<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 June 30, 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
 Incorporation or Organization)                         Identification Number)

                    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 6,520,126 shares of common stock outstanding as of June 30,
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 - 
              June 30, 1997 and September 30, 1996                            2

              Consolidated Statements of Operations - 
              Three Months and Nine Months ended 
              June 30, 1997 and 1996                                          3

              Consolidated Statements of Cash Flows - 
              Nine Months ended June 30, 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


PART II.    OTHER INFORMATION


      Item 6. Exhibits and Reports on Form 8-K                                9

                                       1

<PAGE>

                        PART I.  FINANCIAL INFORMATION
                        ITEM 1.  FINANCIAL STATEMENTS

                      HEALTH SYSTEMS DESIGN CORPORATION
                        CONSOLIDATED BALANCE SHEETS
                                (UNAUDITED)


                                    ASSETS
<TABLE>
<CAPTION>

                                                                 JUNE 30,         SEPTEMBER 30,
                                                                   1997                1996
                                                              -------------      --------------
<S>                                                           <C>                <C>

Current Assets:
   Cash and cash equivalents                                  $  13,045,208      $   15,254,042
   Accounts receivable, net of allowance for doubtful
       accounts of $175,000 at June 30 1997, and
       $100,000 at September 30, 1996                             3,752,654           3,661,984
   Unbilled revenue                                               1,351,080           1,469,533
   Prepaid expenses                                                 454,845             427,586
                                                              -------------      --------------
         Total current assets                                    18,603,787          20,813,145
                                                              -------------      --------------

Property and equipment:
     Computer equipment                                           3,171,933           2,454,204
     Office furniture and other                                   1,089,091             865,725
                                                              -------------      --------------
          Total property and equipment                            4,261,024           3,319,929
Less:  Accumulated depreciation                                  (1,464,993)           (765,203)
                                                              -------------      --------------
          Net property and equipment                              2,796,031           2,554,726
                                                              -------------      --------------
Deposits and other assets                                           127,002              83,211
                                                              -------------      --------------
Software development costs, net of accumulated 
    amortization of $532,313 and $390,508 at June 30, 1997 
    and September 30,1996, respectively                             712,654             305,970
                                                              -------------      --------------
          Total assets                                        $  22,239,474      $   23,757,052
                                                              -------------      --------------
                                                              -------------      --------------

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current portion of capital lease obligations              $       -          $        3,505
    Accounts payable                                                714,815             693,269
    Accrued liabilities                                             598,718             746,358
    Unearned revenue                                              1,265,893           1,201,913
                                                              -------------      --------------
         Total current liabilities                                2,579,426           2,645,045

Stockholders' equity:
     Preferred stock, $.001 par value, 1,000,000 shares 
           authorized, none outstanding                               -                   -
     Common stock, $.001 par value, 20,000,000 shares 
          authorized, 6,520,126 and 6,433,766 shares issued and
          outstanding at June 30, 1997 and September 30, 1996,
          respectively                                                6,520               6,434
    Additional paid-in capital                                   22,999,061          22,842,130
    Treasury stock, 2,054 shares                                    (28,500)            (28,500)
    Deferred compensation                                           (47,219)            (59,039)
    Retained deficit                                             (3,269,814)         (1,649,018)

                                                              -------------      --------------
    Total stockholders' equity                                   19,660,048          21,112,007
                                                              -------------      --------------
          Total liabilities and stockholders' equity          $  22,239,474      $   23,757,052
                                                              -------------      --------------
                                                              -------------      --------------
</TABLE>
                                       2
<PAGE>
                       HEALTH SYSTEMS DESIGN CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                                       THREE MONTHS ENDED                        NINE MONTHS ENDED
                                                             JUNE 30,                                 JUNE 30,
                                                --------------------------------       ---------------------------------
                                                     1997                1996                1997                1996
                                                ------------        ------------       -------------        ------------
<S>                                             <C>                 <C>                <C>                  <C>
Revenues:
   System sales                                 $  4,573,229        $  2,752,282       $  10,934,056        $  6,945,238
   Services and other                                657,571             446,662           1,741,579           1,298,748
                                                ------------        ------------       -------------        ------------
        Total revenues                             5,230,800           3,198,944          12,675,635           8,243,986
Cost of revenues                                   1,680,797             932,303           4,407,695           2,516,350
                                                ------------        ------------       -------------        ------------
         Gross margin                              3,550,003           2,266,641           8,267,940           5,727,636
                                                ------------        ------------       -------------        ------------

Operating expenses:
    General and administrative                     1,354,046           1,047,653           4,131,753           2,572,303
    Sales and marketing                              919,592             771,503           2,967,125           1,869,255
    Product development                            1,530,108           1,078,026           3,317,554           2,574,604
                                                ------------        ------------       -------------        ------------
        Total operating expenses                   3,803,746           2,897,182          10,416,432           7,016,162
                                                ------------        ------------       -------------        ------------
        Loss from operations                        (253,743)           (630,541)         (2,148,492)         (1,288,526)
Interest income (expense), net                       166,469             230,855             527,696            (158,466)
                                                ------------        ------------       -------------        ------------
        Loss before provision for
          income taxes                               (87,274)           (399,686)         (1,620,796)         (1,446,992)
Provision for income taxes                                 -                   -                   -                   -
                                                ------------        ------------       -------------        ------------
Net loss                                          $  (87,274)        $  (399,686)      $  (1,620,796)      $  (1,446,992)
                                                ------------        ------------       -------------        ------------
                                                ------------        ------------       -------------        ------------
Net loss per share                                  $  (0.01)           $  (0.06)           $  (0.25)           $  (0.26)
                                                ------------        ------------       -------------        ------------
                                                ------------        ------------       -------------        ------------
Weighted average common and common 
equivalent shares outstanding                      6,495,558           6,672,699           6,462,643           5,535,900
                                                ------------        ------------       -------------        ------------
                                                ------------        ------------       -------------        ------------

</TABLE>

                                       3

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                     NINE MONTHS ENDED
                                                                                           JUNE 30, 
                                                                             ----------------------------------
                                                                                   1997                1996
                                                                             --------------      --------------
<S>                                                                          <C>                 <C>
Cash flows from operating activities:
     Net loss                                                                $  (1,620,796)      $  (1,446,992)
     Adjustments to reconcile net loss to net cash and cash equivalents
         used in operating activities:
               Depreciation and amortization                                       851,309             400,128
               (Gain) loss on asset disposals                                         (439)             (5,000)
               Amortization of deferred compensation                                11,820              15,816
               Write-off of debt discount                                                -             350,000
               Changes in current assets and liabilities:
                    Accounts receivable                                            (90,670)           (934,156)
                    Unbilled revenue                                               118,453            (951,868)
                    Prepaid expenses                                               (27,259)           (474,965)
                    Accounts payable                                                21,546              21,949
                    Accrued liabilities                                           (147,640)            318,766
                    Unearned revenue                                                63,980             164,636
                                                                             --------------      --------------
                        Net cash used in operating activities                     (819,696)         (2,541,686)
                                                                             --------------      --------------

Cash flows from investing activities:
    Purchases of property and equipment                                           (955,370)         (1,201,957)
    Proceeds from sale of property and equipment                                     5,000               5,000
    Capitalization of software development costs                                  (548,489)           (206,538)
    Other assets                                                                   (43,791)             81,437
                                                                             --------------      --------------
          Net cash used in investing activities                                 (1,542,650)         (1,322,058)
                                                                             --------------      --------------

Cash flows from financing activities:
     Borrowings from line of credit                                                      -             450,000
     Payments under line of credit                                                       -            (958,427)
     Borrowings from notes payable                                                       -           1,500,000
     Payments under notes payable and capital leases                                (3,505)         (2,459,945)
     Proceeds from issuance of common stock, net of issuance costs                                  21,722,965
     Proceeds from exercise of common stock options                                157,017             483,180
                                                                             --------------      --------------
           Net cash provided by financing activities                               153,512          20,737,773
                                                                             --------------      --------------
           Net increase (decrease) in cash and cash equivalents                 (2,208,834)         16,874,029
Cash and cash equivalents at beginning of period                                15,254,042             149,218
                                                                             --------------      --------------
Cash and cash equivalents at end of period                                   $  13,045,208       $  17,023,247
                                                                             --------------      --------------
                                                                             --------------      --------------

Supplemental disclosure of cash flow information:
     Interest paid                                                           $          21       $     122,726
     Taxes paid                                                              $       5,600       $         800

Supplemental disclosure of noncash transactions:
     Cancellation of advances from stockholder through issuances
     of notes payable                                                        $           -       $     500,000
     Warrants exercised for common stock                                     $           -       $     475,000

</TABLE>
                                       4
<PAGE>

                       HEALTH SYSTEMS DESIGN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                JUNE 30, 1997

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 nine month period ended June 30, 1997, are not necessarily indicative of 
the results that may be expected for the year ended September 30, 1997.  
These consolidated financial statements should be read in conjunction with 
the financial statements and footnotes thereto for the year then ended 
September 30, 1996, included in the Company's Form 10-K Annual Report.

2.  NET LOSS PER SHARE

    Net loss per common and common equivalent share is based on the weighted 
average number of common and common dilutive equivalent shares outstanding 
during the period.  Pursuant to Securities and Exchange Commission Staff 
Accounting Bulletin No. 83, common equivalent shares include all common 
shares issued and options and warrants to purchase shares of common stock 
granted by the Company at a price less than the initial public offering price 
during the period March 16, 1995, through the initial public offering date 
(using the treasury stock method for options and warrants and based on the 
public offering price of $13.00 per share) as if they were outstanding for 
all periods presented prior to the initial public offering.

3.  INITIAL PUBLIC OFFERING

    On March 5, 1996, the Company sold 1,855,000 shares of its common stock 
through an initial public offering.  As a result, the Company received net 
proceeds of $21,722,965.  A portion of the proceeds were immediately used to 
retire short-term and long-term indebtedness to banks and other creditors.  
In connection with the repayment of the private placement notes payable of  
$2,000,000, the Company recorded a one-time, non-cash charge to interest 
expense of approximately $333,000 in the second quarter of fiscal 1996 to 
reflect the write-off of deferred interest.  A $17,000 non-cash charge to 
interest expense was recorded in the first quarter of fiscal 1996.  Also, in 
February, 1996, the Company reincorporated in the state of Delaware.

                                       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 third party hardware and software products. License 
revenues are recognized on a percentage of completion basis based on the 
labor hours required to implement the system. Implementation, modification, 
support and consulting fees are billed either on an hourly or monthly basis 
and are recognized as services are rendered. Third party hardware and 
software fees are typically billed and recognized as revenues when delivered 
to the client. 

RESULTS OF OPERATIONS

    REVENUES

    Total revenues were $5,231,000 and $3,199,000 for the three months ended 
June 30, 1997 and 1996, respectively, representing an increase of 64%.  Total 
revenues were $12,676,000 and $8,244,000 for the nine months ended June 30, 
1997 and 1996, respectively, representing an increase of 54%.  The growth in 
total revenues is attributable primarily to an increase in the number and 
size of Diamond implementations and modification projects in progress during 
the period, as well as an increase in third party hardware and software sales.

    During the nine months ended June 30, 1997, the Company executed its 
largest contract to date 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 $1,005,000 and $1,318,000 
in revenues for the three and nine months ended June 30, 1997, respectively.

    The Company's relationship with Blue Cross and Blue Shield of Florida, 
which commenced in November 1995, contributed approximately $1,161,000 in 
revenues for the three months ended June 30, 1997 compared with $1,363,000 in 
the prior year period.  For the nine months ended June 30, 1997 and 1996, the 
project contributed revenues of $2,560,000 and $2,701,000, respectively.

    SYSTEM SALES.  System sales revenues, which includes license, 
implementation, modification and third party hardware and software fees, were 
$4,573,000 and $2,752,000 for the three months ended June 30, 1997 and 1996, 
respectively, representing an increase of 66%.  System sales revenues were 
$10,934,000 and $6,945,000 for the nine months ended June 30, 1997 and 1996 
respectively, representing an increase of 57%.  Revenues associated with 
Diamond 950C/S were partially responsible for the increase in systems sales 
revenues, with the Company experiencing significant increases in Diamond 
950C/S implementation and modification fees for the three months ended June 
30, 1997 compared to the year earlier period.   A significant increase in 
third party hardware and software revenues associated with these sales was 
also responsible for the increase in system sales revenues for the three and 
nine months ended June 30, 1997.

    SERVICES AND OTHER.  Services and other revenues, which includes support 
fees, were $658,000 and $447,000 for the three months ended June 30, 1997 and 
1996, respectively, representing an increase of 47%.  Services and other 
revenues were $1,742,000 and $1,299,000 for the nine months ended June 30, 
1997 and 1996, respectively, representing an increase of 34%.  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 the Diamond products.

                                       6

<PAGE>

    COST OF REVENUES.  Cost of revenues was $1,681,000 and $932,000 for the 
three months ended June 30, 1997 and 1996, respectively, representing an 
increase of 80%.  Cost of revenues was $4,408,000 and $2,516,000 for the nine 
months ended June 30, 1997 and 1996, respectively, representing an increase 
of 75%.  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. Additionally, the cost of 
hardware and third party software increased significantly over the comparable 
period proportionate with an increase in hardware and third party software 
revenues.  Cost of revenues increased from 29% of total revenues in the three 
months ended June 30, 1996 to 32% of total revenues in the three months ended 
June 30, 1997.  The cost of revenues as a percentage of sales is dependent on 
the mix of license, service, and third party hardware and software revenues, 
and may fluctuate over time as these revenue sources fluctuate.

    OPERATING EXPENSES.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenditures were 
$1,354,000 and $1,048,000 for the three months ended June 30, 1997 and 1996, 
respectively, representing an increase of 29%.  General and administrative 
expenditures were $4,132,000 and $2,572,000 for the nine months ended June 
30, 1997 and 1996, respectively, representing an increase of 61%.  The 
increase in general and administrative expenses was due primarily to staff 
additions and investment in infrastructure to support the Company's expanded 
operations, as well as fulfilling the obligations of being a public company.

    SALES AND MARKETING.  Sales and marketing expenditures were $920,000 and 
$772,000 for the three months ended June 30, 1997 and 1996, respectively, 
representing an increase of 19%.  Sales and marketing expenditures were 
$2,967,000 and $1,869,000 for the nine months ended June 30, 1997 and 1996, 
respectively, representing an increase of 59%.  The increase in sales and 
marketing expenses was due to the Company's continued emphasis on 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 $1,530,000 and $1,078,000 for the three months ended 
June 30, 1997 and 1996, respectively, representing an increase of 42%.  
Product development expenditures, net of software capitalization, were 
$3,318,000 and $2,575,000 for the nine months ended June 30, 1997 and 1996, 
respectively, representing an increase of 29%.  The Company capitalized 
$188,000 and $116,000 of product development costs in the three months ended 
June 30, 1997 and 1996, respectively, and  $548,000 and $207,000 in the nine 
months ended June 30, 1997 and 1996, respectively.  The increase in product 
development expenditures 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.  Although the product 
development costs decreased as a percentage of revenues for the quarter, 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 future.

    INTEREST INCOME AND EXPENSE.  Interest income was $166,000 and $231,000, 
respectively, for the three months ended June 30, 1997 and 1996, 
respectively.  Interest income was $528,000 and interest expense was $158,000 
for the nine months ended June 30, 1997 and 1996, respectively.

    The interest income for the three months and nine months ended June 30, 
1997 and the three months ended June 30, 1996, resulted primarily from the 
cash proceeds from the initial public offering completed on March 5, 1996.  
Interest expense for the comparable year earlier periods related to capital 
leases and interest on notes payable, all of which were substantially paid 
off during the first quarter of fiscal 1996.

                                       7

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

    Net cash used in operating activities was $820,000 and $2,542,000 in the 
nine months ended June 30, 1997 and 1996, respectively.   In the nine months 
ended June 30, 1997, net cash used in operating activities resulted primarily 
from the net loss for the period, partially offset by depreciation and 
amortization. 

    Net cash used in investing activities was $1,543,000 and $1,322,000 in 
the nine months ended June 30, 1997 and 1996, respectively, and consisted 
primarily of  purchases of computer equipment and furniture related to the 
expansion of the corporate offices and an increase in software capitalization 
due to new product development projects.

    Net cash provided by financing activities was $154,000 and $20,738,000 in 
the nine months ended June 30, 1997 and 1996, respectively.   In the nine 
months ended June 30, 1997, net cash provided by financing activities 
consisted primarily of proceeds from the exercise of common stock options by 
employees.  In the nine months ended June 30, 1996, net cash provided by 
financing activities consisted primarily of proceeds from the initial public 
offering on March 5, 1996.

    As of June 30, 1997 and 1996, the Company had cash and cash equivalents 
in the amounts of $13,045,000 and $17,023,000, 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 Commission 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

         (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:  August 12, 1997
                                   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
-------                       -----------
             
11.1          Computation of net loss per share

                                      10