UNITED STATES
                         SECURITIES EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                       OR
              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                     For the fiscal year ended May 31, 1997

                           Commission File No. 0-27614

                           MEDICUS SYSTEMS CORPORATION

        A Delaware Corporation IRS      Employer Identification No.36-4056769

                          One Rotary Center, Suite 1111
                            Evanston, Illinois 60201
                                 (847) 570-7500

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 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. _X_ Yes ___ 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. ( )

     As of August  21,  1997,  there  were  5,483,207  shares  of  common  stock
outstanding,  and the aggregate market value of the common stock (based upon the
August  21,  1997  closing  sale price on the Nasdaq  National  Market)  held by
non-affiliates was approximately $23,290,034.

                       Documents Incorporated by Reference

     Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on November 18, 1997 (Part III).
<PAGE>
                                     PART I

ITEM 1. BUSINESS

General

     Medicus Systems Corporation ("Medicus" or the "Company") develops, markets,
and supports a family of specialized  integrated  software  products utilized by
healthcare financial administrators,  physicians and nursing executives,  health
information  and other  administrative  departments  to capture,  structure  and
analyze clinical,  operational and financial  information.  Medicus' specialized
software applications and services allow these professionals to measure, monitor
and manage  organizational  performance  and  optimize  outcomes.  Many of these
products  incorporate  features that enable them to  facilitate  the exchange of
data with  information  systems  used by other  Medicus  clients.  Medicus  also
provides product-related  maintenance and support services. During the year, the
Company  discontinued the line of business which managed the information systems
of healthcare delivery organizations.

     Medicus'  products are currently used by more than 1,200  clients.  Clients
include  hospitals,   academic  medical  centers,  managed  care  organizations,
community  care  networks,   integrated   health   systems,   primary  care  and
multi-specialty physician groups, government agencies, and other organizations.

Basis of Presentation

     Prior  to  March 1,  1996,  the  Company's  predecessor  (the  "Predecessor
Corporation")  operated a software  and related  services  business  and a small
managed care business.  In February 1995, the Predecessor  Corporation adopted a
formal plan to discontinue  its managed care  business,  transfer the assets and
liabilities  of this business to a newly-formed  subsidiary,  and distribute the
shares of this newly-formed  subsidiary to its  stockholders.  In November 1995,
following  meetings  with the  Internal  Revenue  Service and in order to insure
qualification  of the  transaction  as a  tax-free  spin-off,  the  form  of the
transaction was changed.  Instead of transferring  the assets and liabilities of
its  managed  care  business  to  a  newly-formed  subsidiary,  the  Predecessor
Corporation formed a new Delaware subsidiary, Medicus Systems Software, Inc., to
which it  transferred  all of its  assets  and  liabilities  excluding  only the
defined assets and liabilities of its managed care business.  In turn, the stock
of this newly-formed  subsidiary was distributed on a  share-for-share  basis to
the stockholders of the Predecessor  Corporation (the "Distribution"),  the name
of the subsidiary was changed to Medicus  Systems  Corporation,  and the name of
the Predecessor Corporation was changed to Managed Care Solutions, Inc. ("MCS").
Simultaneously,  the outstanding stock of the Predecessor  Corporation was split
in reverse  one-for-three  so that following the  Distribution,  the Predecessor
Corporation's  stockholders  owned one share of the Company (the  successor,  in
substance,  to the Predecessor Corporation which owned all of the assets and was
liable  for  all  obligations  of  the  Predecessor   Corporation  except  those
specifically related to the Predecessor Corporation's managed care business) and
one-third  of a share  of MCS for  every  share of the  Predecessor  Corporation
previously owned.

     Although  the  Company  is, in  substance,  the  Predecessor  Corporation's
successor,  the financial statements of the Company have been prepared as if the
Company had  operated as a  free-standing  entity for all the periods  presented
(excluding certain incremental  corporate expenses that would have been incurred
had it operated on a stand-alone basis).  Accordingly,  the financial statements
include those assets,  liabilities,  revenues and expenses directly attributable
to the  Company's  operations  and  exclude  those  specifically  related to the
managed care  business.  The Company has adopted this  presentation  because the
Company  believes that this  presentation  most fairly  represents its financial
condition,  results of operations and changes in  stockholders'  equity and cash
flows.  The  financial  statements  included  herein  for  periods  prior to the
Distribution do not necessarily  reflect what the financial position and results
of  operation  of the Company  would have been had it operated as a  stand-alone
entity  during  the  periods  covered,  and  may  not be  indicative  of  future
operations or financial position.


<PAGE>
Software Products and Services

     Provider  organizations  are  continuously   challenged  by  purchasers  to
demonstrate  improvement  toward optimal financial and clinical outcomes as they
compete for managed care contracts.  Medicus'  specialized products are designed
to capture,  structure and analyze data in such a way as to assist  providers in
optimizing  the outcomes that are most important to buyers.  Medicus  focuses on
providing  products  in  specialized  market  niches  that are  critical  to the
information  and decision  support  needs of healthcare  providers.  The Company
employs standard interface systems to accomplish the necessary  integration with
existing transaction processing systems.

     Clinical Data Systems (CDS)

     CDS is an integrated  encoding  system and data repository that enables the
healthcare provider to classify,  capture,  validate, and analyze clinical data.
The system is a tool that implements a uniform clinical  database to measure and
monitor patient,  clinical and financial  outcomes.  This expert encoding system
aids in optimizing  prospective  payment  reimbursement  for both  inpatient and
ambulatory  care  services.  It  captures  and  validates  clinical  indicators,
severity and risk factors as well as patient  demographics  data,  diagnoses and
procedures. Clinical data forms the basis upon which (i) the healthcare provider
identifies cases for clinical appropriateness studies, (ii) the Joint Commission
on Accreditation of Healthcare  Organizations (JCAHO), The National Committee on
Quality  Assurance  utilizing its Health Plan and Employer Data and  Information
Set (HEDIS), and state agencies measure  performance,  and (iii) the health care
provider  estimates  service  volumes and costs in  competing  for managed  care
contracts.  By  validating  data at the point of  capture  and  linking  it to a
Diagnosis  Related Group (DRG), the clinical data system creates an accurate and
complete data repository that provides the information  required to manage costs
and improve clinical effectiveness and service efficiency.

     As of May 31,  1997,  the Company had  licensed CDS software for use by 600
hospitals and other users.  These other users include the Health Care  Financing
Administration  (HCFA),  several  professional  peer review  organizations,  the
American Hospital Association (AHA), and numerous consulting and auditing firms.
The CDS product line currently includes two integrated modules:

     The WinCoder+ module is a Windows-based encoding tool released in 1995. The
WinCoder+    module   supports    integrated   data   encoding,    editing   and
diagnosis-related   grouping  for  all  patient   types,   including   inpatient
admissions, emergency room admissions,  referrals, and ambulatory admissions and
procedures.  Utilizing  "expert-system"  logic,  WinCoder+  delivers  advice and
classification guidance to identify errors of omission in clinical documentation
in an effort to optimize Medicare and capitated  reimbursement.  The system also
captures  reliable  and  consistent  clinical  data for both the  financial  and
clinical  users.  The  WinCoder+  product  includes  a  Clinical  and  Financial
Optimizer  which uses  "expert-system"  logic to assist the user in  identifying
errors of omission in clinical  documentation,  and  proposes  related  codes or
other  alternatives  which may be  applicable  and  result  in more  appropriate
reimbursement.

     The WinCOLLECT  module organizes and structures a uniform clinical data set
to  describe  a  patient  population,   including  its  clinical  and  financial
characteristics,  and to  evaluate  the  quality  and  appropriateness  of care.
WinCOLLECT  is a  data  capture  system  that  validates  entries  for  internal
consistency at the point of  collection.  Because each  organization  has unique
requirements and is responding to volatile external forces, this module supports
user customization with user-defined tables and calculated fields. WinCOLLECT is
a core technology for the healthcare  organization  to support medical  records,
quality  assurance,  physician  credentialing,   utilization  review,  discharge
planning,  infection control and risk management functions. This module captures
the  clinical  data  necessary to meet the external  reporting  requirements  of
JCAHO, HCFA,  professional review  organizations,  state data agencies and other
organizations.


<PAGE>
     The CDS products  are  licensed  under  non-exclusive  perpetual  licenses.
Leasing options are also offered.  Total client fees for CDS products range from
$15,000 to $250,000 and are comprised of license fees charged per module and per
user,  implementation,  hardware and  technical  fees.  At the time a license is
granted,  Medicus  generally  enters  into a one-year  maintenance  and  support
agreement  for an annual fee that is based on a  percentage  of the then current
license fee and which is renewable at then current rates for successive one-year
terms.

Decision Support Systems (DSS)

     This division offers two lines of products, Enterprise Analyst and Resource
Case Management.  As of May 31, 1997, Medicus had licensed its DSS software for
use by 150 hospital customers.

     The Company recently  introduced to the market the Enterprise Analyst - the
next  generation of Decision  Support  Systems to assist  integrated  healthcare
delivery  systems in responding to the rapidly changing  healthcare  environment
via a  powerful  client/server  architecture  and one of the most  comprehensive
functionalities available today.

     The  Enterprise  Analyst is a fully  integrated,  enterprise  wide decision
support  system  application  designed to allow our  customers  to maximize  all
components  of  value  -  quality,  outcomes  and  cost  containment.  With  the
Enterprise  Analyst ,  healthcare  organizations  capture,  manage,  and analyze
clinical  and  operational  costs,  case mix data,  payer  contracts,  physician
profiles,  resource utilization,  and patient care outcomes data. The Enterprise
Analyst is comprised of three integrated modules:

     Enterprise Costing allows a healthcare  enterprise to measure,  monitor and
compare costs across the continuum of care for all care  settings.  This product
allows  healthcare  managers  to easily  obtain the  information  needed to make
optimal decisions regarding resource allocation and cost containment. The system
supports flexible cost determination based on a range of methodologies including
micro-costing,  engineered  standards,  relative  value  units,  activity  based
costing, and ratio of cost to charges.

     Enterprise  Case  Mix and  Contract  Management  (CM2) is a  powerful,  new
combination  case mix and  contract  management  system.  CM2  features  a fully
integrated  clinical and financial  database.  The system is designed to analyze
clinical  outcomes  against key  variables  such as revenues,  costs,  severity,
physician to discover the techniques that result in desirable outcomes and lower
costs. CM2 is designed to calculate reimbursement based on payer contract terms,
track  contractual   allowances  accurately  to  provide  precise  profitability
measures and variance  analyses of payer  contracts,  generate payer and patient
letters,  and  provide  a  contract  modeling  capability  that can  handle  any
reimbursement model for more accurate negotiations.

     Enterprise   Performance   Measurement   and  Modeling  (PMM)   effectively
integrates  strategic planning with the operational  planning process across the
enterprise.  PMM  works in a  distributed  environment  and  provides  a dynamic
statistics file for comprehensive flexible budgeting and financial modeling. The
system  supports  enterprise wide detailed wage and salary  planning,  financial
forecasting,   cost  allocation,   contractual  allowance   determination,   and
procedural rate setting.

     Resource Case  Management,  a line of DSS products,  provides case managers
and other personnel the ability to evaluate and manage patient care resources on
a daily  basis.  The  Resource  Case  Management  system is  comprised  of three
integrated  modules  each of which  addresses a distinct and logical part of the
case management and analysis process:

     The Pathway  Generator  module analyzes  historical case data and generates
resource pathways.

     The Pathway Monitor module tracks actual  resource  consumption and related
variation, reports performance, and assigns pathways to cases.

     The Reimbursement module calculates expected reimbursement.


<PAGE>
     The DSS products are licensed under non-exclusive perpetual licenses. Total
client fees for DSS products  range from  $25,000 to $300,000,  depending on the
size of the healthcare  organization,  and are comprised of license fees charged
for the  specific  modules  that are  licensed,  along with  implementation  and
technical fees. At the time a license is granted,  the Company  generally enters
into a one-year  maintenance  and  support  agreement  for an annual fee that is
typically  based on a percentage  of the then  current  license fee and which is
renewable at then current rates for successive one-year terms.

Patient Focused Systems (PFS)

     This division's main product is InterAct 2000, which is a modular system of
software  tools and  methodologies  designed  to manage  patient  care  resource
utilization  through workload  measurement,  staffing  against budget,  cost and
productivity  reporting,  and  employee  scheduling.  As of May  31,  1997,  PFS
software products were licensed to 450 healthcare  organizations.  InterAct 2000
includes two integrated modules:

     The Workload/Productivity module incorporates a proprietary, research-based
workload  measurement  methodology  applicable to all  medical/surgical,  mental
health,  ambulatory,  perinatal,  and dialysis populations.  This module uses an
organization's  own  financial  and  quality  of  care  objectives  to  generate
assessments  of workload and staffing  needs against the  department's  resource
utilization budget.  Workload/Productivity  tracks direct care provider costs so
managers  can  understand  and  control  variances  in  revenue,   expenses  and
productivity.  It also provides data for  comparing  and  benchmarking  resource
utilization     relative    to    similar     institutions    or    departments.
Workload/Productivity  enables the user to fulfill  JCAHO  patient care resource
management requirements.

     The Personnel/Scheduler  module creates balanced staff schedules based on a
specific   scheduling   algorithm   and   a   set   of   user   defined   rules.
Personnel/Scheduler  also  maintains  ongoing  personnel  records with available
interfaces to payroll and time and attendance systems.

     The PFS products are licensed under non-exclusive perpetual licenses. Total
client fees for PFS products  range from  $20,000 to $100,000,  depending on the
size of the healthcare  organization,  and are comprised of license fees charged
for the  specific  modules  that are  licensed  along  with  implementation  and
technical fees. At the time a license is granted,  Medicus generally enters into
a one-year  maintenance and support agreement for an annual fee that is based on
a  percentage  of the then  current  license fee and which is  renewable at then
current rates for successive one-year terms.

Discontinued Operation

     Medicus formerly offered information  management services to operate all or
part  of the  information  systems  division  of  selected  healthcare  provider
organizations.  These services were generally performed on the client's premises
by Medicus personnel that functioned as though they were the client's employees.

     While the information systems management market presents several attractive
opportunities,  it is dominated by many  companies  with  significantly  greater
financial and technical resources.  As a result, price competition is strong and
sales cycles are traditionally  much longer in this sector than in the Company's
core  software and service  product  areas.  Because of this,  and the fact that
information systems management is not a strong fit with the Company's main focus
on healthcare  decision  support system  opportunities,  the Company  decided to
discontinue this line of business.  The Company will continue providing services
under its existing  contract  until May 31,  1998,  the  expiration  date of the
contract.


<PAGE>
Maintenance and Support Services

     Medicus provides training and support services during client implementation
and thereafter,  as required.  Maintenance and support services include software
updates,  enhancements and services which are purchased by substantially  all of
the Company's  clients under renewable annual  contracts.  The Company maintains
logging,  notification,  and  follow-up  procedures  to  track  client  problems
encountered in implementing and operating its products.  It also conducts client
conferences to exchange ideas  regarding  product usage and product  extensions.
Management  believes that these  conferences are valuable in gathering ideas for
future products as well as enhancements to the Company's current product line.

Recurring Revenue

     The Company's recurring revenue (defined as revenue generated pursuant to a
multi-year  contract or pursuant to an ongoing  contract,  such as the Company's
standard form of annual  maintenance  and technical  support  agreements,  which
contemplate continued renewals) was $10.1 million, $9.4 million and $9.0 million
for the three fiscal years ended May 31, 1997, 1996 and 1995, respectively.

Backlog

     As of May 31,  1997 and 1996,  the  Company's  backlog  (which  consists of
signed contracts or purchase orders for products and services which are expected
to be realized as revenue over the next twelve months plus remaining  revenue on
annual  maintenance and support  contracts) was  approximately  $9.2 million and
$8.1 million, respectively. Included in backlog is $4.2 million and $4.9 million
of deferred  maintenance and support for the fiscal years ended May 31, 1997 and
1996, respectively.

Markets

     The  primary  market  for the  Company's  products  and  services  includes
hospitals,  integrated  delivery systems and academic  medical centers.  Table I
below  summarizes  the  Company's  primary  and  secondary  markets for its main
product  lines and the number of clients that have been  licensed to use each of
the Company's three main software products and services.
<PAGE>
<TABLE>
<CAPTION>

                                                 Table I

                                       THE COMPANY'S MAJOR MARKETS

      Products and Services                    Primary Markets                       Secondary Markets
      ---------------------                    ---------------                       -----------------
<S>                                  <C>                                         <C>    

Clinical Data Systems                 All hospitals - more than 5,000             Physician group practices,
                                      potential customers, of which               ambulatory care facilities,
                                      600 are clients                             governmental review
                                                                                  agencies and consulting
                                                                                  firms


Decision Support Systems              All hospitals - more than 5,000             Managed care
                                      potential customers, of which               organizations and
                                      150 are clients                             physician group practices

Patient Focused Systems               Hospitals with more than                    Hospitals  with fewer than
                                      50 beds - more than 3,850                   50  beds, outpatient ambulatory
                                      potential  customers, of which              care  clinics, nursing homes and
                                      450  are  clients                           mental health facilities
                                                                                
</TABLE>
<PAGE>

<PAGE>
     As healthcare  delivery  systems and their respective  information  systems
have become more integrated,  the Company has also placed an increasing emphasis
on the  integration  of its  products  by  implementing  a  strategy  focused on
upgrading  its client base to new  versions of its  software  and  cross-selling
additional products to its more than 1,200 existing  customers.  Because many of
these  clients use only one or two of the  Company's  products,  priced  between
$15,000 and $300,000,  the Company believes this strategy  presents an excellent
growth opportunity.

Market Environment

     The  shift of  patient  care  delivery  to less  costly  settings,  such as
outpatient  clinics and physician  offices,  has accelerated  the  consolidation
trend of healthcare delivery organizations.  Employers and government purchasers
of healthcare services have dramatically shifted providers' financial incentives
by  capping   expenditures   through  various   contract   pricing   mechanisms.
Additionally,  these  consumers  are  devising  new,  objective  indicators  for
measuring clinical performance. Healthcare delivery organizations have responded
by radically  restructuring care delivery  processes.  To support these delivery
process  changes,  providers  need  access to better  data and more  information
analysis tools.

     Successful  healthcare  organizations  require new cost,  profitability and
performance  measurement systems to understand their patient populations and the
cost and  outcomes of the care they  provide.  Market  forces are  significantly
altering the relationships among physicians,  hospitals,  employers and insurers
(private  and  government).  New  paradigms  for  care  delivery,  such  as case
management,  critical or clinical  pathways and outcomes  monitoring,  require a
link between service costs and clinical  outcomes.  The demand for products such
as the Company's  financial and clinical  decision  support  products is growing
rapidly within the context of this increasingly  competitive and price-sensitive
market.

Competition

     The  healthcare  decision  support  software and services  market is highly
competitive.  The  Company  competes  with  several  firms in each of its market
niches,  although  no one firm  competes  directly  in all  niches  in which the
Company  offers  products.  Competing  firms  vary  in  size  and in  geographic
coverage.  A number of them have greater financial and management resources than
the  Company.   The  Company  believes  that  the  principal  factors  affecting
competition are product functionality, analytical methodologies, flexibility and
ease of use, product enhancements, reliability and quality of implementation and
technical  support,  documentation,  size of installed client base,  competitive
pricing,  and  corporate  reputation.  The  Company  believes  that it  competes
favorably in these areas.

Marketing and Sales

     Medicus sells its products through its own direct sales  organization.  The
Company's sales force has historically been organized along product lines but is
being reorganized to sell the full range of the Company's  products.  Individual
product  sales  are  made  by  sales   personnel   and  managers.   Large  sales
opportunities  are pursued by a team including a corporate officer and sales and
technical  personnel.  The Company's products are also marketed under agreements
with accounting firms, consultants and hospital alliances.

     The Company establishes market presence by publishing articles,  presenting
talks at professional  meetings,  assuming leadership  positions in professional
organizations,  participating in trade shows and advertising in trade magazines.
Prospective  clients are  identified  through these and other methods  including
direct mail,  telemarketing,  product seminars,  and requests for proposals from
healthcare organizations.


<PAGE>
Technology

     The Company's software products,  which operate on microcomputers in both a
standalone  and  network  environment  utilizing  Windows  NT,  MS-DOS  and UNIX
operating  systems,  are  developed  with the  objective of providing  efficient
operation,   portability  among  mainstream  hardware  platforms  and  networks,
flexibility  in  supporting  client  needs,  integrated  modularity,   and  cost
effective  support and enhancements.  For this reason,  VB, C, C++ and SmallTalk
programming languages are utilized for software development. Relational database
management systems for software products are  SQL-compatible,  with Oracle being
the  Company's  database  system of choice.  The  support of  industry  standard
technologies as well as  Company-developed  proprietary  development tools allow
effective and efficient  product  development and integration  among current and
future  products.  The  Company's  experience  with  system  interfaces  and the
methodologies   used  for  interfacing   systems  allows   effective  and  rapid
connectivity of Company modules with other client systems.

Product Development

     The software  industry is characterized by rapid  technological  change and
the need for a continuing  high level of  expenditures  for the  development and
improvement of software  products and services.  Medicus'  approach to designing
and  developing  successful  products  is market  driven and based on working in
close  collaboration with its clients.  In developing its products,  the Company
utilizes common software design and development tools and techniques.

     In order to maintain and improve the market  acceptance of its products and
services,  the  Company  believes it must  maintain  its  commitment  to product
development and enhancement. For the three fiscal years ended May 31, 1997, 1996
and 1995,  the  Company  spent $4.6  million,  $4.1  million  and $4.1  million,
respectively,  on research  and  development,  representing  56%, 39% and 30% of
software products and services  revenue.  These  expenditures  include expensed,
capitalized and client-funded research and development spending.

     As  of  May  31,  1997,  the  Company  employed  40  professional  computer
programmers and technical  personnel.  Most of the Company's technical personnel
are involved,  at different times and in varying degrees, in product development
and enhancement.

Product Protection

     The  Company  owns  various  trademarks  and  servicemarks,  including  the
federally  registered  servicemark  "Medicus."  It does not own any  patents  or
registered   copyrights.   The  Company   believes  that  patent  and  copyright
protection,  even  if  available,  are  less  important  in  its  industry  than
innovative software engineering skills, technological and engineering experience
and  marketing  capabilities.  The  Company  relies  largely  upon  its  license
agreements with clients and its own security systems, confidentiality procedures
and  employee  nondisclosure  agreements  to maintain  the trade  secrecy of its
products.  While the  enforceability of such agreements  cannot be assured,  the
Company  believes  that they  provide a  deterrent  to  unauthorized  use of the
Company's proprietary information.

Employees

     As of May 31, 1997, the Company employed 161 persons, of whom 65 were based
at the Company's Evanston,  IL corporate offices, 45 were based at the Company's
Alameda, CA office, 16 were based at the Company's Chesterfield,  MO office, and
35 were based at various other sales and service centers.


<PAGE>
ITEM 2. PROPERTIES

     The  Company's  principal  office is  located in leased  space in  Evanston
containing  approximately 23,200 square feet of space. The lease expires on June
30, 2006. The annual rent for fiscal 1998 for this space is $468,000.

     The Company also leases space for offices in Alameda,  CA and Chesterfield,
MO. The leases for these two facilities expire on October 31, 1999 and April 30,
1998,  respectively,  and have an  aggregate  annual rent of $340,000 for fiscal
1998.

ITEM 3. LEGAL PROCEEDINGS

     On July 11, 1997, St. Joseph Hospital filed a lawsuit,  St. Joseph Hospital
v. Medicus  Systems  Corporation,  File No.  97-36574,  in the District Court of
Harris County,  Texas.  The Company  accepted service of the complaint on August
12, 1997. The complaint  alleges  primarily breach of a contract to provide case
management software,  and seeks unspecified damages,  including attorney's fees.
The  Company  vigorously  denies any  liability,  and intends to file its answer
denying the plaintiff's  claims prior to September 8, 1997, the date such answer
is due.  The chief  executive  officers of the Company  and the  plaintiff  have
recently met to discuss the matter.

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

     The following  matters were submitted to a vote of security  holders during
the Medicus Systems  Corporation  Annual Meeting of Stockholders  held March 19,
1997:
<TABLE>
<CAPTION>


                                                      Votes Cast           Authority
Description of Matter                                     For              Withheld
---------------------                                 ----------           ---------
<S>                                                  <C>                <C>                  <C>                 <C>    

1.   Election of Directors
       William G. Brown                                6,134,711            160,232
       Jon E.M. Jacoby                                 6,134,897            160,046
       Richard C. Jelinek                              6,134,897            160,046
       John P. Kunz                                    6,134,897            160,046
       Risa Lavizzo-Mourey                             6,134,897            160,046
       Walter J. McNerney                              6,134,797            160,146
       Gail L. Warden                                  6,134,897            160,046

                                                      Votes Cast          Votes Cast                                 Broker
                                                          For               Against            Withheld            Non-Votes
                                                      ----------          ----------           --------            ---------
2.   Proposal to approve the Company's
     1996 C.E.O. Replacement Stock Option
     Plan                                              3,972,182            309,015             87,477             1,926,269
3.   Proposal to approve the Company's
     1996 C.E.O. Special Stock Option Plan             4,046,681            251,180             89,168             1,907,914
4.   Proposal to approve the amendments to
     and restatement of the Company's 1989,
     1991, 1993, 1993 Performance and 1994
     Stock Option Plans                                5,878,995            311,162             16,096                88,690
5.   Proposal to approve the Company's
     1997 Employee Stock Option and
     Restricted Stock Plan                             3,714,827            754,942             12,513             1,812,661
6.   Proposal to approve agreements pursuant
     to which the Company would repurchase
     Common Stock and Voting Preferred
     Stock from Richard C. Jelinek                     4,304,924             43,168             20,583             1,926,268

</TABLE>

<PAGE>
                                                      PART II

ITEM 5.  MARKET FOR THE  COMPANY'S  COMMON  STOCK AND  RELATED  STOCKHOLDER
         MATTERS

     The Company's  common stock is traded on the Nasdaq  National  Market under
the  symbol  "MECS".  Trading  commenced  March  1,  1996  as a  result  of  the
Distribution.

     The following table sets forth, for the periods indicated, the high and low
reported  sale prices for the common  stock as  reported on the Nasdaq  National
Market since the Distribution on March 1, 1996.


        Fiscal Year 1996                                        High       Low

             Fourth Quarter                                    $ 9.00    $ 5.25
 
       Fiscal Year 1997

             First Quarter                                       6.50      4.75
             Second Quarter                                      6.31      4.50
             Third Quarter                                       7.50      4.38
             Fourth Quarter                                      6.50      5.25

     There were 185 holders of record and approximately 2,160 beneficial holders
of the Company's common stock as of August 21, 1997.

     The  Predecessor  Corporation  (prior  to March 1,  1996)  and the  Company
(beginning  March 1, 1996)  declared  quarterly  dividends of $0.03 per share in
each of the  quarters in fiscal  years 1995 and 1996.  The Board of Directors of
the Company has  determined  not to pay  dividends  on the common  stock for the
foreseeable future.

     On December 5, 1996,  the Company  reached an agreement  in principle  (the
"Agreement") with its founder,  Richard C. Jelinek, to purchase from Mr. Jelinek
and a trust of which Mr.  Jelinek is a  beneficiary  (the  "Trust")  one million
shares of Common  Stock and 500  shares of Voting  Preferred  Stock.  Also,  Mr.
Jelinek  agreed to resign as Chairman  and agreed,  among other  things,  not to
attempt to seek voting  control of the Company for a period of five years.  (Mr.
Jelinek  continues to serve as a Director.) In exchange,  the Company  agreed to
pay Mr.  Jelinek  and the Trust  $4.5  million  in cash and $2.0  million  in 8%
two-year  promissory  notes,  and to issue to Mr.  Jelinek and the Trust 400,000
five-year  warrants to purchase  Common Stock at $8.00 per share.  The Company's
Board of Directors  approved the Agreement on January 2, 1997, and the Company's
stockholders  approved the Agreement at the Annual  Meeting of  Stockholders  on
March 19, 1997.  Neither the  warrants  nor the shares of Common Stock  issuable
upon exercise of the warrants were registered  under the Securities Act of 1933,
pursuant to the exemption contained in Section 4(2) of that Act.

ITEM 6.   SELECTED FINANCIAL DATA

     The  selected  financial  data  presented  below has been  derived from the
financial  statements  of the Company and the Report on Form 10 filed on January
25, 1996. The financial statements for each of the years in the five-year period
ended  May 31,  1997 have  been  audited  by Price  Warehouse  LLP,  independent
accountants.  Revenues and operating income (loss) have been restated to exclude
results  from  the  Company's  discontinued  operation.  Also,  the  assets  and
liabilities  related to this  separate  line of business  are  presented  as net
assets of  discontinued  operations  on the 1997 and 1996  Balance  Sheet.  This
selected  financial  data  should  be read  in  conjunction  with  "Management's
Discussion  and Analysis of Results of Operations  and Financial  Condition" and
the Company's Financial Statements and Notes.

<PAGE>
<TABLE>
<CAPTION>


                                                                 Year Ended May 31,
                                   -------------------------------------------------------------------------------
                                         1997             1996            1995           1994           1993
                                   ---------------- --------------- ----------------- ------------- --------------
<S>                                  <C>              <C>              <C>            <C>            <C>   

Statement of Operations:
   Revenues                           $ 18,269,700     $ 19,794,179     $  22,507,267  $  21,336,870  $ 18,140,323
   Operating income (loss)              (7,355,865)      (7,444,704)        3,540,262      4,379,146     3,225,905
   Net income (loss)                    (4,220,018)      (3,725,991)        3,024,493      3,224,711     2,116,869

Loss per common share*                   $   (0.70)            -                 -              -             -       
Pro forma earnings (loss) per common
      share*                                  -        $      (0.57)    $        0.45  $        0.51  $       0.39

Balance Sheet:
   Working capital                    $  2,090,534     $ 12,627,354     $  17,149,499  $  21,983,507  $  9,411,327
   Total assets                         22,848,672       27,688,565        30,881,842     35,509,776    17,804,670
   Stockholders' equity                  9,501,609       18,201,237        22,304,371     25,574,678    11,460,792
</TABLE>

     * Loss per common share and pro forma earnings  (loss) per common share are
based upon the actual capital  structure of the Company since March 1, 1996, and
the capital structure of the Predecessor Corporation prior to March 1, 1996.


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

     This report  contains  statements  that may be considered  forward-looking,
such as the discussion of the Company's  strategic  goals, new products and cash
flows.  These statements  speak of the Company's  plans,  goals or expectations,
refer to estimates, or use similar terms. Actual results could differ materially
from the results indicated by these statements  because the realization of those
results is subject to many uncertainties.

     Some of these uncertainties that may affect future results are discussed in
more detail  below under  "Management's  Discussion  and  Analysis of  Financial
Condition  and  Results  of  Operations'  and  under  "Item 1 -  Business."  All
forward-looking  statements included in this document are based upon information
presently  available,  and the  Company  assumes  no  obligation  to update  any
forward-looking statement.

RESULTS OF OPERATIONS

     The following table sets forth for the periods indicated (i) the percent of
revenue  represented  by  certain  line  items in the  Company's  Statements  of
Operations  and  (ii) the  percentage  change  in each  line item from the prior
period.
<TABLE>
<CAPTION>
                                                                                                  Percentage
                                                                                             Increase (Decrease)
                                                   
                                                     Percent of Revenues                ------------------------------
                                                 For the years ended May 31,               1996 to         1995 to
                                          ------------------------------------------
                                             1997           1996            1995             1997            1996
                                         ------------- --------------- --------------   --------------- --------------
<S>                                     <C>           <C>             <C>              <C>             <C>  

Revenues:
   Software products and services         44.6%         52.4%           60.0%            (21.5)%         (23.1)%
   Maintenance and support services       55.4          47.6            40.0               7.4             4.5
                                         ------------- --------------- --------------   --------------- --------------
                                         100.0         100.0           100.0              (7.7)          (12.1)
                                         ------------- --------------- --------------   --------------- --------------
Costs and expenses:
   Software products and services <F1>    36.0          37.5            30.5             (24.5)           (5.5)
   Maintenance and support services <F1>  50.4          59.1            48.5              (8.4)           27.2
                                         ------------- --------------- --------------   --------------- --------------
                                          44.0          47.8            37.7             (15.0)           11.3

   Marketing, general and  
     administrative                       54.9          57.0            37.0             (11.1)           35.6
   Research and development               16.8           9.3             9.6              67.0           (14.6)
   Restructuring charges                  15.3          23.5              -              (39.9)            N/M
   Stock repurchase                        9.3           -                -                N/M             N/M
                                         ------------- --------------  --------------   --------------- --------------
                                                                         
                                         140.3         137.6            84.3              (5.9)           43.6
                                                                         
                                         ------------- --------------- --------------   --------------- --------------              
Operating income (loss)                  (40.3)        (37.6)           15.7              (1.2)           N/M
Interest and other income                  2.0           2.8             3.0             (33.9)          (18.2)
                                         ------------- --------------- --------------   --------------- --------------
Income (loss) from continuing operations
   before income taxes                   (38.3)        (34.8)           18.7               1.4             N/M
Provision for (benefit from) income 
   taxes                                 (14.1)        (14.2)            6.7              (8.8)            N/M
                                         ------------- --------------- --------------   --------------- --------------
Income (loss) from continuing operations (24.2)        (20.6)           12.0               8.5             N/M
Discontinued operation, net of taxes       1.1           1.8             1.4             (42.6)            7.1
                                         ------------- --------------- --------------   --------------- --------------
Net income (loss)                        (23.1)%       (18.8)%          13.4%              N/M             N/M
                                         ============= =============== ==============   =============== ==============
<FN>
<F1> Shown as a percent of related revenues.
</FN>
</TABLE>

     (1) Shown as a percent of related revenues.

     Operating  revenues are derived from two sources:  (1) license fees and the
related  services  for  licensing  the  Company's  software  products;  and  (2)
maintenance and support services related to such software products.


<PAGE>
Comparison of Fiscal Year 1997 to Fiscal Year 1996

Software Products and Services

     Software  products and services  revenues  decreased 22% to $8.1 million in
fiscal 1997 compared to $10.4  million in fiscal 1996.  The decrease in revenues
was  attributable,  in  part,  to  the  delay  in the  release  of  certain  new
Windows-based  products,  including  the next  generation  of  Decision  Support
Systems.  Also  contributing  to the decline was a continued  lengthening of the
sales  cycle,  due to complex  implementation  plans  related to the  increasing
number of  clients  migrating  from the  DOS-based  to  Windows-based  products,
principally  in the  CDS  division.  Additionally,  the  Company  experienced  a
continuing  weakness in its existing  markets and product lines,  resulting from
price pressures and consolidations in the healthcare industry and in the managed
care  environment.  Costs  and  expenses  for  software  products  and  services
decreased 25% to $2.9 million compared to $3.9 million in fiscal 1996. Costs and
expenses as a percentage of related revenue were 36% and 38% for fiscal 1997 and
1996, respectively.  The decrease was due to cost containment measures initiated
by management and a lower volume of services provided.

Maintenance and Support Services

     Maintenance and support services revenues  increased 7% to $10.1 million in
fiscal 1997 compared to $9.4 million in fiscal 1996.  The increase was primarily
due to the  continuing  migration  of  clients  to the  Company's  Windows-based
products,  along with modest price  increases  for certain  products.  Costs and
expenses decreased 8% to $5.1 million in fiscal 1997 compared to $5.6 million in
fiscal 1996.  Costs and expenses as a percentage of related revenue were 50% and
59% for fiscal 1997 and 1996, respectively.  The decrease was primarily due to a
shift in focus of technical personnel from maintenance activities to development
activities to complete certain new Windows-based products.

Marketing, General and Administrative

     Marketing,  general  and  administrative  expenses  decreased  11% to $10.0
million in fiscal 1997  compared to $11.3  million in fiscal 1996.  The decrease
primarily  was due to higher  expenses in the prior year related to the increase
in the provision for doubtful  accounts,  and expenses related to the separation
of the managed care business.

Research and Development

     Total   expenditures  for  research  and  development   (including  amounts
capitalized and funded by clients)  increased 12% to $4.6 million in fiscal 1997
from $4.1 million in fiscal  1996.  Research and  development  costs  charged to
expense  were $3.1  million in fiscal 1997  compared  to $1.8  million in fiscal
1996. The Company did not obtain funding from clients under development  service
agreements  during the twelve  months ended May 31,  1997,  compared to $218,000
obtained  in fiscal  1996,  for its  research  and  development  efforts.  These
development  service  agreements  provide  for  retention  of  ownership  of the
products developed by the Company.  The Company capitalized software development
costs of $1.8 million in fiscal 1997 and $2.0 million in fiscal 1996 pursuant to
Statement of Financial  Accounting Standards No. 86. Costs capitalized in fiscal
1997 were  partially  offset by $240,000 in  provisions  recorded as part of the
abandonment  of certain  development  efforts.  Total  research and  development
expenditures  (including amounts capitalized and funded by clients) were 56% and
39% of software  products and  services  revenues  during  fiscal 1997 and 1996,
respectively.  During fiscal 1997, the Company's  development efforts focused on
the Clinical Data Systems and Decision  Support  Systems  product lines.  During
fiscal 1996,  the  Company's  development  efforts  focused on the Resource Case
Management  System,  Medicus  Architecture  (MACH 1), and the  Decision  Support
Systems product line.


<PAGE>
Restructuring Charges

     As part  of an  ongoing  evaluation,  the  Company  refined  its  strategic
planning  process  during  fiscal  1997,  and  assessed  continuing  obligations
associated with the  implementation of its strategic plan. The Company continued
the  process of  implementing  its plans  during 1997 and,  following  the stock
repurchase  from its founder in the quarter  ended  February 28, 1997,  recorded
$2.8 million in restructuring  charges to complete its plan,  including accruing
costs to reorganize the Company's business units, to abandon certain development
efforts, and to increase the allowance for doubtful accounts.  Specifically, the
Company  decided to relocate  operations  for its Clinical Data Systems  ("CDS")
division, based in Alameda, CA, to the Company's Evanston, IL corporate offices.
Costs  associated with the relocation,  which is expected to be completed during
the next nine months,  included costs to cancel  existing lease  agreements,  to
terminate  employees  and to write down  abandoned  assets.  The Company did not
accrue estimated incremental costs of approximately $1.3 million associated with
the  relocation.  Such costs relate to the orderly  transition  of the division,
will be  incurred  during  fiscal  1998  and are  not  accruable  as part of the
restructuring  charge  under  generally  accepted  accounting   principles.   In
addition,  the Company  increased  it reserves  for product  line exit costs and
severance  costs  that  relate  to the  remaining  customers  of the  previously
discontinued  Clinical Case  Management  Systems  ("CCM")  product  line.  Also,
certain product  development  efforts for the Company's  Patient Focused Systems
("PFS") products were abandoned, and the associated development costs, which had
been  previously  capitalized,  along with other related product line exit costs
were expensed. The Company has increased its allowance for doubtful accounts due
to the potential for certain  additional  billed and unbilled  accounts becoming
uncollectible  as a result of the decisions  discussed  above.  Direct costs and
expenses of the restructuring were 15% of fiscal 1997 revenues.

Stock Repurchase

     On December 5, 1996,  the Company  reached an agreement  in principle  (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek,
and a trust of which he is a beneficiary  (the  "Trust"),  one million shares of
Common Stock and 500 shares of Voting Preferred Stock.  Also, Mr. Jelinek agreed
to resign as Chairman  and agreed,  among other  things,  not to attempt to seek
voting  control of the  Company  for a period of five years.  In  exchange,  the
Company  agreed to pay Mr.  Jelinek and the Trust $4.5  million in cash and $2.0
million in 8% two-year  promissory  notes,  and to issue to Mr.  Jelinek and the
Trust 400,000 five-year warrants to purchase Common Stock at $8.00 per share.

     The  Company's  results  of  operations  for the year  ended  May 31,  1997
included $1,690,042 in related costs and expenses, as a result of the Agreement.
Amounts in excess of the market price of the Common Stock and the exercise price
of the Voting Preferred Stock, aggregating $1,319,000,  have been expensed. Also
included are $371,042 in investment banking and other professional fees incurred
to consummate the Agreement.

Interest and Other Income

     Interest and other income decreased 34% to $367,000 in fiscal 1997 compared
to $556,000 in fiscal 1996, primarily due to lower average cash balances.

Income Taxes

     The Company's  effective income tax rate benefit decreased to 37% in fiscal
1997 compared to 41% in fiscal 1996. The decrease was primarily  attributable to
the fiscal 1997 net operating loss and stock repurchase transaction.

Discontinued Operation

     Results from the Company's  discontinued line of business  decreased 43% to
$199,000 in fiscal 1997  compared to $347,000 in fiscal 1996,  primarily  due to
lower revenues from the contract to manage the information  systems functions at
Bethesda, Inc. in Cincinnati, Ohio.

Comparison of Fiscal Year 1996 to Fiscal Year 1995

Software Products and Services

     Software products and services  revenues  decreased 23% to $10.4 million in
fiscal 1996  compared to $13.5  million in fiscal 1995.  The decrease in revenue
was  attributable,  in part,  to a general  weakness  in the  Company's  primary
markets  and product  lines,  resulting  from  continued  consolidations  in the
healthcare   industry  and  growing  price  pressures  in  the  current  managed
healthcare  environment.  Also  contributing  to the decline  were delays in the
release of certain Windows-based products,  higher than expected turnover in the
sales force, the increasing complexity and size of new contracts and the related
lengthening  of  the  sales  cycle.  Additionally,   the  Company  continued  to
experience increased competition in many of its markets.  Costs and expenses for
software  products  and services  decreased 6% to $3.9 million  compared to $4.1
million in fiscal 1995.  Costs and expenses as a percentage  of related  revenue
were 38% and 31% for fiscal 1996 and 1995, respectively. The increase was due to
the mix of software, hardware and implementation revenue.

Maintenance and Support Services

     Maintenance and support services  revenues  increased 5% to $9.4 million in
fiscal 1996 compared to $9.0 million in fiscal 1995.  The increase was primarily
due to a larger  installed base of licensed  products and modest price increases
for the Company's maintenance and support services. Costs and expenses increased
27% to $5.6 million  compared to $4.4 million in fiscal 1995. Costs and expenses
as a  percentage  of related  revenue were 59% and 49% for fiscal 1996 and 1995,
respectively.  The increase was  primarily  due to a shift in focus of technical
personnel to maintenance  activities from development  activities  during fiscal
1996, and incremental  expenses  related to supporting  clients on the Company's
new  Windows-based  products as well as the  technology  platforms  historically
support by the Company.

Marketing, General and Administrative

     Marketing,  general  and  administrative  expenses  increased  36% to $11.3
million in fiscal 1996  compared to $8.3  million in fiscal  1995.  The increase
primarily  resulted  from an increase in the  provision  for doubtful  accounts,
following a comprehensive analysis necessitated by the current market conditions
in the  healthcare  industry,  and  expenses  related to the  separation  of the
managed care business.

Research and Development

     Total   expenditures  for  research  and  development   (including  amounts
capitalized and funded by clients)  remained  constant at $4.1 million in fiscal
1996 and 1995.  Research  and  development  costs  charged to expense  were $1.8
million in fiscal 1996  compared  to $2.2  million in fiscal  1995.  The Company
obtained funding from clients under product  development  service  agreements of
$218,000  and $509,000 in fiscal 1996 and 1995,  respectively,  for its research
and  development  efforts.  These  development  service  agreements  provide for
retention of ownership  of the  products  developed by the Company.  The Company
capitalized  software  development costs of $2.0 million in fiscal 1996 and $1.4
million in fiscal 1995 pursuant to Statement of Financial  Accounting  Standards
No.  86.  Total  research  and  development   expenditures   (including  amounts
capitalized  and funded by clients)  were 39% and 30% of software  products  and
services revenues during fiscal 1996 and 1995, respectively. During fiscal 1996,
the  Company's  development  efforts  focused on the  Resource  Case  Management
System,  Medicus Architecture (MACH 1), and the Decision Support Systems product
line.  During fiscal 1995,  the  Company's  development  efforts  focused on the
Clinical Case  Management  System,  the Resource  Case  Management  System,  the
WinCoder+ and Workload/Productivity modules.


<PAGE>
Restructuring Charges

     During  February,  1996,  the Company  commenced a process to evaluate  its
current strategic  position,  including the markets it expects to pursue and its
product offerings in those chosen markets. As a result of decisions made as part
of this evaluation  process,  the Company recorded $4.7 million in restructuring
charges,  representing  costs and expenses to exit  certain  product  lines,  to
abandon  certain  product  development  efforts and to provide  for  liabilities
resulting  from the strategic  redirection of the Company,  including  severance
costs.  Specifically,  the Company  decided to exit the Clinical Case Management
Systems and the  Executive  Information  Systems  product  lines.  Additionally,
product  development  efforts for the Clinical Data Systems  Wincoder V2 project
and  portions  of the MACH 1 project,  which will no longer be  utilized  in the
Medicus product line,  were abandoned and their  associated  development  costs,
which had been previously capitalized, were expensed. Severance costs associated
with an officer and several employees, in addition to the write-off of a portion
of the  Contract  Management  System,  were also  included in the  restructuring
charge.  Direct costs and expenses of the restructuring  were 24% of fiscal 1996
revenues.

Interest and Other Income

     Interest and other income decreased 18% to $556,000 in fiscal 1996 compared
to $680,000 in fiscal 1995, primarily due to lower average cash balances.

Income Taxes

     The  Company's  effective  income tax rate  increased to 41% in fiscal 1996
compared to 36% in fiscal 1995. The increase was primarily  attributable  to the
fiscal 1996 suspension of the research and development tax credit.

Discontinued Operation

     Results from the Company's  discontinued  line of business  increased 7% to
$347,000 in fiscal 1996  compared to $324,000 in fiscal 1995,  primarily  due to
higher revenues from the contract to manage the information systems functions at
Bethesda, Inc. in Cincinnati, Ohio.

FINANCIAL CONDITION

Liquidity and Capital Resources

     As a result of the Company's commitment to expand its software products and
services,  funds are  required  to support  its  ongoing  product  research  and
development  activities  and the  infrastructure  required to serve its customer
base.  Historically,  cash  generated  from its operations has been an important
contributor  to  these  needs.  As a  result  of the  market  factors  adversely
affecting fiscal 1997 results, as well as the stock repurchase transaction,  the
Company was required to use a significant  portion of its cash  reserves.  It is
expected that, following the restructuring efforts described herein, the Company
will return to a situation  where cash from operations will provide an important
source of  liquidity  to support its normal  capital  needs,  although  numerous
factors,  including  any  reductions  in revenues  from  currently  anticipated
amounts, could affect the amount of such cash available.


<PAGE>
     At May 31, 1997, the Company had available  cash reserves of  approximately
$1.2  million.  In  addition,  the Company  had a $2.5  million  standby  credit
facility  available.  $1.0 million of the  principal  amount of the Company's 8%
promissory  notes,  issued in  connection  with the Company's  stock  repurchase
agreement,  is due in March 1998.  In  addition,  the Company  anticipates  cash
outlays  of  approximately  $3.2  million  in the next  nine  months,  resulting
primarily from its decision to reorganize its business units and to exit certain
product lines.

     The Board of Directors of the Company has  determined  not to pay dividends
on  the  common  stock  for  the  foreseeable  future.  While  the  Company  has
experienced  negative cash flows from operating  activities  during the past two
fiscal years, management believes that, as a result of significant reductions in
expenses, its cash flows will improve. While there can be no assurance that this
will occur, the Company currently  believes that it will have adequate financial
resources available from operations and the available credit facility to provide
sufficient   liquidity  to  meet  its  ordinary  capital  requirements  for  the
foreseeable future, including the March 1998 payment on the promissory notes and
cash outlays related to the Company's restructuring plan.

     During its second fiscal quarter,  the Company bills its clients in advance
for the next calendar year's  maintenance and support  services  provided on its
software  products.  This  generates  an  increase  in  the  Company's  accounts
receivable and deferred  revenue  balances  during those periods,  and increases
cash  balances in  subsequent  months as the  related  accounts  receivable  are
collected.

Impact of Inflation

     To date,  inflation has not had a material impact on the Company's revenues
or income.=====================================================================

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO FINANCIAL STATEMENTS                                             Page

Report of Independent Accountants                                          F-2

Balance Sheets as of May 31, 1997 and 1996                                 F-3

Statements of Operations for the years ended May 31, 
1997, 1996 and 1995                                                        F-4

Statements of Changes in Stockholders' Equity for 
the years ended May 31, 1997, 1996 and 1995                                F-5

Statements of Cash Flows for the years ended May 31, 1997, 1996 and 1995   F-7

Notes to Financial Statements                                              F-8


<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and
Stockholders of Medicus Systems Corporation

     In our opinion,  the accompanying balance sheets and the related statements
of  operations,  of changes in  stockholders'  equity and of cash flows  present
fairly,  in all material  respects,  the financial  position of Medicus  Systems
Corporation  at May 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three  years in the  period  ended May 31,  1997,  in
conformity  with  generally  accepted  accounting  principles.  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 of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.




Price Waterhouse LLP

Chicago, Illinois
July 23, 1997

<PAGE>
<PAGE>
<TABLE>
<CAPTION>

                                       MEDICUS SYSTEMS CORPORATION
                                              BALANCE SHEETS
                                          May 31, 1997 and 1996



                       A S S E T S                                                    1997            1996
                                                                                ---------------- ---------------
<S>                                                                            <C>              <C>  

Current assets:
   Cash and cash equivalents                                                     $ 1,205,135      $   765,312
   Short-term investments                                                               -           7,705,380
   Accounts receivable and unbilled services, net of allowance for doubtful
     accounts of $1,713,008 and $1,222,463, respectively                          10,500,676        8,451,675
   Inventories                                                                       214,264          235,398
   Prepaid expenses and other                                                        258,725          638,669
   Prepaid and deferred income taxes                                               2,147,416        2,650,076
   Due from Managed Care Solutions, Inc.                                                -             647,408
   Net assets of discontinued operation                                              111,381        1,020,764
                                                                                ---------------- ---------------
                                                                                  14,437,597       22,114,682
                                                                                ---------------- ---------------

Property and equipment, at cost less accumulated depreciation                      2,335,175        2,794,932
Internally developed software, at cost less accumulated amortization 
   of $2,110,378 and $1,729,141, respectively                                         3,087,849        2,152,419

Installment accounts receivable, due after one year, less unearned
   interest of $154,647 and $147,963, respectively                                   533,488          398,897
Deferred income taxes                                                              2,454,563          227,635
                                                                                ---------------- ---------------
                                                                                 $22,848,672      $27,688,565
                                                                                ================ ===============
      L I A B I L I T I E S  A N D  S T O C K H O L D E R S'  E Q U I T Y
Current liabilities:
   Accounts payable                                                              $   597,787      $   188,777
   Accrued compensation                                                              453,035        1,487,551
   Accrued restructuring charges                                                   2,247,416        1,527,461
   Other accrued liabilities                                                       1,138,226          970,140
   Deferred revenue                                                                6,910,599        5,313,399
   Notes payable                                                                   1,000,000            -                      
                                                                                ---------------- ---------------
                                                                                  12,347,063        9,487,328
                                                                                ---------------- ---------------
Notes payable                                                                      1,000,000            -                      
                                                                                ---------------- ---------------
Stockholders' equity:
   Preferred stock $1,000 par, 500 shares authorized and issued                      500,000            -
   Common stock $.01 par:
     Authorized - 10,000,000 shares
     Issued - 6,487,159 shares and 6,456,447 shares, respectively                     64,872           64,564
   Capital in excess of par value                                                 22,063,715       21,880,994
   Capital in excess of par value - warrant                                          944,000            -

   Less treasury stock:
     Preferred stock, at cost - 500 shares                                          (500,000)           -
     Common  stock, at cost -  1,007,002  and 7,002 shares, resp                  (5,687,418)         (62,418)

   Unrealized loss on short-term investments                                           -              (18,361)
   Accumulated deficit                                                            (7,883,560)      (3,663,542)
                                                                                ---------------- ---------------
                                                                                   9,501,609       18,201,237
                                                                                ---------------- ---------------

                                                                                 $22,848,672     $27,688,565

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

</TABLE>

     The accompanying notes are an integral part of these statements.

 
<PAGE>
<TABLE>
<CAPTION>
    

                                       MEDICUS SYSTEMS CORPORATION
                                         STATEMENTS OF OPERATIONS
                             For the years ended May 31, 1997, 1996 and 1995

                                                             1997              1996             1995
                                                        ---------------  ----------------  ---------------
<S>                                                    <C>              <C>               <C>   

Revenues:
   Software products and services                        $  8,148,858      $  10,374,977    $  13,495,033
   Maintenance and support services                        10,120,842          9,419,202        9,012,234
                                                        ---------------  ----------------  ---------------
                                                           18,269,700         19,794,179       22,507,267
                                                        ---------------  ----------------  ---------------

Costs and expenses:
   Software products and services                           2,936,115          3,889,458        4,117,822
   Maintenance and support services                         5,098,992          5,563,821        4,374,432
                                                        ---------------  ----------------  ---------------
                                                            8,035,107          9,453,279        8,492,254
   Marketing, general and
     administrative                                        10,034,473         11,287,826        8,325,563
   Research and development                                 3,065,552          1,835,575        2,149,188
   Restructuring charges                                    2,800,391          4,662,203             -
   Stock repurchase                                         1,690,042                -               -

                                                        ---------------  ----------------  ---------------
                                                           25,625,565         27,238,883       18,967,005
                                                        ---------------  ----------------  ---------------
Operating income (loss)                                    (7,355,865)        (7,444,704)       3,540,262
   Interest and other income                                  367,430            555,742          679,547
                                                        ---------------  ----------------  ---------------
Income (loss) from continuing operations
   before income taxes                                     (6,988,435)        (6,888,962)       4,219,809
Provision for (benefit from) income taxes                  (2,569,365)        (2,816,313)       1,519,131
                                                        ---------------  ----------------  ---------------

Income (loss) from continuing operations                   (4,419,070)        (4,072,649)       2,700,678
Discontinued operation, net of taxes                          199,052            346,658          323,815

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

Net income (loss)                                       $  (4,220,018)    $   (3,725,991)   $   3,024,493
                                                        ===============  ================  ===============


Earnings (loss) per common and common  
equivalent share, pro forma for 1996 
and 1995 

   Continuing operations                                $       (0.73)    $        (0.62)   $        0.40
   Discontinued operation                                        0.03               0.05             0.05
                                                        ---------------  ----------------  ---------------

                                                        $       (0.70)    $        (0.57)   $        0.45
                                                        ===============  ================  ===============

Weighted average common and common equivalent
shares outstanding                                          6,007,023          6,539,988        6,704,251
                                                        ===============  ================  ===============




</TABLE>







                     The accompanying notes are an integral 
                     part of these statements.


<PAGE>
<TABLE>
<CAPTION>
 
                                       MEDICUS SYSTEMS CORPORATION
                              STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                             For the years ended May 31, 1997, 1996 and 1995




                                                     Capital in                     Unrealized
                      Preferred   Common  Capital in Excess of Treasury  Treasury    Loss on
                      Stock Par   Stock   Excess of  Par Value   Stock     Stock     Short-term   Accum.         Group 
                       Value  Par Value Par Value   Warrant  (Preferred)  (Common)   Investments Deficit        Equity       Total
                      -------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
<S>                  <C>      <C>     <C>         <C>      <C>        <C>          <C>       <C>          <C>           <C>
Balance, May 31, 1994                                                                                        25,574,678  25,574,678
                      -------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
 Net income                                                                                                   3,024,493   3,024,493
 Payments to Predece-
   ssor Corporation, 
   net                                                                                                       (6,236,370) (6,236,370)
 Market value adjust-
   ment of short-term 
   investments, net 
   of income taxes                                                                   (58,430)                               (58,430)
                      -------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Balance, May 31, 1995                                                                (58,430)                22,362,801  22,304,371
                      -------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
 Net loss prior to 
   February 29, 
   1996 distribution                                                                                           (253,772)   (253,772)
 Payments to Predec-
   essor Corporation, 
   net                                                                                                         (404,534)   (404,534)
 Market value adjust-
   ment of short-term 
   investments, net 
   of income taxes                                                                    57,379                                 57,379
 February 29, 1996
   distribution of
   common stock                 64,320  21,702,593                         (62,418)                         (21,704,495)       -    
 Net loss subsequent 
   to February 29,   
   1996 distribution                                                                           (3,472,219)               (3,472,219)
 Sale of stock under 
   employee stock  
   purchase plan                    79      42,574                                                                           42,653
 Sale of stock under
   employee stock
   option plan,
   including tax
   benefits                        165     112,835                                                                          113,000
 Vested portion of 
   stock options 
   applicable to 
   compensation                             22,992                                                                           22,992
   expense                                                                                                                 
 Declaration of 
   dividends                                                                                     (191,323)                 (191,323)
 Market value adjust-
 ment of short-term                                                                                                   
   investments, net 
   of income taxes                                                                   (17,310)                               (17,310)
                      -------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Balance, May 31, 1996     -    64,564  21,880,994       -         -        (62,418)  (18,361)  (3,663,542)          -     18,201,237
                      -------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Net loss                                                                                       (4,220,018)               (4,220,018)
Stock repurchase      $500,000                      944,000  (500,000)  (5,625,000)                                      (4,681,000)
Sale of stock under 
   employee stock  
   purchase plan                  308     171,759                                                                           172,067
   Vested portion of 
   stock options app-
   licable to 
   compensation
   expense                                 10,962                                                                            10,962
Mrkt value adjustment 
   of short-term 
   investments, net 
   of income taxes                                                                    18,361                                 18,361
                      -------- ------- ----------- -------- ---------- ------------ --------- ------------ ------------- -----------
Balance,May 31,1996    500,000  64,872  22,063,715  944,000  (500,000)  (5,687,418)     -      (7,883,560)       -        9,501,609


</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE>
<TABLE>
<CAPTION>

                                       MEDICUS SYSTEMS CORPORATION
                                         STATEMENTS OF CASH FLOWS
                             For the years ended May 31, 1997, 1996 and 1995

                                                                    1997                1996                 1995
                                                             ------------------- -------------------  -------------------
<S>                                                         <C>                  <C>                  <C>   

Cash flows from operating activities:
   Net income (loss)                                          $    (4,220,018)     $  (3,725,991)      $   3,024,493
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization of
      property and equipment                                        1,097,274            683,281             592,411
     Amortization of software                                         381,238          1,229,408             538,933
     Deferred income taxes                                            (62,612)        (2,410,259)            383,374
     Restructuring charges                                          1,446,781          4,208,496                -
     Stock repurchase                                               1,319,000                 -                  -
     Provision for doubtful accounts                                  368,361          1,483,173                -

     Changes in current assets and current liabilities:

      Accounts receivable and unbilled services                    (1,917,262)        (1,740,049)           (495,179)
      Due from Managed Care Solutions, Inc.                           647,408           (647,408)               -
      Inventories                                                      21,134            (25,451)             67,641
      Prepaid expenses and other current assets                    (1,371,036)          (351,855)           (290,798)
      Installment accounts receivable                                (134,591)           162,557            (290,685)
      Accounts payable                                                409,268           (433,420)            187,697
      Accrued compensation                                         (1,034,516)           768,542            (320,241)
      Other accrued liabilities                                       212,033            195,687            (141,065)
      Deferred revenue                                              1,597,200            299,375             300,080

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

Net cash provided by (used in) operating activities                (1,240,338)          (303,914)          3,556,661

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

Cash flows from investing activities:

         Additions to property and equipment                         (619,932)          (806,997)           (871,222)
         Additions to internally developed software                (1,593,494)        (2,301,701)         (1,956,169)
         Purchase of short-term investments                       (86,846,102)       (42,565,224)        (78,747,517)
         Proceeds from sale of short-term investments              89,798,110         39,903,650          61,760,000
         Proceeds from maturity of short-term investments           4,784,360          5,033,377          23,683,611

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

Net cash provided by (used in) investing activities                 5,522,942           (736,895)          3,868,703

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

Cash flows from financing activities:

              Sale of preferred stock                                500,000                -                    -
              Sale of common stock                                   157,219              38,830                 -
              Stock  repurchase                                   (4,500,000)               -                    -
              Payments from Predecessor Corporation                     -                761,984           1,295,470
              Payments to Predecessor Corporation                       -             (1,359,386)         (7,338,969)
              Dividends paid                                            -               (191,323)                -

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

Net cash used in  financing activities                            (3,842,781)           (749,895)         (6,043,499)

                                                             ------------------- -------------------  -------------------
 
Net increase (decrease) in cash and cash equivalents                 439,823          (1,790,704)          1,381,865

Cash and cash equivalents:
      Beginning of period                                            765,312           2,556,016           1,174,151
                                                             ------------------- -------------------  -------------------
      End of period                                           $    1,205,135      $      765,312       $   2,556,016
                                                             =================== ===================  ===================


The accompanying notes are an integral part of these statements.

</TABLE>
<PAGE>
<PAGE>
                           MEDICUS SYSTEMS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - GENERAL INFORMATION AND BASIS OF PRESENTATION

     Prior  to  March 1,  1996,  the  Company's  predecessor  (the  "Predecessor
Corporation")  operated a software  and related  services  business  and a small
managed  care  business.  In  connection  with a series  of  transactions  which
occurred on March 1, 1996,  the  Predecessor  Corporation  formed a new Delaware
subsidiary,  Medicus Systems Software,  Inc., to which it transferred all of its
assets and liabilities  excluding only the defined assets and liabilities of its
managed care business.  In turn, the stock of this  newly-formed  subsidiary was
distributed on a  share-for-share  basis to the  stockholders of the Predecessor
Corporation  (the  "Distribution"),  the name of the  subsidiary  was changed to
Medicus Systems  Corporation  (the  "Company"),  and the name of the Predecessor
Corporation was changed to Managed Care Solutions,  Inc. ("MCS"). The Company is
liable  for  all  obligations  of  the  Predecessor   Corporation  except  those
specifically related to the Predecessor Corporation's managed care business.

     Although  the  Company  is, in  substance,  the  Predecessor  Corporation's
successor,  the financial statements of the Company have been prepared as if the
Company had  operated as a  free-standing  entity for all the periods  presented
(excluding certain incremental  corporate expenses that would have been incurred
had it operated on a stand-alone basis).  Accordingly,  the financial statements
include those assets,  liabilities,  revenues and expenses directly attributable
to the  Company's  operations  and  exclude  those  specifically  related to the
managed  care  business.  The Company  believes  this  presentation  most fairly
represents  its  financial  condition,  results  of  operations  and  changes in
stockholders'  equity and cash flows. The financial  statements  included herein
for  periods  prior to the  Distribution  do not  necessarily  reflect  what the
financial  position and results of operations of the Company would have been had
it operated as a stand-alone  entity during the periods covered,  and may not be
indicative of future operations or financial position.

     The  Company  and MCS signed a services  agreement,  pursuant  to which the
Company (i) made available to MCS certain services,  including tax,  accounting,
data processing, cash management,  employee benefits,  monitoring,  operational,
supervisory, insurance purchasing and claims administration consulting services,
and (ii) provided  certain  financial  services to MCS,  including  analysis and
advice regarding potential financial transactions  (including but not limited to
proposed  issuance  of debt or  equity  securities,  proposed  merger  or  asset
acquisition  or  sale   transactions  and  dividend,   stock  split  or  similar
transactions),  assistance in budget and forecast  preparation,  relations  with
financial  analysts,  financial press, and investors,  and crisis management and
control.  Such services  commenced on March 1, 1996, and continued for one year.
MCS paid the Company  $700,000 for such  services.  In order to  compensate  the
Company for fixed costs  incurred in making such  services  available,  MCS paid
such fees whether or not it elected to utilize the services. MCS also reimbursed
the Company for its out-of-pocket expenses in connection therewith. The services
agreement  also  provided that the Company would not be liable for any losses or
damages suffered in respect of services to be performed  thereunder,  other than
by reason of its willful  misconduct  or gross  negligence  in  performing  such
services.  Marketing,  general  and  administrative  expenses  were  reduced  by
$525,000 and $175,000 in the years ended May 31, 1997 and 1996, respectively, as
a result of this agreement.



<PAGE>
NOTE 2 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Nature of operations

     Medicus develops,  markets, and supports a family of specialized integrated
software products utilized by healthcare  financial  administrators,  physicians
and nursing executives,  health information and other administrative departments
in the United States and Canada.  The Company's  software  products and services
enable  clients to capture,  structure  and analyze  clinical,  operational  and
financial  information thereby allowing these professionals to measure,  monitor
and manage  organizational  performance  and  optimize  outcomes.  Medicus  also
provides product-related maintenance and support services.

     Revenue recognition

     Revenue from  software  license  agreements  is  recognized  upon  contract
execution,  product  delivery  and  client  acceptance  in  instances  where  no
remaining  obligations  under the  agreement  exist.  In  instances  where minor
obligations  remain under a license agreement after the delivery of the product,
a pro rata portion of the revenue is deferred until the minor  obligations  have
been  fulfilled.  When the software  product has been delivered but  significant
obligations  are present under a license  agreement,  the full amount of revenue
under the  agreement  is deferred  and  recognized  as the related  services are
performed. Revenue from maintenance and support agreements is recognized ratably
over the term of the contract.


     Inventories

     Inventories,  which  consist  primarily of data  processing  equipment  and
forms,  are stated at the lower of cost or market value,  cost being  determined
using specific identification.

     Property and equipment

     Property and equipment are stated at cost.  Depreciation  is computed using
the  straight-line  method  based upon an  estimated  useful life of five years.
Gains or losses resulting from sales or retirements are recorded as incurred, at
which time  related  costs and  accumulated  depreciation  are removed  from the
accounts. Renewals and betterments are capitalized and depreciated.  Maintenance
and repairs are charged to expense as incurred.

     Purchased  software used in operations is stated at cost.  Amortization  is
computed using the  straight-line  method based upon an estimated useful life of
three to five years. The amortization  charged to expense in 1997, 1996 and 1995
totaled $305,415, $371,095 and $315,313, respectively.

     Internally developed software

     Costs of internally  developed  software (net of accumulated  amortization)
aggregating $3,087,849 and $2,152,419 as of May 31, 1997 and 1996, respectively,
consist of certain  production costs of computer  software to be sold, leased or
otherwise marketed which have been capitalized in accordance with the provisions
of Statement  of Financial  Accounting  Standards  ("SFAS") No. 86.  Capitalized
software  costs are amortized on a  product-by-product  basis.  Amortization  is
computed based upon the ratio of current revenues to total anticipated  revenues
or the  straight-line  method over the estimated life of the product  (typically
three years), whichever provides the greater amortization.  Amortization expense
for capitalized  software costs totaled  $381,237,  $784,209 and $222,595 during
1997, 1996 and 1995, respectively.



<PAGE>

     Research and development

     Research and development  costs,  principally the design and development of
proprietary  software prior to the  establishment of technological  feasibility,
are expensed as incurred.  Routine  maintenance  expenses incurred in connection
with specific software  applications related to individual contracts are charged
to costs of software products and services as incurred.


     Income taxes

     The Company  follows the  provisions  of Statement of Financial  Accounting
Standards  No. 109,  "Accounting  for Income  Taxes." The statement  requires an
asset and liability  approach for financial  accounting and reporting for income
taxes.


     Earnings per share

     Since the capital  structure of the Company is  comparable to that existing
prior to the  Distribution,  earnings  (loss) per common share is based upon the
actual  capital  structure  of the  Company  for the  period  from March 1, 1996
through May 31, 1997, and the capital  structure of the Predecessor  Corporation
for the period from June 1, 1995 through  February 29, 1996.  Pro forma earnings
(loss) per common share is based upon the capital  structure of the  Predecessor
Corporation,  and does not necessarily  reflect the results of operations of the
Company had it operated as a stand-alone  entity  during the periods  presented,
and may not be indicative of future operations.  Weighted average shares used in
the calculation of earnings  (loss) per share represent  common stock and common
stock  equivalents.  Common stock  equivalents  include  shares  issuable on the
exercise of stock  options and the warrant (when  dilutive),  using the treasury
stock method from the date of grant.


     Management estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the reported  amounts of assets and  liabilities at the
date of the  financial  statements  and the  reported  amounts of  revenues  and
expenses  recognized during the periods  presented.  Actual results could differ
from those estimates.

     Fair value of financial instruments

     The carrying  amounts  reported in the balance sheets for cash,  short-term
investments,  accounts  receivable,  prepaid  expenses and other current assets,
accounts  payable,  accrued  expenses and notes payable  approximate  fair value
because of the immediate or short-term maturity of these financial instruments.

     Statements of cash flows

     For purposes of the  Statements of Cash Flows,  the Company  considers cash
and cash equivalents to be cash and overnight investments.  Actual cash paid for
income  taxes  for the  years  ended May 31,  1997,  1996 and 1995 was  $90,561,
$539,559 and $1,427,700, respectively.


     Reclassifications

     Certain  reclassifications  have been made in the  prior  period  financial
statements   to   conform   to   the   current   period   presentation.    These
reclassifications  had no effect on  previously  reported  total  assets,  total
liabilities, stockholders' equity or results of operations.

<PAGE>

NOTE 3 - DISCONTINUED OPERATION

     Effective  May 31,  1997 the  Company  adopted  a plan to  discontinue  its
contract services line of business.  This separate line of business consisted of
information systems management contracts with two customers (one customer during
the year ended May 31, 1997).  As a result of this  decision,  the net assets of
the contract  services  line of business have been  reclassified  in the Balance
Sheet at May 31, 1997 and 1996.  Also, the results of operations of the contract
services business have been reclassified in the Statements of Operations for the
three years ended May 31, 1997.

     The assets and liabilities of the discontinued  operation consist mainly of
the following:
<TABLE>
<CAPTION>


                                                             May 31, 1997              May 31, 1996
                                                        ----------------------     ---------------------
<S>                                                    <C>                        <C>   

  Accounts receivable and unbilled services                 $ 288,457                    $ 1,212,747
  Prepaid expenses and other                                   45,702                         70,725
  Property and equipment                                       37,032                         54,617
  Accounts payable and other accrued liabilities             (212,771)                      (276,960)
  Accrued compensation                                        (47,039)                       (40,365)
                                                        ----------------------     ---------------------
                                                            $ 111,381                    $ 1,020,764
                                                        ======================     =====================

</TABLE>
     The following  table  summarizes  selected  financial  data of the contract
services business for the years ended May 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>

                                                                           Year Ended May 31,
                                                        --------------------------------------------------------------------
                                                                1997                    1996                    1995

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


Revenues                                                   $ 10,043,000            $ 11,271,000            $11,322,000
Operating income                                                324,000                 573,000                506,000
Income tax expense                                              124,610                 226,331                182,146


</TABLE>
     The contract  services  line of business is expected to continue  operating
until the  expiration  of its remaining  contract on May 31, 1998.  This line of
business is not expected to incur losses or generate significant income prior to
its termination.


NOTE 4 - RESTRUCTURING CHARGES

     During the third quarter of fiscal 1996, the Company commenced a process to
evaluate  its  strategic  position,  including  the  markets it will  pursue and
product offerings in those chosen markets.  As a result of decisions made in the
quarter  ended  February 29,  1996,  the Company  began a plan  resulting in the
recording of approximately $1.6 million in charges to exit certain product lines
and abandon certain development efforts.

     Specifically, the Company decided to exit the Executive Information Systems
product  line,  recording  charges to write down related  customer  accounts and
accrue future costs to provide maintenance  associated with existing contractual
obligations.  In addition, product development efforts for the Optimizer project
and  portions  of the MACH 1 project,  which will no longer be  utilized  in the
Medicus product line,  were abandoned and their  associated  development  costs,
which had been previously capitalized, were expensed.

     During the fourth  quarter of fiscal year 1996,  the Company  continued the
process resulting in additional charges of $3.1 million.  The Company decided to
exit the Clinical Case Management  Systems product line and abandon  development
efforts for the  Clinical  Data  Systems  Wincoder V2 project.  Severance  costs
associated with an officer and several  employees,  in addition to the write-off
of a portion  of the  Contract  Management  System,  were also  included  in the
restructuring charge.


<PAGE>
     As part  of an  ongoing evaluation,  the  Company  refined  its  strategic
planning  process  during  fiscal  1997,  and  assessed  continuing  obligations
associated  with the  implementation  of the plan.  The  Company  continued  the
process  of  implementing  its  plans  during  1997  and,  following  the  stock
repurchase  from its founder in the quarter  ended  February 28, 1997,  recorded
$2.8 million in charges to complete its plan,  including  accruing certain costs
to reorganize  the Company's  business  units,  to abandon  certain  development
efforts, and to increase the allowance for doubtful accounts.  Specifically, the
Company  decided to relocate  operations  for its Clinical Data Systems  ("CDS")
division, based in Alameda, CA, to the Company's Evanston, IL corporate offices.
Costs accrued associated with the relocation,  which is expected to be completed
during  the  next  twelve  months,  included  costs  to  cancel  existing  lease
agreements,  to  terminate  employees  and to write down  abandoned  assets.  In
addition,  the Company  increased  its  reserves for product line exit costs and
severance  costs  that  relate  to the  remaining  customer  of  the  previously
discontinued  Clinical Case  Management  Systems  ("CCM")  product  line.  Also,
certain product  development  efforts for the Company's  Patient Focused Systems
("PFS") products were abandoned, and the associated development costs, which had
been  previously  capitalized,  along with other related product line exit costs
were expensed. The Company has increased its allowance for doubtful accounts due
to the potential for certain  additional  billed and unbilled accounts to become
uncollectible as a result of the decisions discussed above.

     The restructuring  charges included in the Statements of Operations for the
years ended May 31, 1997 and May 31, 1996,  respectively,  were comprised of the
following items:
<TABLE>
<CAPTION>

                                                                    May 31,                    May 31,
                                                                     1997                       1996

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

       Product line exit costs                                  $    798,000               $    856,633
       Business unit reorganization costs                            705,697                       -
       Employee termination and severance costs                      569,868                  1,117,086
       Accounts receivable  and  reserves                            450,000                    787,206
       Capitalized software write-downs                              276,826                  1,901,278

                                                             ----------------------     ---------------------
                                                                $   2,800,391              $  4,662,203
                                                             ======================     =====================
</TABLE>

     The Company's  revised  strategic  plan included the  termination  of three
officers and  thirty-nine  employees in 1997 and one officer and three employees
in 1996.

     At May 31, 1996, restructuring  liabilities in the Balance Sheet aggregated
$1,527,461.  During the year  ended May 31,  1997,  the  Company  increased  its
reserve for  employee  termination  and  severance  costs and product line exits
costs by $569,868 and  $798,000,  respectively,  primarily  due to the Company's
decision to relocate its CDS division and increase its CCM product line reserve.
The Company also  recorded a $705,697  charge for business  unit  reorganization
costs  associated  with the  relocation.  The Company  did not accrue  estimated
incremental costs of approximately  $1.3 million associated with the relocation.
Such costs relate to the orderly  transition of the  division,  will be incurred
during  fiscal 1998 and are not  accruable as part of the  restructuring  charge
under generally accepted  accounting  principles.  During the year ended May 31,
1997 the Company paid  $763,844,  $233,950  and $31,100 in  severance  benefits,
product line exit costs, and business unit reorganization  costs,  respectively.
The Company also reduced its reserve for severance  obligations  and  continuing
obligations  on product line exit costs by $124,716 and $200,000,  respectively,
as a result of favorable  settlements with two of its employees and negotiations
with its customers.

     The  components  of the  restructuring  reserve at May 31, 1997,  which the
Company expects will be paid during the next twelve months,  and at May 31, 1996
are as follows:

                                            May 31,             May 31,
                                             1997                1996

                                          ----------         ------------
Product line exit costs                   $  774,425         $    410,375
Business unit reorganization costs           674,597                 -
Employee termination and severance costs     798,394            1,117,086

                                          ----------         ------------
                                          $2,247,416         $  1,527,461
                                          ==========         ============


<PAGE>
NOTE 5 - STOCK REPURCHASE

     On December 5, 1996,  the Company  reached an agreement  in principle  (the
"Agreement") with its founder, Richard C. Jelinek, to purchase from Mr. Jelinek,
and a trust of which he is a beneficiary  (the  "Trust"),  one million shares of
Common Stock and 500 shares of Voting Preferred Stock.  Also, Mr. Jelinek agreed
to resign as Chairman  and agreed,  among other  things,  not to attempt to seek
voting control of the Company for a period of five years. (Mr. Jelinek continues
to serve as a Director.) In exchange,  the Company agreed to pay Mr. Jelinek and
the Trust $4.5 million in cash and $2.0 million in 8% two-year promissory notes,
and to issue to Mr. Jelinek and the Trust 400,000 five-year warrants to purchase
Common Stock at $8.00 per share.  The Company's Board of Directors  approved the
Agreement  on January 2,  1997,  and the  Company's  stockholders  approved  the
Agreement at the Annual Meeting of Stockholders on March 19, 1997.

     The  Company's  results  of  operations  for the year  ended  May 31,  1997
included $1,690,042 in related costs and expenses, as a result of the Agreement.
The fair value of  consideration  exchanged in excess of the market price of the
Common Stock and the exercise price of the Voting Preferred  Stock,  aggregating
$1,319,000,  has been expensed. Also included are $371,042 in investment banking
and other  professional  fees incurred to consummate the Agreement.  The Company
recorded the charge in the quarter ended February 28, 1997.


NOTE 6 - PROPERTY AND EQUIPMENT

     Property and  equipment  as of May 31, 1997 and 1996 were  comprised of the
following:

                                                        1997           1996
                                                   -------------- --------------
      Equipment                                    $  4,358,224   $ 3,797,976
      Furniture and fixtures                            674,796       645,260
      Leasehold improvements                            276,355       294,052
      Purchased software used in operations           2,105,910     2,058,068
                                                   -------------- --------------
                                                      7,415,285     6,795,356
      Less - accumulated depreciation                 5,080,110     4,000,424
                                                   -------------- --------------
                                                   $  2,335,175   $ 2,794,932
                                                   ============== ==============

NOTE 7 - INCOME TAXES

     The provision for (benefit  from) income taxes from  continuing  operations
consisted of the following:

                                              Year Ended May 31,
                                   --------------------------------------------
                                       1997           1996            1995
                                   -------------- -------------   -------------
      Currently payable:      
          Federal                   $ (2,183,016)  $   (344,770)   $    838,701
          State                         (323,737)       (61,284)        297,056
                                   -------------- -------------   -------------
                                      (2,506,753)      (406,054)      1,135,757
      Deferred                           (62,612)    (2,410,259)        383,374
                                   -------------- -------------   -------------
                                    $ (2,569,365)  $ (2,816,313)   $  1,519,131
                                   ============== =============   =============

     A reconciliation of total taxes based on the federal statutory rate and the
Company's actual total provision (benefit) was as follows:

<PAGE>
<TABLE>
<CAPTION>




                                                              Year Ended May 31,
                                           --------------------------------------------------------
                                                 1997                1996               1995
                                           -----------------  ------------------ ------------------
<S>                                       <C>                <C>                <C>   

Income tax at the federal statutory
   rate of 34%                             $    (2,266,022)   $    (2,147,430)   $     1,606,762
State taxes, net of federal benefit               (197,944)          (281,377)           202,736
Research and development tax credit               (111,439)              -              (179,659)
Effect of stock repurchase                         191,760               -                  -
Other, net                                         (61,110)          (161,175)            71,438
                                           -----------------  ------------------ ------------------
                                           $    (2,444,755)   $    (2,589,982)   $     1,701,277
                                           =================  ================== ==================
</TABLE>


     The  components  of  the  deferred  income  tax  provision  (benefit)  from
continuing operations were as follows:
<TABLE>
<CAPTION>

                                                                  Year Ended May 31,
                                              ---------------------------------------------------------
                                                     1997               1996                1995
                                              ------------------ ------------------- ------------------
<S>                                          <C>                <C>                 <C>   

Provision for doubtful accounts                $      (161,354)   $      (255,654)    $         -
Net operating loss carried forward                    (244,148)          (937,554)              -
Capitalization of software costs
   for financial reporting purposes                    505,930           (350,483)           481,153
Depreciation                                           (14,751)           (53,416)           (58,122)
Financial reporting reserve recognized
   in advance of tax deduction                        (148,289)          (813,152)           (39,657)
                                              ------------------ ------------------- ------------------
                                               $       (62,612)   $    (2,410,259)    $      383,374
                                              ================== =================== ==================
</TABLE>

     The  deferred  income tax  assets and  liabilities  were  comprised  of the
following:
<TABLE>
<CAPTION>

 
                                                                         As of May 31,
                                                        -----------------------------------------------
                                                             1997            1996            1995
                                                        --------------- --------------- ---------------
<S>                                                    <C>             <C>             <C>   

Provision for doubtful accounts                          $   (659,508)   $   (498,154)   $   (242,500)
Financial reporting reserve recognized in
   advance of tax deduction                                (1,066,896)       (918,609)       (105,457)
Net operating loss carried forward                         (3,544,223)       (937,554)           -
Research and development credit carryforward                 (111,439)           -               -
   short-term investments                                        -            (12,628)        (40,184)
                                                        --------------- --------------- ---------------
Total deferred tax assets                                  (5,382,066)     (2,366,945)       (388,141)
                                                        --------------- --------------- ---------------
Capitalization of software costs for
   financial reporting purposes                             1,188,822         682,892       1,033,375
Depreciation                                                   12,277          27,028          80,444
                                                        --------------- --------------- ---------------
Total deferred tax liabilities                              1,201,099         709,920       1,113,819
                                                        --------------- --------------- ---------------
Total net deferred taxes                                 $ (4,180,968)   $ (1,657,025)   $    725,678
                                                        =============== =============== ===============
</TABLE>
     In connection  with the  Distribution,  the Company and MCS agreed to share
the tax burdens of the Predecessor Corporation, based upon the taxable income of
the separate businesses prior to the Distribution.  The Company and MCS are also
prohibited  from taking any actions  which are  inconsistent  with the  tax-free
nature of the Distribution.

     The  Company  will be able to utilize  tax net  operating  losses  incurred
subsequent  to the  Distribution  to the extent the Company  has taxable  income
subsequent to the Distribution.


<PAGE>
     Management has determined  that the net deferred tax asset more likely than
not  will be  realized  in the  future  and,  therefore,  has not  provided  any
valuation  allowances  against  these assets.  The Company's net operating  loss
carryforwards  of  $3,544,223  expire  in 2011  and  2012,  while  research  and
development tax credits expire in 2012.

NOTE 8 - NOTES PAYABLE AND LINE OF CREDIT

     On December 5, 1996, the Company reached an agreement in principle with its
founder,  Richard C. Jelinek, to purchase from Mr. Jelinek, and a trust of which
he is a beneficiary  (the  "Trust"),  one million shares of Common Stock and 500
shares of Voting  Preferred  Stock.  In exchange,  the Company agreed to pay Mr.
Jelinek  and the Trust  $4.5  million in cash and $2.0  million  in 8%  two-year
promissory  notes,  and issued to Mr.  Jelinek and the Trust  400,000  five-year
warrants to purchase Common Stock at $8.00 per share.  The scheduled  maturities
are $1 million  March 19, 1998 and $1 million  March 19,  1999.  Interest  costs
incurred and paid on the promissory notes totaled $32,258 for the year ended May
31, 1997.

     In April  1997,  the Company  entered  into an  agreement  with a bank that
provides  for a  secured,  revolving  line of  credit  up to a  maximum  of $2.5
million.  The credit  facility,  which has an initial  maturity  date of October
1998, bears interest at the bank's prime rate and provides the bank with a first
security interest in all assets of the Company.  Certain financial covenants and
reporting  requirements are also included in the agreement.  As of May 31, 1997,
the Company had not utilized the line of credit.

NOTE 9 - STOCKHOLDERS' EQUITY

     The following table summarizes  information regarding  stockholders' equity
as of May 31, 1997:
<TABLE>
<CAPTION>

                                                                                                                  Dividend
                                                                                  Total Par         Votes         Right Per
                                  Shares           Shares        Par Value          Value            Per            Share
                                Authorized         Issued        Per Share       Outstanding        Share         Per Annum

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

Voting preferred stock <F1>            500           -          $  1,000.00           -            44,000            (1)
Preferred stock <F2>             1,000,000           -                  .01           -              (2)             (2)
Common stock                    10,000,000      6,487,159               .01     $   64,872            1               - 
                                                                                                                   
<FN>
<F1>The previous  chairman of the board and chief executive officer exercised an
option to purchase all of the authorized and unissued shares of voting preferred
stock at $1,000 per share on March 19, 1997.  The Company,  as part of the stock
repurchase agreement, immediately repurchased these shares. The voting preferred
stock is currently held in treasury.

<F2>The Board of  Directors  has the  authority  to  determine  the  rights  and
preferences of this preferred stock upon its issuance.
</TABLE>

NOTE 10 - STOCK OPTIONS AND WARRANTS

     Upon the  Distribution,  the Company  adopted various stock option plans of
the Predecessor Corporation.  Options to purchase Predecessor Corporation common
stock have been  converted  into options to purchase  Medicus common stock based
upon the fair market value following the  Distribution.  The Company applies APB
Opinion 25 and related Interpretations to account for its plans. Accordingly, no
compensation  cost is  generally  recognized  for its stock option plans and its
employee  stock  purchase  plan.  Had   compensation   cost  for  the  Company's
stock-based  compensation  plans been determined  based on the fair value at the
grant dates for awards under those plans  consistent with the method  prescribed
by SFAS 123, "Accounting for Stock-Based Compensation," the Company's net income
and  earnings  per share  would  have  been  reduced  to the pro  forma  amounts
indicated below:

<PAGE>
 
                                                        Year Ended May 31,
                                                --------------------------------
                                                   1997                 1996
                                                -------------------------------
Net income (loss)              As reported       $ (4,220,018)    $ (3,725,991)
                               Pro forma           (5,187,253)      (4,262,364)

Earnings (loss) per share      As reported              (0.70)           (0.57)
                               Pro forma                (0.86)           (0.65)



     For  purposes of SFAS 123, the fair value of each option grant is estimated
on the date of grant  using  the  Black-Scholes  option-pricing  model  with the
following  weighted-average  assumptions  used  for  grants  in  1997  and  1996
respectively:  no  expected  dividends,  expected  volatility  of and 76.36% and
72.17%,  risk-free interest rates of 6.56% and 6.09% for the stock options;  and
lives of 7 years. The weighted-average fair value of options granted in 1997 and
1996 was $4.18 and $5.30 respectively.

     The stock  exercise  price of each option is determined by a committee (the
"Committee")  of no  fewer  than  two  Directors  designated  by  the  Board  of
Directors, and shall not be less than the fair market value of the stock subject
to the option at the time the option is granted.  Each option  shall be for such
term of not more than ten years as shall be  determined  by the Committee at the
date of  grant.  The  Committee  shall  have full and  final  authority,  in its
absolute  discretion,  to determine  the time or times when each option  becomes
exercisable  and the duration of the exercise  period.  The Committee may at its
discretion  accelerate  the  exercisability  of any  option  at any time  before
expiration or termination of an option previously  granted,  extend the terms of
such option, except that an aggregate option period may never exceed ten years.

     As of May 31, 1997,  the Company had 358,879  options  available  for grant
under all plans. A summary of the status of the Company's option plans as of May
31, 1997 and 1996, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
                                            Year Ended May 31,                         Year Ended May 31,

                                                   1996                                        1997
                                  ---------------------------------------     ---------------------------------------
<S>                                 <C>               <C>                        <C>                <C>   
                                                            Weighted-                                    Weighted-
                                                          Avg. Exercise                                Avg. Exercise
                                         Shares               Price                   Shares              Price
Outstanding at
beginning of year                           -                   -                    1,387,350            $ 7.53

Conversion at
Distribution of options
previously held                        1,035,850        $     7.85                        -                  -

Granted                                  368,000              6.28                     615,100              5.49

Exercised                                (16,500)             0.48                        -                  -

Cancelled/Forfeited                         -                  -                      (320,100)             6.10

Outstanding at End of                 ----------                                    ---------- 
year                                   1,387,350              7.53                   1,682,350              6.79
                                      ==========                                    ==========
Options Exercisable at
year-end                                 332,950              7.78                     414,950              7.70
                                      ==========                                    ==========

</TABLE>

 
     The  following  table  summarizes   information  about  the  stock  options
outstanding at May 31, 1997:
<TABLE>
<CAPTION>


                                         Options Outstanding                                    Options Exercisable
                      ----------------------------------------------------------     ----------------------------------------
                                                Weighted
                                                 Average
                             Number             Remaining            Weighted                    Number              Weighted
     Range of             Outstanding          Contractual           Average                 Exercisable at          Average
  Exercise Prices          at 5/31/97          Life (yrs.)        Exercise Price                5/31/97           Exercise Price
 ----------------          ----------          -----------        --------------                -------           --------------
<S>                     <C>                   <C>                <C>                       <C>                   <C>  

 $ 0.19 to 2.00             19,650                  7.8             $  1.87                      19,650            $  1.87
   5.00 to 5.82            529,000                  9.5                5.38                       7,500               5.25
   6.25 to 6.82            644,200                  7.9                6.56                     169,550               6.69
   7.02 to 7.60            182,000                  8.6                7.44                      47,750               7.29
   8.97 to 9.62            273,500                  6.9                9.34                     153,500               9.34
 11.89 to 16.50             34,000                  7.4               11.90                      17,000              11.90

</TABLE>

     The Company  realizes an income tax  benefit  from the  exercise of certain
stock options.  These income tax benefits result in a decrease in current income
taxes payable and an increase in capital in excess of par value.

     A healthcare services organization with which the Company maintains a joint
development  agreement  holds  a  warrant  to  purchase  100,000  shares  of the
Company's  common  stock at a price of $7.80  per  share,  exercisable  any time
before  March,  1999.  The  value  of  the  warrant  is  being  amortized  on  a
straight-line basis over its six-year life.

     The  Company's  founder,  Richard C.  Jelinek,  holds  400,000  warrants to
purchase common stock at $8.00 per share.  The value of the warrant was recorded
as part of the stock repurchase agreement recorded in the quarter ended February
28, 1997.

NOTE 11 - EMPLOYEE BENEFITS

     In connection with the Distribution,  the Company adopted an employee stock
purchase plan under which the sale of common stock to employees was  authorized.
Employees may designate up to the lesser of $10,000 or 10% of their compensation
for the purchase of stock.  The purchase  price is the lesser of 85% of the fair
market  value of the stock on either  the date of grant of a  one-year  purchase
option or the date the purchase  option is exercised.  During the year ended May
31,  1997 and the period from March 1, 1996  through  May 31,  1996,  29,162 and
7,132  shares,  respectively,  of common stock were issued under the plan for an
aggregate  purchase  price of $128,423 and $38,352,  respectively.  Compensation
cost related to the employee  stock  purchase  plan, as determined  based on the
fair value  method of SFAS 123,  would have  aggregated  $139,000  and  $75,000,
respectively,  for the years ended May 31, 1997 and 1996 had the Company adopted
this statement. For purposes of SFAS 123, these amounts were estimated using the
Black-Scholes  model with the following  assumptions for the years ended May 31,
1997 and 1996,  respectively:  no expected  dividends,  an expected  life of one
year, expected volatility of 130.17% and 158.17% and risk-free interest rates of
5.40% and 5.45%.

     The Company has a  contributory  retirement  savings plan  ("401(k)  Plan")
which  covers  eligible  employees  who qualify as to age and length of service.
Participants  may  contribute  1% - 15% of their  salaries,  subject  to maximum
contribution  limitations  imposed by the IRS.  The expense of the 401(k)  Plan,
consisting of discretionary Company  contributions,  was $134,795,  $121,602 and
$101,512 for the years ended May 31, 1997, 1996 and 1995, respectively.


<PAGE>
NOTE 12 - COMMITMENTS

     The Company has various lease  agreements  for real and personal  property.
These obligations extend through 2006 and in some cases contain renewal options.
As of May 31, 1997, future minimum lease payments for  non-cancelable  operating
leases in excess of one year are as follows:

                    Year Ending May 31,
                               1998                         $     977,404
                               1999                             1,017,264
                               2000                               847,322
                               2001                               716,538
                               2002                               677,786
                           Thereafter                           2,890,522
                                                            ---------------
                                                            $   7,126,836
                                                            ===============

     Rental expense on all operating  leases  totaled  $828,221,  $682,400,  and
$664,844, during fiscal 1997, 1996 and 1995, respectively.

NOTE 13 - RELATED PARTY TRANSACTIONS

     As  discussed  in Note 1, the Company and MCS signed a services  agreement.
For the year ended May 31,  1997 and during the fourth  quarter of fiscal  1996,
the Company charged MCS $525,000 and $175,000,  respectively, for services under
this agreement,  reducing general and  administrative  expense by these amounts.
Due from Managed Care Solutions,  Inc. on the Balance Sheet includes this charge
plus amounts owing related to the Distribution. During fiscal 1996 and 1995, the
Company  provided  MCS cash  infusions  for  operating  purposes of $250,000 and
$5,000,000, respectively.

     The Company has  repurchased  Common Stock and Voting  Preferred Stock from
its  founder,  Richard  C.  Jelinek,  and a trust of which he is a  beneficiary,
pursuant to a transaction  described in Note 5 and Note 8. Mr. Jelinek continues
to serve as a Director.


NOTE 14 - CONCENTRATIONS OF CREDIT RISK

     The  Company's  revenues  are  generated  from  clients  operating  in  the
healthcare  industry,  and accordingly,  as of May 31, 1997 and 1996, all of the
Company's trade  receivables and installment  receivables  were from entities in
this industry.  The Company has no policy requiring collateral for the extension
of trade credit in the ordinary course of business.

NOTE 15 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     SFAS No. 128,  "Earnings per Share," issued in February  1997,  changes the
method of calculating earnings per share and will be effective for the Company's
financial  statements for the year ending May 31, 1998.  Earlier  application is
not permitted.  However, the Company is permitted to disclose pro forma earnings
per share amounts  computed  using this  Statement in periods prior to adoption.
Upon  adoption,  all prior  period  earnings per share data  presented  shall be
restated to conform to this  Statement.  The  calculation  of earnings per share
under this  Statement is simpler  than prior  methods and more  consistent  with
international  accounting  standards.  Given the  Company's  historical  losses,
common stock  equivalents  were excluded from prior pro forma earnings per share
calculations  because  they  were  anti-dilutive.  Therefore,  adoption  of this
Statement  is not  expected  to have a  material  impact on  amounts  previously
reported as pro forma net loss per common share.


     SFAS No. 130, "Reporting  Comprehensive  Income," issued in June 1997,will
require the Company to disclose,  in financial  statement format,  all non-owner
changes in  equity.  Such  changes  include,  for  example,  cumulative  foreign
currency  translation  adjustments,  certain  minimum  pension  liabilities  and
unrealized gains and losses on available-for-sale  securities. This Statement is
effective  for fiscal  years  beginning  after  December  15, 1997 and  requires
presentation of prior period financial  statements for  comparability  purposes.
The  Company  expects  to adopt  this  Statement  beginning  with its  financial
statements for the year ending May 31, 1998.

     SFAS No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information,"  issued  in  June  1997,   establishes   standards  for  reporting
information about operating segments in annual financial  statements and interim
financial reports.  It also establishes  standards for related disclosures about
products and services, geographic areas and major customers.  Operating segments
are components of an enterprise  about which separate  financial  information is
available that is evaluated  regularly by the chief operating  decision maker in
deciding  how to allocate  resources  and in assessing  performance.  Generally,
financial  information  is  required  to be  reported  on the basis that is used
internally  for  evaluating  segment  performance  and  deciding how to allocate
resources  to  segments.  The  Company  expects to adopt this  Statement  in its
financial statements for the year ending May 31, 1998.

NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     Unaudited quarterly financial  information for the years ended May 31, 1997
and 1996 is supplementary and is provided in the following summary:
<TABLE>
<CAPTION>
 

                                                                       Three Months Ended
                                        --------------------------------------------------------------------------------------------
                                               May 31,                February 28,             November 30,              August 31,
                                                1997                      1997                     1996                     1996
                                        ---------------------     ---------------------    ---------------------    ----------------
<S>                                     <C>                      <C>                      <C>                      <C>   

Total revenues                            $ 4,845,868               $ 4,064,276              $ 5,162,777              $ 4,196,779
Total operating expenses                    2,075,024                 5,259,597                2,121,897                1,378,980
Operating income (loss)                    (1,399,027)               (6,347,410)                 109,905                  280,667
Net income (loss)                            (793,571)               (3,930,237)                 211,574                  292,216
Earnings (loss) per common share                (0.14)                    (0.60)                    0.03                     0.05
</TABLE>
<TABLE>
<CAPTION>



                                                                      Three Months Ended
                                        --------------------------------------------------------------------------------------------
                                              May 31,               February 29,             November 30,              August 31,
                                                1996                    1996                     1995                     1995
                                        --------------------    ---------------------    ---------------------    ------------------
<S>                                     <C>                      <C>                      <C>                      <C>   

Total revenues                            $ 4,871,723               $ 4,203,719              $ 5,318,504              $ 5,400,233
Total operating expenses                    5,664,899                 3,278,847                2,612,565                2,559,171
Operating income (loss)                    (5,946,480)               (1,596,314)                (104,481)                 202,571
Net income (loss)                          (3,472,218)                 (781,890)                 188,090                  340,027
Earnings (loss) per common share                (0.54)                    -                         -                        -
Pro forma earnings (loss) per                        
   common share                                   -                       (0.12)                    0.03                     0.05
</TABLE>

     Results of operations  for the quarters  ended  February 28, 1997,  May 31,
1996, and February 29, 1996 include  restructuring  charges  discussed in Note 4
and the stock  repurchase  discussed in Note 5. Total revenues,  total operating
expenses,  and  operating  income for all  periods  have been  restated  for the
discontinued operation discussed in Note 3.

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

      None.
                                    PART III

     ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  officers  of the  Company,  their  ages and their  positions  with the
Company are provided in the table  below.  The other  information  called for by
Item 10 is incorporated by reference to the  Registrant's  Proxy Statement being
sent to  stockholders in connection with the 1997 Annual Meeting of Stockholders
to be held on November 18, 1997 (the "Proxy Statement").

        Name                       Age                   Position

      Patrick C. Sommers           50        President, Chief Executive Officer 
                                             and Chairman

      Angus J. Carroll             38        Senior Vice President

      Marlon T. Gruen              43        Senior Vice President

      Robert C. Steffel            44        Senior Vice President

      Daniel P. DiCaro             40        Vice President, Chief Financial 
                                             Officer and Asst. Secretary

      Susan K. Doctors             56        Vice President

      Lynda D. Hernandez           41        Vice President

      Timothy K. Rutledge          39        Vice President

      William G. Brown             54        Secretary and Director

      Officers serve at the pleasure of the Board.

     Patrick C. Sommers, President, Chief Executive Officer, and Chairman of the
Board of Directors  joined the Company in February 1996.  From 1992 to 1996, Mr.
Sommers  served as  President  of Ceridian  Employer  Services,  a $400  million
division of Ceridian Corporation (formerly Control Data Corporation).  From 1990
to 1992, Mr. Sommers was President of GTE  Information  Services,  a division of
GTE  Corporation,  and from 1969 to 1990,  he served  in  successive  management
positions with Dun & Bradstreet  Corporation,  culminating  with his position as
President of Dun & Bradstreet Information Resources, Inc.

     Angus J. Carroll,  Senior Vice  President,  joined the Company in July 1996
and is responsible for strategic planning and business development. From 1993 to
1996, Mr.  Carroll served as Vice President of Business  Development at Ceridian
Employer  Services.  From 1990 to 1993, he was Director of Business  Planning at
GTE  Corporation.  From 1979 to 1990,  Mr.  Carroll held  successive  management
positions with Dun & Bradstreet  Corporation,  culminating  with the position of
Assistant  Vice  President of Computer  Development.  Mr.  Carroll  received his
M.B.A. from Fairleigh-Dickinson University.

     Marlon T. Gruen, Senior Vice President, joined the company in February 1997
and is responsible  for  marketing.  From 1992 to 1997, Mr. Gruen served as Vice
President of Marketing for Merck-Medco  Managed Care, LLC, a division of Merck &
Company.  From 1991 to 1992,  he was Director of Product  Planning at GTE Health
Systems,  a division of GTE Corporation.  From 1990 to 1991, Mr. Gruen served as
Director of Product  Planning at Consumer Health  Services,  Inc. Prior to that,
from 1977 to 1990, he held successive management positions with Dun & Bradstreet
Corporation,  culminating  with the  position of  Assistant  Vice  President  of
Product Planning & Development.


<PAGE>
     Robert C. Steffel,  Senior Vice President,  is responsible for the contract
management and information services businesses.  Prior to joining the Company in
December  1991, he was Vice  President,  Information  Systems of Specialty  Home
Health Care from 1989 to 1991. He also served as Director of Information Systems
and Management Engineering at Curaflex Home Health Care from 1988 to 1989.

     Daniel P. DiCaro,  Vice President,  Chief  Financial  Officer and Assistant
Secretary,  joined  the  Company  in  January  1997.  Mr.  DiCaro was one of the
founders of Imagination  Pilots  Entertainment  (IPE), a joint venture with Time
Warner in consumer multimedia software. Mr. DiCaro served as the Chief Financial
Officer and Chief Operating  Officer of IPE from 1994 to 1997. He is currently a
director of IPE. From 1990 to 1994,  Mr.  DiCaro  served as the Chief  Financial
Officer of a group of  privately  held,  venture  capital  backed,  software and
information service companies.  Previously, he was the Vice President of Finance
for  CCC  Information  Services  Inc.  (1987  to  1990)  and  a  member  of  the
international  accounting  firm of Arthur Young and Company (1984 to 1987).  Mr.
DiCaro  received  his  M.B.A.   from  DePaul   University  and  is  a  certified
public accountant.

     Susan K. Doctors, Vice President, joined the Company in January 1995 and is
responsible  for Human  Resources  and  Administration.  From 1993 to 1995,  she
worked as an independent consultant.  Prior to 1993, Ms. Doctors worked 19 years
at  Official  Airline  Guides,  Inc.  holding  successive  management  positions
culminating with her position as Vice President of Human Resources.  Ms. Doctors
received  her  Masters  in  Management  from  the  Kellogg  Graduate  School  at
Northwestern University.

     Lynda D. Hernandez,  Vice  President,  is responsible for the operations of
the Clinical Data Systems  division.  Most  recently,  Ms.  Hernandez  served as
Senior Director for operations.  From 1990 to 1992, she was manager of Technical
Support,  Interfaces and Client Services in the Clinical Data Systems  division.
Prior to 1990,  Ms.  Hernandez  served in successive  technical  and  management
positions with the Company.

     Timothy K. Rutledge,  Vice President,  is responsible for the operations of
the  Decision  Support  Systems  division.  He joined  the  Company in June 1992
following  the  acquisition  of  Innovate  Software  Solutions,  Inc.  which  he
co-founded in 1989. He held successive management positions with that firm until
its  acquisition  by  Medicus.  Previously,  he served  as a  manager  for Price
Waterhouse.

     William G. Brown is a partner of Bell,  Boyd & Lloyd,  Chicago,  IL,  legal
counsel to the Company, and has been Secretary and a Director of the Predecessor
Corporation since its incorporation in December 1984, and of MCS and the Company
since  March 1, 1996.  Mr.  Brown is also a Director  of MYR Group,  Dovenmuehle
Mortgage and CFC International, Inc.

ITEM 11. EXECUTIVE COMPENSATION

     The  information  called for by Item 11 is incorporated by reference to the
information under the caption "Compensation" in the Registrant's Proxy Statement
for the 1997 Annual Meeting of Stockholders to be held on November 18, 1997 (the
"Proxy Statement").

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT

     The  information  called for by Item 12 is incorporated by reference to the
information  under the caption  "Common Stock  Ownership by  Management"  in the
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information  called for by Item 13 is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.



<PAGE>

                                 PART IV

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


INDEX TO FINANCIAL STATEMENTS
                                                                   Page

Report of Independent Accountants                                   F-2

Balance Sheets at May 31, 1997 and 1996                             F-3

Statements of Operations for the years 
ended May 31, 1997, 1996 and 1995                                   F-4

Statements of Changes in Stockholders' Equity for the years 
ended May 31, 1997, 1996 and 1995                                   F-5

Statements of Cash Flows for the years ended May 31, 1997, 
1996 and 1995                                                       F-7

Notes to Financial Statements                                       F-8
 
     All  supplemental  schedules  other than as set forth  above are omitted as
inapplicable  or because the required  information  is included in the Financial
Statements or the Notes to Financial Statements.


<PAGE>
Exhibits:

     A list of Exhibits is set forth in the Exhibit Index,  which index precedes
such  exhibits  and  which is  incorporated  herein by this  reference  thereto.
Included  in the  exhibits  listed  therein  are the  following  exhibits  which
constitute management contracts or compensatory plans or arrangements:

         (i.)     1989 Stock Option Plan, as amended
         (ii.)    1991 Stock Option Plan
         (iii.)   1993 Stock Option Plan
         (iv.)    1993 Performance Stock Option Plan
         (v.)     Stock Purchase Plan, as amended
         (vi.)    Form of Indemnification Contract between Registrant and each 
                  officer and director
         (vii.)   Retirement Savings Plan
         (viii.)  1994 Stock Option Plan
         (ix.)    1994 Directors' Stock Option Plan
         (x.)     1995 RCM Stock Option Plan
         (xi.)    1996 C.E.O. Stock Option Plan
         (xii.)   1996 C.E.O. Replacement Stock Option Plan
         (xiii.)  1996 C.E.O. Special Stock Option Plan
         (xiv.)   1997 Employee Stock Option and Restricted Stock Plan
         (xv.)    Amendment to and Restatement of the 1989, 1991, 1993, 1993 
                  Performance and 1994 Stock Option Plans
         (xvi.)   Stock Repurchase and Warrant Agreement between the Company 
                  and Richard C. Jelinek
         (xvii.)  Stock Repurchase and Warrant Agreement between the Company and
                  the Boston Safe Deposit and Trust Company of California, or
                  its successors, as trustee of the Richard C. Jelinek 
                  Charitable Remainder Unitrust dated August 3, 1993


Reports on Form 8-K:

     No  reports on Form 8-K were  filed  during the last  quarter of the fiscal
year ended May 31, 1997.




<PAGE>
                                  Exhibit Index

    Exhibit
    Number                                                              
       2                   Distribution  Agreement  between  the  Predecessor  
                           Corporation  and the  Registrant  (Incorporated  by  
                           Reference  to  Exhibit  2(b) to the  Predecessor
                           Corporation's Report on Form 8-K (Commission File No.
                           0-19393) dated March 1, 1996, as amended by Form 
                           8-K/A-1 filed on April 30, 1996).

       3        (a)        Restated Certificate of Incorporation (incorporated 
                           by reference to Exhibit 4(a) to Registration 
                           Statement number 333-3028).
                (b)        Bylaws (incorporated by reference to Exhibit 3(b) to 
                           the Registrant's Registration Statement on Form 10 
                           (Commission File No. 0-27614)).

      10        (b)        Agreement between the Registrant and Comshare, Inc.**

                (c)        1989 Stock Option Plan, as amended**

                (c)(1)     1991 Stock Option Plan ***

                (c)(2)     1993 Stock Option Plan****

                (c)(3)     1993 Performance Stock Option Plan****

                (c)(4)     1994 Stock Option Plan*****

                (c)(5)     1994 Directors' Stock Option Plan #

                (c)(6)     1995 RCM Stock Option Plan ##

                (c)(7)     1996 C.E.O. Stock Option Plan ##

                (c)(8)     1996 C.E.O. Replacement Stock Option Plan ##

                (c)(9)     1996 C.E.O. Special Stock Option Plan ##

                (c)(10)    1997 Employee Stock Option and Restricted Stock 
                           Plan (Incorporated by Reference to Exhibit D to the 
                           Company's Proxy Statement dated February 17, 1997 
                           (Commission File No. 0-27614))

                (c)(11)    Amendment to and Restatement of the 1989, 1991, 1993,
                           1993 Performance and 1994 Stock Option Plans 
                           (Incorporated by Reference to Exhibit C to the 
                           Company's Proxy Statement dated February 17, 1997 
                           (Commission File No. 0-27614))

                (e)(1)     Stock Repurchase and Warrant Agreement between the 
                           Company and Richard C. Jelinek (Incorporated by 
                           Reference to Exhibit E to the Company's Proxy 
                           Statement dated February 17, 1997 
                           (Commission File No. 0-27614))

                (e)(2)     Stock Repurchase and Warrant Agreement between the 
                           Company and the Bostons Safe Deposit and Trust 
                           Company of California, or its successors, as trustee 
                           of the Richard C. Jelinek Charitable Remainder 
                           Unitrust dated August 3, 1993 (Incorporated by 
                           Reference to Exhibit E to the Company's Proxy 
                           Statement dated February 17, 1997 
                           (Commission File No. 0-27614))

                (f)        Stock Purchase Plan, as amended ##

                (g)        Form of Indemnification Contract between Registrant
                           and each officer and director**

                (h)        Retirement Savings Plan****

                (i)        Lease of Evanston, IL office ##

                (j)        Lease of Alameda, CA office ##

                (k)        Lease of Cincinnati, OH office***

                (l)        Lease of Chesterfield, MO office ##

                (m)        Loan and Security Agreement with Cole Taylor Bank

      23                   Consent of Price Waterhouse LLP


<PAGE>
*       Indicated only on manually signed original of report.

**      Incorporated by reference to the exhibit with the same designation filed
        as part of Registration Statement No. 33-41253.

***     Incorporated by reference to the exhibit with the same designation filed
        as part of the Annual Report on Form 10-K of the Predecessor Corporation
        for the fiscal year ended May 31, 1992.

****    Incorporated by reference to the exhibit with the same designation filed
        as part of the Annual Report on Form 10-K of the Predecessor Corporation
        for the fiscal year ended May 31, 1993.

*****   Incorporated by reference to the exhibit with the same designation filed
        as part of the Annual Report on Form 10-K of the Predecessor Corporation
        for the fiscal year ended May 31, 1994.

#       Incorporated by reference to the exhibit with the same designation filed
        as part of the Annual Report on Form 10-K of the Predecessor Corporation
        for the fiscal year ended May 31, 1995.

##      Incorporated by reference to the exhibit with the same designation filed
        as part of the Annual  Report on  Form  10-K of  the Registrant  for the
        fiscal year ended May 31, 1996.


<PAGE>
                                   SIGNATURES

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

     MEDICUS SYSTEMS CORPORATION


     By   Patrick C. Sommers 
          ------------------
          Patrick C. Sommers Chairman,  
          Chief Executive Officer
          and President

Dated:  August 28, 1997

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

                 Signature             Title                         Date

           Patrick C. Sommers         Chairman of the           August 28, 1997
          --------------------        Board of Directors, 
           Patrick C. Sommers         Chief Executive Officer
                                      and President

            Daniel P. DiCaro          Vice President            August 28, 1997
          --------------------        (principal financial and
            Daniel P. DiCaro          accounting officer)
                                             
            William G. Brown          Director                  August 28, 1997
          --------------------
            William G. Brown

             Jon E.M. Jacoby          Director                  August 28, 1997
          --------------------
             Jon E.M. Jacoby

           Richard C. Jelinek         Director                  August 28, 1997
          --------------------
           Richard C. Jelinek

              John P. Kunz            Director                  August 28, 1997
          --------------------
              John P. Kunz

           Risa Lavizzo-Mourey        Director                  August 28, 1997
          --------------------
           Risa Lavizzo-Mourey

             Gail L. Warden           Director                  August 28, 1997
          --------------------
             Gail L. Warden