<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                                       
                             Washington, DC  20549

                                   FORM 10-Q

 Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
                                     of 1934

                 For the quarterly period ended December 31, 1997

                                        OR

  Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange
                                   Act of 1934

            For the transition period from ___________ to ____________

                     Commission file number        0-27502
                                            --------------------
                                          
                        HEALTH SYSTEMS DESIGN CORPORATION
              (Exact name of registrant as specified in its charter)

          DELAWARE                                   94-3235734
(State or other Jurisdiction of         (I.R.S. Employer Identification Number)
 Incorporation or Organization)
                                       
                    1330 BROADWAY, OAKLAND, CALIFORNIA  94612
            (Address of principal executive offices)      (Zip code)
                                          
                                 (510) 763-2629
               (Registrant's telephone number, including area code)






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
1932 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes   X     No
                                     ------      ------

The registrant had 6,534,908 shares of common stock outstanding as of December
31, 1997.

Exhibit index is located on page 10

<PAGE>
                                       
                       HEALTH SYSTEMS DESIGN CORPORATION
                                          
                                     INDEX
                                          
PART I.    FINANCIAL INFORMATION                                         PAGE 


      Item 1. Consolidated Financial Statements

              Consolidated Balance Sheets - 
              December 31, 1997 and September 30, 1997                     2

              Consolidated Statements of Operations - 
              Three Months ended December 31, 1997 and 1996                3

              Consolidated Statements of Cash Flows - 
              Three Months ended December 31, 1997 and 1996                4

              Notes to Consolidated Financial Statements                   5


     Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                    6




                                       1
                                        
                                       
<PAGE>

                                        
                       PAGE PART I.  FINANCIAL INFORMATION
                         ITEM 1.  FINANCIAL STATEMENTS

                       HEALTH SYSTEMS DESIGN CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

                                      ASSETS

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,            SEPTEMBER 30,
                                                                               1997                    1997
                                                                           (UNAUDITED)
                                                                          --------------          --------------- 
<S>                                                                       <C>                    <C>              
Current Assets:
   Cash and cash equivalents                                              $  9,395,975            $  11,194,757 
   Accounts receivable, net of allowance for doubtful
     accounts of $195,000 at December 31 1997, and
     $193,000 at September 30, 1997                                          6,506,535                5,208,056 
   Unbilled revenue                                                          1,656,576                  994,421 
   Prepaid expenses                                                            732,659                  568,266
                                                                         -------------            -------------
       Total current assets                                                 18,291,745               17,965,500
                                                                         -------------            -------------
Property and equipment:
   Computer equipment                                                        3,838,627                3,636,153
   Office furniture and other                                                1,280,981                1,149,701
                                                                         -------------            -------------
       Total property and equipment                                          5,119,608                4,785,854
Less:  Accumulated depreciation                                             (1,885,532)              (1,599,767)
                                                                         -------------            -------------
       Net property and equipment                                            3,234,076                3,186,087
                                                                         -------------            -------------
Deposits and other assets                                                      125,502                  127.000 
                                                                         -------------            -------------
Software development costs, net of accumulated 
     amortization of  $633,191 and $582,752 in 1997 and 1996,
     respectively                                                              913,296                  798,540 
                                                                         -------------            -------------
       Total assets                                                      $  22,564,619            $  22,077,127 
                                                                         -------------            -------------
                                                                         -------------            -------------
                           LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable                                                     $   1,032,170             $  1,202,704
    Accrued liabilities                                                      1,983,281                1,740,674
    Unearned revenue                                                         3,236,253                1,675,265
                                                                         -------------            -------------
         Total current liabilities                                           6,251,704                4,618,143

Stockholders' equity (deficit):
     Preferred stock, $.001 par value, 1,000,000 shares 
           authorized, none outstanding                                              -                        -
     Common stock, $.001 par value, 20,000,000 shares 
          authorized, 6,534,906 and 6,533,406 shares issued and
          outstanding at December 31, 1997 and September 30, 1997,
          respectively                                                           6,533                    6,533
    Additional paid-in capital                                              23,033,532               23,029,552
    Treasury stock, 2,054 shares                                               (28,500)                 (28,500)
    Deferred compensation                                                      (39,339)                 (43,279)
    Retained deficit                                                        (6,659,311)              (5,505,322)
                                                                         -------------            -------------
    Total stockholders' equity                                              16,312,915               17,458,984
                                                                         -------------            -------------
          Total liabilities and stockholders' equity                     $  22,564,619            $  22,077,127 
                                                                         -------------            -------------
                                                                         -------------            -------------

</TABLE>

                                        2

<PAGE>

                        HEALTH SYSTEMS DESIGN CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED
                                                                             DECEMBER 31,
                                                               -------------------------------------
                                                                   1997                     1996
                                                               ------------            -------------
<S>                                                              <C>                   <C>
Revenues:
  System sales                                                   $4,545,848             $  2,858,214
  Services and other                                                744,894                  464,326
                                                               ------------            -------------
      Total revenues                                              5,290,742                3,322,540
Cost of revenues                                                  2,201,399                1,335,773
                                                               ------------            -------------
      Gross margin                                                3,089,343                1,986,767
                                                               ------------            -------------
Operating expenses:
  General and administrative                                      1,873,471                1,333,858
  Sales and marketing                                               975,341                1,069,731
  Product development                                             1,516,095                  856,730
                                                               ------------            -------------
      Total operating expenses                                    4,364,907                3,260,319
                                                               ------------            -------------
      Loss from operations                                       (1,275,564)              (1,273,552)
Interest income (expense), net                                      121,575                  183,463
                                                               ------------            -------------
      Loss before provision for
         income taxes                                            (1,153,989)              (1,090,089)
Provision for income taxes                                                -                        -
                                                               ------------            -------------
Net loss                                                         (1,153,989)              (1,090,089)
                                                               ------------            -------------
                                                               ------------            -------------
Net loss per share                                                 $  (0.18)                $  (0.17)
                                                               ------------            -------------
                                                               ------------            -------------
Weighted average common and common 
  equivalent shares outstanding                                   6,534,621                6,436,372
                                                               ------------            -------------
                                                               ------------            -------------
</TABLE>

                                        3

<PAGE>

                                        
                       HEALTH SYSTEMS DESIGN CORPORATION
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                               THREE MONTHS ENDED
                                                                                                    DECEMBER 31, 
                                                                                     ------------------------------------------
                                                                                            1997                     1996
                                                                                     ------------------        ----------------
<S>                                                                                  <C>                       <C>
Cash flows from operating activities:
  Net loss                                                                           $      (1,153,989)        $     (1,090,089)
  Adjustments to reconcile net loss to net cash and cash equivalents  
      provided by (used in) operating activities:  
            Depreciation and amortization                                                      340,144                  257,670
            Loss on disposal of property and equipment                                               -                    5,647
            Changes in current assets and liabilities:   
                 Accounts receivable                                                        (1,298,479)                 523,694
                 Unbilled revenue                                                             (662,155)                (439,981)
                 Prepaid expenses                                                             (164,393)                 (15,125)
                 Accounts payable                                                             (170,034)                (100,666)
                 Accrued liabilities                                                           242,607                  158,024
                 Unearned revenue                                                            1,560,988                  742,997
                                                                                     ------------------        ----------------
                     Net cash provided by (used in) operating activities                    (1,305,311)                  42,171
                                                                                     ------------------        ----------------
Cash flows from investing activities:  
  Purchases of property and equipment                                                         (333,754)                (310,640)
  Capitalization of software development costs                                                (165,195)                (138,636)
  Other assets                                                                                   1,498                  (35,644)
                                                                                     ------------------        ----------------
       Net cash used in investing activities                                                  (497,451)                (484,920)
                                                                                     ------------------        ----------------
Cash flows from financing activities:
  Payments under capital leases                                                                      -                   (1,403)
  Proceeds from exercise of common stock options                                                 3,980                   16,798
                                                                                     ------------------        ----------------
       Net cash provided by financing activities                                                 3,980                   15,395
                                                                                     ------------------        ----------------
       Net increase (decrease) in cash and cash equivalents                                  (1,798,782)                (427,354)
Cash and cash equivalents at beginning of period                                            11,194,757               15,254,042
                                                                                     ------------------        ----------------
Cash and cash equivalents at end of period                                           $       9,395,975         $     14,826,688
                                                                                     ------------------        ----------------
                                                                                     ------------------        ----------------
Supplemental disclosure of cash flow information:
     Interest paid                                                                   $                -        $             90

</TABLE>

                                        4

<PAGE>

                                                                      
                         HEALTH SYSTEMS DESIGN CORPORATION
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 DECEMBER 31, 1996
                                          
1.  BASIS OF PRESENTATION


     The accompanying unaudited consolidated financial statements have been 
prepared in accordance with generally accepted accounting principles for 
interim financial information and on substantially the same basis as the 
annual audited financial statements. Accordingly, they do not include all of 
the information and footnotes required by generally accepted accounting 
principles for complete financial statements. In the opinion of management, 
all adjustments (consisting only of normal recurring accruals) considered 
necessary for a fair presentation have been included. Operating results for 
the three month period ended December 31, 1997 are not necessarily indicative 
of the results that may be expected for the year ended September 30, 1998.  
These consolidated financial statements should be read in conjunction with 
the financial statements and footnotes thereto for the year then ended 
September 30, 1997 included in the Company's Form 10-K Annual Report.

2.  REVENUE RECOGNITION


     The Company licenses its internally developed software products and 
other software products to health care organizations under the terms of 
product license contracts.  Individual sales may include, among others, a 
combination of software license, implementation, program modifications, 
training, and support. Contracts with customers may be terminated under 
certain circumstances and revenues recognized could be refundable upon 
termination in certain cases, including breach of contract. The termination 
of customer contracts could have a material adverse effect on the Company's 
business, financial condition, or results of operations.

     In October, 1997, the AICPA issued SOP 97-2 "Software Revenue 
Recognition," which the Company is required to adopt as of October 1, 1999.  
Effective October 1, 1997, the Company adopted this pronouncement. There was 
no material impact on the financial statements taken as a whole.

     The Company generates revenues from licensing the rights to use its
software products directly to end users and indirectly through 
distributors. The Company also generates revenues from sales of 
post-contract support, implementation, and modification services, and 
training services performed for customers who license the Company's products.

     If collection is probable, the Company generally recognizes Diamond 950 
C/S license revenue on a percentage of completion basis based on the labor 
hours required to implement the system, as the implementation of Diamond 950 
C/S occurs over a significant period of time and entails significant 
modifications. Historically, the Company has recognized Diamond 725 license 
revenue on the same basis as Diamond 950 C/S. The Company has concluded, 
based upon its favorable experience in standardizing the installation of 
Diamond 725, the relatively short installation time required to install the 
product, and favorable experience with customer acceptance, that the 
installation services performed in installing Diamond 725 qualify as a 
service transaction under SOP 97-2. As such, effective October 1, 1997, the 
Company will recognize Diamond 725 license revenue for contracts entered into 
after September 30, 1997 upon shipment of the software to end users if there 
are no uncertainties surrounding the contract. The impact of this change was 
to recognize an additional $174,000 in revenue for the quarter ended December 
31, 1997.

     If a software license agreement provides for acceptance criteria that 
extend beyond the published specifications of the applicable product, then 
revenues are recognized upon the earlier of customer acceptance or the 
expiration of the acceptance period. In situations where there are 
undelivered elements critical to functionality of the software product, the 
entire license fee is deferred.

3.  EARNINGS PER SHARE


     In the fiscal year ending September 30, 1998 the company will report its 
net loss per share based on the recently issued Statement of Financial 
Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share." The pro 
forma effect of this accounting change on the three months ended December 31, 
1997 and 1996 is:

<TABLE>
<CAPTION>
                                             1997                 1996
                                            -----                -----

<S>                                         <C>                  <C>
Primary EPS, as reported                    (0.18)               (0.17)
Pro forma effect of SFAS No. 128                -                    -
                                            -----                -----
Basic EPS, pro forma                        (0.18)               (0.17)
                                            -----                -----
                                            -----                -----

Fully diluted EPS, as reported              (0.18)               (0.17)
Pro forma effect of SFAS No. 128                -                    -
                                            -----                -----
Diluted EPS, pro forma                      (0.18)               (0.17)
                                            -----                -----
                                            -----                -----
</TABLE>


                                        5

<PAGE>


                      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                   FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     The Company provides managed care information systems software to 
healthcare organizations that use managed care techniques to deliver 
services, manage financial risk and control costs.  The Company introduced 
its first internally financed and developed application, Diamond 725, in 
fiscal 1992, followed by Diamond 950C/S and Diamond Objects in fiscal 1995 
and Diamond 725Q in fiscal 1996.                                              
     The Company's revenues are derived from licensing Diamond 725, Diamond 
725Q, Diamond 950C/S and Diamond Objects, providing the associated 
implementation, modification, support and consulting services, and reselling 
hardware and third party products. Until fiscal 1998, the Company recognized 
license revenues on a percentage of completion basis based on the labor hours 
required to implement the system. Effective October 1, 1997, the Company adopted
AICPA Statement of Position 97-2, as described in Note 2. to the financial 
statements.  Implementation, modification, support and consulting fees are 
billed either on an hourly or monthly basis and are recognized as services are 
rendered. Hardware and third party software fees are typically billed and 
recognized as revenues when delivered to the client. 

RESULTS OF OPERATIONS

      REVENUES

     Total revenues were $5,291,000 and $3,323,000 for the three months ended 
December 31, 1997 and 1996, respectively, representing an increase of 59%.  
The growth in total revenues is attributable primarily to an increase in the 
number and size of Diamond 950C/S implementations in progress during the 
period.

     During the first quarter of fiscal 1998, the Company executed its 
largest license contract to date with Kaiser Permanente to use Diamond 
950C/S.  The relationship with Kaiser contributed approximately $729,000 and  
$0 in license and services revenues for the three months ended December 31, 
1997 and 1996, respectively.  

     During the first quarter of fiscal 1997, the Company executed a contract 
with Blue Cross/Blue Shield of North Carolina, which includes a license to 
use Diamond 950C/S, as well as implementation and product modification 
services. The relationship with Blue Cross and Blue Shield of North Carolina 
contributed approximately $626,000 and  $0 in revenues for the three months 
ended December 31, 1997 and 1996, respectively.  

     The Company's relationship with Blue Cross and Blue Shield of Florida, 
which commenced in November 1995, contributed approximately $399,000 in 
revenues for the three months ended December 31, 1997 compared with $596,000 
in the prior year period. 

     SYSTEM SALES.  System sales revenues were $4,546,000 and $2,858,000 for 
the three months ended December 31, 1997 and 1996, respectively, representing 
an increase of 59%.  Revenues associated with Diamond 950C/S were responsible 
for the majority of the increase in systems sales revenues, with significant 
increases in Diamond 950C/S license and implementation and fees.

     SERVICES AND OTHER.  Services and other revenues were $745,000 and 
$465,000 for the three months ended December 31, 1997 and 1996, respectively, 
representing an increase of 60%.  Support fees continued to account for the 
majority of services and other revenues.  The increase in services and other 
revenues was due primarily to the expansion of the installed base for Diamond 
725.

     COST OF REVENUES.  Cost of revenues was $2,201,000 and $1,336,000 for 
the three months ended December 31, 1997 and 1996, respectively, representing 
an increase of 65%.  Cost of revenues increased primarily as a result of the 
increased number of personnel, both HSD employees and independent 
contractors, required to implement and support the larger client base. Cost 
of revenues increased from 40% of total revenues in the three 

                                        6

<PAGE>

months ended December 31, 1996 to 41% of total revenues in the three months 
ended December 31, 1997, although no long-term trend should be implied from 
this quarter to quarter comparison.  The cost of revenues as a percentage of 
sales is dependent on the mix of license, service, and hardware and third 
party software revenues, and may fluctuate over time as these revenue sources 
fluctuate.

     OPERATING EXPENSES.  

     GENERAL AND ADMINISTRATIVE.  General and administrative expenditures 
were $1,873,000 and $1,334,000 for the three months ended December 31, 1997 
and 1996, respectively, representing an increase of 40%.  The increase in 
general and administrative expenses was due primarily to staff additions and 
investment in infrastructure to support the Company's expanded operations.  
The Company believes that the level of general and administrative expenses 
will continue to increase, although at a slower rate as the Company expands 
its staff to support a larger client base. General and administrative 
expenses include the salaries and benefits associated with general 
management, finance and administration, as well as costs associated with 
recruiting and facilities.

     SALES AND MARKETING.  Sales and marketing expenditures were $975,000 and 
$1,070,000 for the three months ended December 31, 1997 and 1996, 
respectively, representing an decrease of 9%.   Sales and marketing expenses 
as a percentage of revenues decreased in the three months ended December 31, 
1997 when compared to the corresponding period in 1996, primarily as a result 
of a decrease in marketing personnel.  Although there was a decrease during 
this time period, the Company continues to emphasize the expansion of its 
sales and marketing department to better address market demand for its 
products.

     PRODUCT DEVELOPMENT.  Product development expenditures, net of software 
capitalization, were $1,516,000 and $857,000 for the three months ended 
December 31, 1997 and 1996, respectively, representing an increase of 77%.  
The Company capitalized $165,000 and $139,000 of product development costs in 
the three months ended December 31, 1997 and 1996, respectively.  The 
increase in product development expenditures, net of capitalization, is due 
primarily to the continued development of Diamond 950C/S and Diamond 725, 
including increased staffing and the hiring of technical consultants to 
assist such efforts.  The Company believes that research and development 
expenditures are essential to maintaining its competitive position and 
expects these costs to continue to constitute a significant percentage of 
total revenues in the near future.

     INTEREST INCOME AND EXPENSE. Interest income, net of interest expense, 
was $122,000 and $183,000 at December 31,1997 and 1996, respectively. 
Interest income represents interest earned on the Company's excess cash 
balances, which are generally placed in short term investments, money market 
funds, and government securities. Interest expense during the prior year 
period consisted primarily of interest on capital leases. 

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by (used in) operating activities was $(1,305,000) and 
$42,000 in the three months ended December 31, 1997 and 1996, respectively.  
In the three months ended December 31, 1997, net cash used in operating 
activities consisted primarily of a net loss of $(1,154,000), an increase in 
accounts receivable and in unbilled revenue, and a decrease in accounts payable 
offset by an increase in unearned revenues. The increase in unearned revenue 
was due primarily to the execution of several contracts at the end of the 
period.  The increase in accounts receivable was due primarily to billing for 
these contracts.
     Net cash used in investing activities was $497,000 and $485,000 in the 
three months ended December 31, 1997 and 1996, respectively, and consisted 
primarily of  purchases of computer equipment.
     Net cash provided by financing activities was $4,000 and $15,000 in the 
three months ended December 31, 1997 and 1996, respectively.  In the three 
months ended December 31, 1997, net cash provided by financing activities 
consisted primarily of proceeds from the exercise of common stock options by 
employees.

                                        7

<PAGE>

     As of December 31, 1997 and 1996, the Company had cash and cash 
equivalents in the amounts of $9,396,000 and $14,827,000, respectively.  The 
company believes that available funds and its cash flow from operations will 
be adequate to fund its presently anticipated working capital requirements 
for at least the next 12 months.
               

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 
1995:  The statements contained in this report which are not historical facts 
are forward-looking statements that are subject to risks and uncertainties 
that could cause actual results to differ materially from those set forth in 
or implied by forward-looking statements, including the Company's dependence 
on a single product line, the recent introduction of Diamond 950C/S, which is 
based on client/server technology, dependence of the Company's results of 
operations on its relationship with certain large customers, the variable 
nature of the Company's operating results, the length of the Company's sales 
cycle, the Company's dependence on key personnel, intense competition, and 
other risks described in the Company's Securities and Exchange filings.  



                                        8

<PAGE>

PART II.  OTHER INFORMATION

Item 6.  Exhibits and reports on Form 8-K

         (a)   Exhibits

               11.1    Statement re:  computation of earnings per share
               10.27   License agreement, dated October 20, 1997, with Kaiser 
                       Permanente

         (b)   Reports on Form 8-K

               No reports on Form 8-K have been filed during the quarter for
               which this report is filed.


                                        
                                          
                                   SIGNATURES
                                          
Pursuant to the requirements of the Securities and Exchange Act of 1934, the 
Registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.

                                        Health Systems Design Corporation


Date:  February 13, 1998                                             
     
                                        By:   /s/ Russell J. Harrison    
                                           -----------------------------------
                                            Russell J. Harrison, President and
                                            Chief Executive Officer

                                        By:   /s/ Steven J. Correia         
                                           ------------------------------------
                                            Steven J. Correia,   
                                            Acting Chief Financial Officer




                                        9

<PAGE>



                         HEALTH SYSTEMS DESIGN CORPORATION
                                 INDEX TO EXHIBITS

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

10.27     License agreement with Kaiser Permanente +
11.1      Computation of net loss per share

----------

+   Confidential treatment has been requested with respect to portions of this
    exhibit.  



                                        10