
  Proceeds from issuance of common and preferred stock, net .................          3,782       2,245,016      17,081,800
  (Decrease) increase in accrued initial public offering costs ..............           --          (446,568)        446,568
                                                                                       -----        --------         -------
                                                                                                               
            Net cash provided by financing activities .......................          3,782       1,798,448      17,528,368
                                                                                       -----       ---------      ----------
                                                                                                           
NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS .......................      5,537,638     (14,887,292)     14,484,529

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR .........................................................        779,317      15,666,609       1,182,080
                                                                                     -------      ----------       ---------
  CASH AND CASH EQUIVALENTS AT
  END OF YEAR ...............................................................   $  6,316,955    $    779,317    $ 15,666,609
                                                                                ============    ============    ============
  
Supplemental disclosures of cash flow information
   Cash paid (received) for income taxes, net ...............................   $     43,701    $     (9,509)   $      1,716
                                                                                ============    ============    ============
                                                                                                                
</TABLE>

See notes to financial statements.

<PAGE>
         PATIENT INFOSYSTEMS, INC.


         NOTES TO FINANCIAL STATEMENTS
         YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996                          


1.       BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

         Organization - Patient  Infosystems,  Inc. ("the Company")  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 cash equivalents and available-for-sale
         securities.  The  carrying  values  of cash  and cash  equivalents  and
         available-for-sale securities approximate fair value.

         Revenue  Recognition  and Deferred  Revenue - The  Company's  principal
         source  of  revenue  to date  has  been  from  contracts  with  various
         pharmaceutical   companies  and  managed  care  organizations  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,  1998 and  1997,  approximately
         $755,000  (33%) and  $925,800  (45%),  respectively,  of the  Company's
         revenues arose from  contracts with one customer.  At December 31, 1998
         and  1997,  accounts  receivable  included  balances  of  $736,650  and
         $231,484, 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 1998 or 1997.

         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  (SFAS) 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. (See Note 8)

         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 1998 or 1997.

         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. 130 - In 1998,  the
         Company  adopted  SFAS No. 130,  "Reporting  Comprehensive  Income" and
         restated the prior years'  financial  statements  to conform to the new
         reporting standard.  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 be reported in a financial statement
         that  is  displayed  with  the  same   prominence  as  other  financial
         statements.  Comprehensive income for the Company includes net loss and
         the unrealized gain or loss on available-for-sale securities.

         Statement  of Financial  Accounting  Standards  No. 131 - In 1998,  the
         Company  adopted  SFAS  No.  131,  "Disclosures  about  Segments  of an
         Enterprise  and Related  Information."  The  Statement  requires that a
         public company report financial and descriptive  information  about its
         reportable operating segments using the management approach.  SFAS also
         requires  that  segment  information  of earlier  years be  restated to
         conform to the new standard. The adoption of SFAS No. 131 had no effect
         on the consolidated financial position,  results of operations, or cash
         flows of the Company.

         Statement of Position 97-2 - In 1998, the Company adopted  Statement of
         Position (SOP) 97-2,  "Software  Revenue  Recognition,"  which provides
         guidance  on  applying  generally  accepted  accounting  principles  in
         recognizing revenue on software transactions. The implementation of SOP
         97-2  did not have a  material  effect  on the  Company's  revenues  or
         earnings.

         Statement of Financial Accounting Standards No. 133 - In June 1998, the
         Financial Accounting Standards Bard issued SFAS No. 133, Accounting for
         Derivative  Instruments and Hedging  Activity,  which is required to be
         adopted by the Company in 2001.  The Statement will require the Company
         to  recognize  all  derivatives  on the  balance  sheet at fair  value.
         Derivatives  that are not  hedges of  underlying  transactions  must be
         adjusted to fair value through  income.  If the  derivative is a hedge,
         depending  on the  nature of the  hedge,  changes  in the fair value of
         derivatives  will either be offset  against the change in fair value of
         the hedged assets,  liabilities or firm commitments through earnings or
         recognized  in other  comprehensive  income  until the  hedged  item is
         recognized  in  earnings.  The  ineffective  portion of a  derivative's
         change  in fair  value  will be  immediately  recognized  in  earnings.
         Management has not yet determined the effect SFAS No. 133 will have, if
         any,  on the  Company's  consolidated  financial  position,  results of
         operations or cash flows.

         Reclassifications   -  Certain   1997  and  1996   amounts   have  been
         reclassified to conform with 1998 presentations.

2.       AVAILABLE -FOR-SALE SECURITIES 

         The following is a summary of available-for-sale securities at December
         31: 

                                                     1998           1997
                                                     ----           ----

          Certificates of Deposit                $1,029,674    $     -
          U.S. Government Securities                  -         12,232,335
                                                 ----------     ----------
                                                 

          Total Available-for-Sale Securities    $1,029,674    $12,232,335
                                                 ==========    ===========
                                                   
         Realized  and  unrealized   gains  and  losses  on   available-for-sale
         securities  were  immaterial as of and for the years ended December 31,
         1998, 1997 and 1996.

         The cost and estimated fair value of  available-for-sale  securities by
         contractual maturity at December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                                             
                                          Amortized        Fair       Amortized        Fair
                                             Cost          Value         Cost          Value
                                             ----          -----         ----          -----
<S>                                       <C>            <C>            <C>        <C>  
Due in one year or less ................ $ 1,029,674   $ 1,029,674   $ 2,824,280   $ 2,823,704
Due after one year through two years ...        --            --       9,400,389     9,408,631
                                           ---------     ---------     ---------     ---------
                                                                                                  
                                         $ 1,029,674   $ 1,029,674   $12,224,669   $12,232,335
                                         ===========   ===========   ===========   ===========
</TABLE>
                                                                                

3.       PROPERTY AND EQUIPMENT

         Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>


                                                     1998         1997
                                                     ----         ----
<S>                                               <C>         <C>    

Computer software ............................   $  545,467   $  380,831
Computer equipment ...........................      795,996      600,279
Telephone equipment ..........................      301,172      189,479
Leasehold improvements .......................       43,979       41,504
Office furniture and equipment ...............      363,387      249,291
                                                    -------      -------
                                                              
                                                  2,050,001    1,461,384

Less accumulated depreciation and amortization      867,507      502,419
                                                    -------      -------
                                                              
Property and equipment, net ..................   $1,182,494   $  958,965
                                                 ==========   ==========
</TABLE>
                                                            

4. INCOME TAXES

         Income tax expense for the years ended December 31, 1998, 1997 and 1996
         consists of:
<TABLE>
<CAPTION>

                                 1998      1997       1996
                                 ----      ----       ----
<S>                            <C>       <C>         <C> 
Current:
  U.S. federal ............   $  --     $  --      $  --
  State and local .........    43,701    (9,509)     1,716

Deferred:
  U.S. federal ............      --        --         --
  State and local .........      --        --         --
                              -------   -------     ------

Income Tax Expense (Credit)   $43,701   $(9,509)   $ 1,716
                              =======   =======    =======
</TABLE>
                                                   

 
         Income tax expense for the years ended December 31, 1998, 1997 and 1996
         differed from the amounts  computed by applying the U.S. federal income
         tax rate of 34 percent as a result of the following:
<TABLE>
<CAPTION>
                                                        1998           1997           1996
                                                        ----           ----           ----
<S>                                                 <C>            <C>            <C>    
Computed "expected" tax expense .................   $(1,627,160)   $(1,109,539)   $  (953,605)

Increase in income taxes resulting from:

     Change in the valuation allowance
       for deferred tax assets ..................     1,628,997      1,094,833        949,726

     State and local income taxes, net of federal
       income tax benefit .......................        28,843         (6,276)         1,133

     Other, net .................................        13,021         11,473          4,462
                                                         ------         ------          -----
                                                                                 
                                                    $    43,701    $    (9,509)   $     1,716
                                                    ===========    ===========    ===========
                                                                                  
</TABLE>


<PAGE>


         The tax effects of temporary  differences that give rise to significant
         portions of the deferred tax assets and  deferred  tax  liabilities  at
         December 31, 1998 and 1997 are presented below.
<TABLE>
<CAPTION>

                                                                              1998           1997
                                                                              ----           ----
<S>                                                                     <C>             <C>   
Deferred tax assets: .................................................      
Accounts receivable, principally due
  to allowance for doubtful accounts .................................   $    20,000    $    20,000
Deferred revenue .....................................................       101,000         27,000
Compensation .........................................................        89,000         67,000
Net operating loss carryforwards .....................................     4,569,000      2,711,000
Tax credit carryforwards .............................................        59,000         59,000
Other ................................................................        20,000         12,000
                                                                              ------         ------
     Total gross deferred tax assets .................................     4,858,000      2,896,000

     Less valuation allowance ........................................    (4,711,000)    (2,737,000)
                                                                          ----------     ---------- 

     Net deferred tax assets .........................................       147,000        159,000
                                                                             -------        -------

Deferred tax liabilities:

Property and equipment, principally due to differences in depreciation
  and amortization ...................................................       (69,000)       (66,000)
Other ................................................................       (78,000)       (93,000)
     Total gross deferred tax liability ..............................      (147,000)      (159,000)
                                                                            --------       -------- 

     Net deferred tax assets .........................................   $    --        $    --
                                                                         ===========    ===========
</TABLE>
 
         At December 31, 1998, the Company has net operating loss carryforwards
         for federal income tax purposes of approximately  $11,437,000 which are
         available to offset future  federal  taxable  income,  if any,  through
         2018.  The Company also has  investment  tax credit  carryforwards  for
         federal  income  tax  purposes  of  approximately   $59,000  which  are
         available to reduce future federal income taxes, if any, through 2018.

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
         SFAS  No.  123,   "Accounting   for   Stock-Based   Compensation".   No
         compensation  cost has been  recognized for the Stock Option Plan as it
         relates to  employees  since the  exercise  price of the options on the
         date of grant approximated fair market value. 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>


                                    1998             1997             1996
                                    ----             ----             ----
<S>                           <C>              <C>               <C>    

Net loss - as reported ....   $  (4,829,467)   $  (3,263,351)   $  (2,806,436)

Net loss - pro forma ......   $  (4,849,320)   $  (3,406,973)   $  (2,879,457)


Net loss per share - basic
  and diluted - as reported   $       (0.60)   $       (0.41)   $        (.44)


Net loss per share - basic
  and diluted - pro forma .   $       (0.60)  $        (0.43    $        (.46)

</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 5.32% for year ended December 31, 1998, 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 .94 for year  ended  December  31,  1998,  .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>

                                                           Outstanding  Weighted-Average
                                                             Options     Exercise Price
                                                             -------     --------------
<S>                                                          <C>        <C>    
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 granted during the year ended December 31, 1998
  (weighted average fair value of $1.38) ................    399,200    $   1.38

Options forfeited by holders during the year
  ended December 31, 1998 ...............................   (320,820)   $   3.15

Options exercised during the year ended December 31, 1998     (8,520)   $   0.44
                                                              ------   
Options outstanding at December 31, 1998 .................   867,920    $   0.91
                                                             -------    

Options exercisable at December 31, 1998 .................   290,816    $   0.49
                                                             -------    

Options available for grant at December 31, 1998 ........    212,080
                                                             -------
</TABLE>

         The following table summarizes  information  concerning outstanding and
         exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
                                         Options Outstanding            Options Exercisable
                                         -------------------            -------------------
                                              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                   376,200          1.29   $      .30      240,120   $     0.29

 $1.00 - $1.99                  488,740          4.07   $     1.37       47,716   $     1.36

 $2.00 - $4.99                    2,980          --     $     3.15        2,980   $     3.15
                                  -----                                   -----  
                                867,920                                 290,816
                                =======                                 =======
</TABLE>

         The Company also has outstanding stock purchase warrants  entitling the
         holders to purchase a total of 23,400 shares of common stock at a price
         of $1.38 per share  (weighted  average  exercise  price of  $1.38).  At
         December 31, 1998, 9,360 of these warrants are currently  vested,  with
         the remaining  14,040 warrants vesting at 20% per year. The Company has
         recorded  compensation  costs in connection  with the issuance of these
         warrants for the years ended  December  31, 1998,  1997 and 1996 in the
         amount of $7,388, $8,283 and $13,208 respectively.

7.       COMMITMENTS

         The Company  leases  office  space for its main  operating  facility in
         Rochester,  New York,  under an operating lease  agreement  expiring in
         November 1999. Additionally, the Company subleases office space for its
         Wayne,   Pennsylvania  facility  under  an  operating  lease  agreement
         expiring  in May  2001  and  leases  office  space  for  its  Berkeley,
         California  facility  under an operating  lease  agreement  expiring in
         October  1999.  Rent  expense  from these  leases  for the years  ended
         December 31,  1998,  1997 and 1996 was  $210,375,  $154,907 and $70,479
         respectively.

         At December 31, 1998,  future minimum lease payments under these leases
         are summarized as follows:


                       1999                                     $ 253,301
                       2000                                        40,200
                       2001                                        16,750
                                                                   ------
                                                                $ 310,251
                                                                =========

8.       NET LOSS PER SHARE

         Net loss per share is based on 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
         the Company  incurred a loss in 1998 and 1997,  outstanding  options to
         purchase  867,920 and 798,060  shares of common  stock at $.14 to $4.99
         per share,  were not  included in the  computation  of diluted loss per
         share as they would be antidilutive.
<TABLE>
<CAPTION>

                                                                           Net Loss         Shares     Per-Share
                                                                           Numerator      Denominator    Amount
                                                                           ---------      -----------    ------
<S>                                                                                 <C>             <C>           <C>  
For the year ended December 31, 1998
     Basic and diluted ................................................   $(4,829,467)     8,018,398   $  (0.60)
                                                                          ===========      =========   ======== 
                                                                                                                 
For the year ended December 31, 1997
     Basic and diluted ................................................   $(3,263,351)     7,980,094   $  (0.41)
                                                                          ===========      =========   ======== 
                                                                                                                 
For the year ended December 31, 1996
     Loss available to Common Shareholders ............................   $(2,806,436)

     Weighted average common stock outstanding ........................                    3,678,435

     Series A Convertible Preferred Stock .............................                    1,296,000

     Series B Convertible Preferred Stock .............................                      437,500

     Potential common shares calculated
     using the treasury stock method:
          Series B Convertible Preferred
            Stock issued May and June 1996 ............................                      177,365
          Common stock options ........................................                      758,416
                                                                          -------------------------------------

     Basic and diluted ................................................   $(2,806,436)     6,347,716   $  (0.44)
                                                                          ===========      =========   ======== 
</TABLE>

9.       JOINT VENTURE

         On  November  12,  1998,  the  Company  entered  into a  joint  venture
         agreement with MacLean Hunter Publishing Limited to market and sell, on
         an exclusive  basis in Canada,  products and services  developed by the
         Company and to jointly manage,  finance and operate the business entity
         Patient Infosystems Canada, Inc., which is dedicated to the development
         of a commercially viable business built around the sale,  marketing and
         service of the Company's products and services.

10.      SUBSEQUENT EVENT

         On  February  26,  1999,   the  Company,   through  its  newly  formed,
         wholly-owned   subsidiary,   Patient  Infosystems   Acquisition  Corp.,
         acquired substantially all of the assets of HealthDesk  Corporation,  a
         consumer  healthcare software company primarily engaged in the business
         of designing and developing  Internet based products in the healthcare,
         wellness and disease management industries. The acquired assets include
         inventory,  intellectual property, hardware and software. The principal
         consideration  paid for the transaction was $761,463.  The Company paid
         for the acquisition using its available cash.

11.      QUARTERLY RESULTS (UNAUDITED)

         The  following  is a  summary  of  the  unaudited  interim  results  of
         operations by quarter:

<TABLE>
<CAPTION>
                                                                      First         Second         Third         Fourth
                                                                      -----         ------         -----         ------
<S>                                                              <C>            <C>            <C>            <C>   
Year ended December 31, 1998:
Revenues .....................................................   $   290,354    $   874,119    $   465,181    $   714,418
Gross margin .................................................       (94,933)       324,848       (243,116)      (172,346)
Net loss .....................................................    (1,055,038)      (680,017)    (1,348,843)    (1,745,569)
Net loss per common share ....................................         (0.13)         (0.08)         (0.17)         (0.22)

Year ended December 31, 1997:
Revenues .....................................................   $   523,477    $   570,330    $   433,059    $   535,507
Gross margin .................................................       172,407         35,839         34,363        190,636
Net loss .....................................................      (588,524)      (892,906)    (1,097,562)      (684,359)
Net loss per common share ....................................         (0.07)         (0.11)         (0.14)         (0.09)

</TABLE>

<PAGE>

     Item 9. Changes in and  Disagreements  With  Accountants  on Accounting and
     Financial Disclosures.
                  None

<PAGE>
                                    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, 1998.

     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, 1998.

     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, 1998.


     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, 1998.

     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, 1998.
                                                          
                                    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, 1998.

         (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:

               10.15 Asset  Purchase  Agreement  dated as of September  29, 1998
               among  Patient  Infosystems  Acquisition  Corp.,  the Company and
               HealthDesk Corporation.

               10.16 Amendment to Asset Purchase  Agreement dated as of December
               1, 1998 among Patient Infosystems  Acquisition Corp., the Company
               and HealthDesk Corporation.

               10.17 Second  Amendment to Asset Purchase  Agreement  dated as of
               February 1, 1999 among Patient Infosystems Acquisition Corp., the
               Company and HealthDesk Corporation.

               10.18 Sublease dated as of September 29, 1998 between  HealthDesk
               Corporation and Patient Infosystems Acquisition Corporation.

               10.19 Consulting  Agreement dated as of March 8, 1999 between the
               Company and John V. Crisan.

               10.20 Lease  Agreement  dated as of February 22, 1995 between the
               Company and Conifer Prince Street Associates.

               10.21 First  Addendum to Lease  Agreement  dated as of August 22,
               1995 between the Company and Conifer Prince Street Associates.

               10.22 Second Addendum to Lease Agreement dated as of November 17,
               1995 between the Company and Conifer Prince Street Associates.

               10.23  Third  Addendum to Lease  Agreement  dated as of March 28,
               1996 between the Company and Conifer Prince Street Associates.

               10.24 Fourth  Addendum to Lease Agreement dated as of October 29,
               1996 between the Company and Conifer Prince Street Associates.

               10.25 Fifth Addendum to Lease  Agreement dated as of November 30,
               1996 between the Company and Conifer Prince Street Associates.

               10.26 Sixth Addendum to Lease  Agreement dated as of November 24,
               1997 between the Company and Conifer Prince Street Associates.

               10.27 Sublease  Agreement  dated as of March 30, 1998 between the
               Company and Medecision, Incorporated.

               10.28  Joint  Venture  and  Stockholders  Agreement  dated  as of
               November  12,  1998  between  the  Company  and  Maclean   Hunter
               Publishing Limited.

               10.29 Lease  Agreement  dated as of October 12, 1998  between the
               Company and Parker Associates.

         (11)     Statement of Computation of Per Share Earnings


         (21)     Subsidiaries

         (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.

<PAGE>

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


         PATIENT INFOSYSTEMS, INC.

         By:      /s/ Donald A. Carlberg          April 13, 1999
                  ----------------------          --------------
                  Donald A. Carlberg              Date
                  Director, President, and Chief Executive Officer



         Pursuant to the  requirements  the Securities and Exchange Act of 1934,
         this report has been signed below by the following persons on behalf of
         the registrant and in the capacities and on the dates indicated.


By: /s/ Donald A. Carlberg                        April 13, 1999
--------------------------                        --------------
Donald A. Carlberg                                Date
Director, President and Chief Executive Officer
(Principal Executive Officer)

By: /s/ John V. Crisan                            April 13, 1999
----------------------                            --------------
John V. Crisan                                    Date
Chief Financial Officer
(Principal Financial and Accounting Officer)

By: /s/ Derace L. Schaffer, M.D.                  April 13, 1999
--------------------------------                  --------------
Derace L. Schaffer, M.D.                          Date
Chairman of the Board

By: /s/ John Pappajohn                            April 13, 1999
----------------------                            --------------
John Pappajohn                                    Date
Director

By: /s/ Barbara J. McNeil, M.D., Ph.D.            April 13, 1999
--------------------------------------            --------------
Barbara J. McNeil, M.D., Ph.D.                    Date
Director

By: /s/ Carl F. Kohrt, Ph.D.                      April 13, 1999
----------------------------                      --------------
Carl F. Kohrt, Ph.D.                              Date
Director

By: /s/ David B. Nash, M.D.                       April 13, 1999
---------------------------                       --------------
David B. Nash, M.D.                               Date
Director