<PAGE>   1
 
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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                  FORM 10-KSB
                            ------------------------
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
   EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                                       OR
[ ] TRANSACTION REPORT UNDER SECTION 13 OR 15(D) OF THE
   SECURITIES EXCHANGE ACT OF 1934
        FOR THE TRANSITION PERIOD FROM                TO
 
                         COMMISSION FILE NUMBER 0-21031
                            ------------------------
                             QUADRAMED CORPORATION
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 
<TABLE>
<S>                                           <C>
                   DELAWARE                                     52-1992861
         (STATE OR OTHER JURISDICTION              (I.R.S. EMPLOYER IDENTIFICATION NO.)
      OF INCORPORATION OR ORGANIZATION)
</TABLE>
 
                         80 E. SIR FRANCIS DRAKE BLVD.
                                    SUITE 2A
                               LARKSPUR, CA 94939
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
 
                                 (415) 461-7725
                 ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE
 
   SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: None.
  SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: Common
                                     Stock
 
     Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
 
     The issuer's revenues for the fiscal year ended December 31, 1996 were
$19,088,000.
 
     The aggregate market value of the Common Stock held by non-affiliates of
the registrant on March 10, 1997 was $33,147,171.
 
     The number of shares of common stock outstanding on March 10, 1997 was
6,017,067.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Definitive Proxy Statement relating to the Company's 1997 Annual Meeting of
Stockholders to be filed hereafter (incorporated into Part III hereof).
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
     Except for the historical financial information contained herein, the
matters discussed in this Annual Report on Form 10-KSB may be considered
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such statements include declarations regarding the intent, belief or
current expectations of the Company and its management. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties and that
actual results could differ materially from those indicated by such
forward-looking statements. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements include those risks identified in "Item 6 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors That
Might Affect Future Operating Results" and other risks identified from time to
time in the Company's reports and registration statements filed with the
Securities and Exchange Commission, including the registration statement on Form
SB-2 related to the Company's initial public offering.
 
OVERVIEW
 
     QuadraMed Corporation ("QuadraMed" or the "Company") develops, markets and
sells a suite of financial management, decision support and electronic data
interchange software products and services designed to enable health care
providers to increase operational efficiency and measure the cost of care and to
facilitate the negotiation of managed care contracts and capitation agreements.
QuadraMed has developed an all-payor, open systems-based electronic data
interchange ("EDI") system designed to collect clinical and financial data
efficiently from its provider customers and speed the reimbursement of their
third-party claims. The Company's financial management products are designed to
increase the accuracy and timeliness of reimbursement, as well as to improve
work flow through the use of electronic files and document imaging for
management of clinical and financial information and patient records. By
accessing the enhanced data stream created by the Company's products, the
Company's decision support products enable providers to measure clinical
outcomes and the resources consumed in achieving such outcomes. The modular
design of the Company's products enables customers to purchase the entire suite
of products as an integrated solution or to purchase applications individually,
adding functionality as their needs evolve. The Company's products and services,
which have been purchased by over 410 health care providers and eight payors,
are designed to operate with, enhance and prolong the life of legacy health care
information systems while providing the functionality required in today's
competitive health care environment. In addition to its software products, the
Company provides business office outsourcing and reimbursement consulting
services.
 
     The Company offers a suite of products, called QuanTIM, which is designed
to improve the operational efficiencies, work flow and clinical, financial and
administrative decision making of health care providers. QuanTIM captures
detailed clinical and financial encounter data at the patient level that is
utilized by the Company's financial management and decision support
applications. Because the Company's EDI software products enable providers to
edit claims at providers' sites and format claims data for all payors, the
Company's customers gain access to a detailed database of information for use
with the Company's decision support products, which measure outcomes and
resource allocation. These EDI products offer detailed information from
disparate information systems allowing consistent, enterprise-wide decision
support analysis. The Company's financial management products allow providers to
track contract terms and to hierarchically review medical records information to
ensure that a bill is properly coded and includes all services rendered. This
capability facilitates providers' ability to obtain timely and accurate
reimbursement and to measure the profitability of managed care contracts.
Moreover, through electronic document imaging and information transfer, the
Company's products improve work flow, allowing providers to move toward a
paperless environment for reimbursement and decision support functions.
 
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     The Company was incorporated in September 1993 in California under the name
QuadraMed Corporation, in conjunction with the acquisition of Coast Micro, Inc.,
an EDI company in October 1993. In December 1993, the Company acquired Seton
Financial and Criterion Healthcare Management, both accounts receivable
management services companies. In December 1993, the Company acquired certain
assets of Trim Healthcare Systems, Inc., a reimbursement consulting services
company. In June 1994, the Company acquired Health Information Technology, Inc.,
a vendor of managed care contract administration software, and in December 1994
the Company purchased HealthView, a clinically-based provider profiling system,
from HealthSynq Corporation. In December 1995, the Company acquired the net
assets of Healthcare Design Systems, a health care information services company.
The Company was reincorporated in Delaware under its current name in August
1996. In December 1996, the Company, through its wholly owned subsidiary
InterMed Acquisition Corporation, a Delaware corporation, completed the
acquisition and merger of InterMed Healthcare Systems Inc., a provider of
client-server information systems that assist health care payors in managing
administrative and financial transactions with providers. Following the
acquisition of InterMed Healthcare Systems Inc., the Company implemented a
divisional structure to enhance and focus its sales efforts. The Company's three
divisions are Value-Added Systems, EDI and Business Office Outsourcing Services.
Unless the context otherwise requires, references herein to the "Company" and
"QuadraMed" refer to QuadraMed Corporation, a Delaware corporation, its wholly
owned subsidiaries and QuadraMed Corporation, its California predecessor. The
Company's executive offices are located at 80 East Sir Francis Drake Blvd., Ste.
2A, Larkspur, CA 94939. Its telephone number is (415) 461-7725.
 
     The Company's strategy is to continue to strengthen its position as a
leading provider of financial management, decision support and EDI software in
the healthcare market. In addition, the Company plans to leverage its software
products to expand its outsourcing business. Key elements of the Company's
strategy include (i) expanding its customer base through its direct sales force,
strategic alliances and hospital association endorsements, (ii) leveraging its
existing customer base through cross-selling of its products, (iii) selectively
acquiring complementary products and services, (iv) capitalizing on outsourcing
opportunities to expand its outsourcing customer base and (v) continuing to
devote considerable resources to developing proprietary state-of-the-art
technology. See "Item 6 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That Might Affect Future
Operating Results."
 
     The Company's customers are typically hospitals and other health care
providers, and substantially all of the Company's revenues in 1996 and 1995 were
derived from the sale of software products and services to hospitals. The
Company's performance is dependent on continued demand for its products in the
health care information systems and services industry. Consolidation in the
health care information systems and services industry could have a material
adverse effect on the Company due to the decrease in the number of potential
purchasers of the Company's products and services or the acquisition of one or
more of the Company's customers by an acquiror that uses products that compete
with those of the Company. Legislative or market-driven reforms could also have
unpredictable effects on the Company's business, financial condition and results
of operations. In addition, the decision to purchase the Company's products
often involves the approval of several individuals within hospitals and other
health care providers. Consequently, it is difficult for the Company to predict
the timing or outcome of the buying decisions of customers or potential
customers.
 
     The Company's future performance is also dependent in part on the success
of its marketing strategy which involves, to a substantial degree, a reliance
upon strategic alliance partners to sell the Company's products as a component
of the integrated systems being marketed by such partner or to endorse the
Company's products. If these strategic alliance partners elect to remove their
product endorsement or elect not to include the Company's products as components
in their integrated systems or are unsuccessful in achieving significant sales
of the systems into which the Company's products are to be integrated, the
Company's business, financial condition and results of operations would be
materially adversely affected.
 
     The Company has expanded, and intends to continue to expand, in substantial
part through acquisitions of products, technologies and businesses. The
Company's ability to expand successfully through acquisitions depends on many
factors, including the successful identification and acquisition of products,
technologies or businesses and management's ability to effectively negotiate and
consummate acquisitions and integrate and operate the new products, technologies
or businesses. There is significant competition for acquisition opportunities in
the Company's industry, which may intensify due to consolidation in the health
care industry,
 
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increasing the costs of capitalizing on acquisition opportunities. The Company
competes for acquisition opportunities with other companies that have
significantly greater financial and management resources than the Company. The
inability to successfully identify appropriate acquisition opportunities,
consummate acquisitions or successfully integrate acquired products,
technologies, operations, personnel or businesses could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, acquisitions may divert management's attention from other business
concerns, expose the Company to the risks of entering markets in which the
Company has no direct prior experience or to risks associated with the market
acceptance of acquired products and technologies, or result in the loss of key
employees of the Company or the acquired company. Moreover, future acquisitions
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt and the recognition of
amortization expenses related to goodwill and other intangible assets, which
could adversely affect the Company's business, financial condition and results
of operations.
 
     The acquisition and merger of InterMed Healthcare Systems Inc. in December
1996 increased the number and complexity of software products offered by the
Company. The further integration of this company's products and operations into
the products and operations of the Company will divert management attention from
other matters, will place further pressure on the Company's executive officers
and may result in additional administrative expense. Failure to successfully
complete this integration of products and operations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     The Company's anticipated future operations may place a strain on its
management systems and resources. The Company expects that it will be required
to continue to improve its financial and management controls, reporting systems
and procedures, and will need to expand, train and manage its work force. There
can be no assurance that the Company will be able to effectively manage these
tasks, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. In 1994, 1995
and 1996 the Company experienced significant turnover in its sales personnel,
including its Senior Vice President of Sales. The Company has hired in the last
year and intends to continue to hire a significant number of additional sales
personnel. Thus, a substantial percentage of the Company's sales force is
currently inexperienced in selling the Company's products and will remain so for
some time. In addition, competition for experienced sales personnel is intense,
and there can be no assurance that the Company will be able to attract,
assimilate or retain highly qualified employees in the future. If the Company is
unable to hire and retain such personnel, particularly those in key positions,
the Company's business, financial condition and results of operations could be
materially adversely affected. The Company's future success also depends in
significant part upon the continued service of its executive officers, its
product managers and other key sales, marketing, and development personnel.
 
     The loss of the services of any of its executive officers or other key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. Additions of new and departures
of existing personnel can be disruptive and could have a material adverse effect
on the Company's business, financial condition and results of operations.
 
     DRGX(R) is a registered trademark of the Company. ASCX(TM), QuadraMed(TM),
QuanTIM(TM) and the logo of the Company are trademarks of the Company. All other
trademarks and trade names referred to in this Annual Report on Form 10-KSB are
the property of their respective owners.
 
THE QUANTIM SUITE OF PRODUCTS
 
     QuanTIM, The Information Management system, is QuadraMed's suite of
financial management, decision support and EDI software products designed to
improve operational efficiencies, work flow and financial and clinical decision
making of health care providers. QuanTIM, with its modular architecture and
flexible electronic interface, is designed to utilize data from disparate health
care information systems and to allow its users to extend the life and
functionality of legacy hospital information and practice management systems.
QuanTIM may be licensed either as an integrated suite or as individual
applications. As a result of this modular design, additional applications can be
readily integrated into customers' existing applications.
 
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<PAGE>   5
 
     The Company's QuanTIM suite consists of three software product categories:
financial management, decision support and EDI. The Company's financial
management products are designed to enable providers to effectively administer
their contracts to increase the accuracy and timeliness of reimbursement, and to
improve work flow through the use of electronic files and document imaging for
management of clinical and financial information and patient records. The
Company's decision support products use edited, accurate claims data for
clinical and financial resource utilization monitoring, provider profiling and
clinical outcomes monitoring. The Company's EDI products provide an all-claims,
all-payor electronic claims editing and submission system and an electronic
remittance advice system that receives and posts payment information to the
customer's financial management system.
 
     The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. The Company has not filed any patent applications covering
its technology or registered any of its copyrights with state or federal
agencies. There can be no assurance that measures taken by the Company to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products and services that are
substantially equivalent or superior to those of the Company. Substantial
litigation regarding intellectual property rights exists in the software
industry, and the Company expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in the
Company's industry segment grows and the functionality of products overlaps.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that a license or similar agreement will be available on reasonable terms in the
event of an unfavorable ruling on any such claim. In addition, any such claim
may require the Company to incur substantial litigation expenses or subject the
Company to significant liabilities and could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
  Financial Management Products
 
     The Company's financial management products, which are described below,
allow providers to track managed care and capitated contract terms and to
hierarchically review medical records information to ensure that a bill is
properly coded and includes all services rendered. The Company's customers use
this capability to obtain timely and accurate reimbursement and to measure the
profitability of managed care contracts.
 
     QuanTIM Contract Management.  QuanTIM Contract Management is a software
application that tracks providers' multiple managed care, capitated,
governmental and other payor contract terms, including coverage and
reimbursement for individual diagnoses and procedures. The application
calculates expected reimbursement and the contractual allowance, which is the
difference between the standard charge generated by the provider and the actual
amount owed by the payor under the contract. Expected reimbursement and
contractual allowance amounts can be posted automatically to the provider's
financial information system at the time of billing. QuanTIM Contract Management
allows providers to measure the allocation of revenues and the profitability of
contracts based on specific payor contract terms. QuanTIM Contract Management's
pricing module eliminates labor intensive, error prone manual repricing of
bills, a process that often leads to inaccurate reimbursement and financial
statements. In addition, QuanTIM Contract Management is used as a modeling tool
for managed care contract negotiation and detailed analysis of contract
performance.
 
     QuanTIM DRGX.  QuanTIM DRGX is a software application designed to assist
providers in managing the complexities of the diagnosis related groups ("DRG")
reimbursement system and to ensure equitable payment based on the submission of
a complete and accurate claim. QuanTIM DRGX is not designed to encode or group
information to maximize DRG reimbursement, but instead is designed to ensure
appropriate reimbursement based on accurate and complete billing information.
This product interfaces with legacy financial and medical records information
systems prior to billing to hierarchically review all billing records on a
concurrent basis and to select those bills that have a clinical, financial or
statistical reason to be held in the billing cycle until medical claim coding
can be completed. The product serves as a "safety net," catching revenues that
would otherwise be lost through billing of incomplete or inaccurately coded
data.
 
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     QuanTIM ASCX.  QuanTIM ASCX is a software application designed to assist in
managing the complexities of ambulatory surgical center ("ASC") reimbursement
and outpatient coding systems. ASC coding is often based on incomplete medical
record information, resulting in missing charges or inaccurate coding of
procedures performed and inaccurate assignment of payment level classifications.
QuanTIM ASCX flags incomplete or inaccurate medical claim coding by
hierarchically reviewing billing records prior to billing and identifying those
bills that have clinical, financial or statistical reasons for review.
 
     QuanTIM Electronic Document Management.  QuanTIM Electronic Document
Management is a software application for patient accounting and medical record
departments that captures, indexes, stores and retrieves paper-based
demographic, clinical and financial information and records. This product is
based on an open software architecture which utilizes electronic files that
integrate financial and ancillary department electronic information with scanned
images of paper documents. The Company believes that this application improves
provider work flow, reduces administrative cost and helps providers move toward
paperless business offices and medical records departments. Multi-user access to
the electronic patient account file reduces the need for paper files and storage
while offering access to account information from any work station. The
combination of existing electronic financial information and scanned images with
multi-user capabilities effectively creates a complete electronic patient
account file that can be efficiently routed through billing and administration
departments, thus improving work flow. In addition to licensing this software
application, the Company offers customers the option of purchasing the hardware
required to implement this solution.
 
  Decision Support Products
 
     The Company's decision support products, which are described below,
generally include database analysis software and national and regional benchmark
data that may be licensed to the customer. The customer provides its own
internally generated clinical and financial information to the Company, and the
Company performs risk and severity adjustments on such information based on
patient demographics and health status and formats it for comparison against the
national and regional data. The updated and adjusted data sets are returned to
the customer for use with the database analysis software.
 
     The Company's QuanTIM Performance Measurement System has been accepted for
inclusion on the Joint Commission on Accreditation of Healthcare Organization's
initial list of performance measurement systems.
 
     QuanTIM Clinical Performance Measurement.  QuanTIM Clinical Performance
Measurement is a software application that measures clinical outcomes and
resource utilization based on diagnosis, patient, physician and other variables.
This product is used as a benchmarking tool to compare hospital-level
information against 101 risk and severity adjusted outcome indicators. The
benchmarking information is derived from a standardized national set of 10
million patient records. The outcomes database is organized into six major
categories: overall mortality, obstetrics, surgery, neonatal, radiology and
general medical. The customer typically produces reports that compare its
performance against competitor or peer group providers and against expected
outcomes derived from the national and regional data set.
 
     QuanTIM Financial Performance Measurement.  QuanTIM Financial Performance
Measurement is a software application that employs cost accounting,
length-of-stay, and other benchmark information to allow customers to measure
cost, clinical resource utilization and profitability by physician, payor,
diagnosis and procedure. Most providers have access to charge and reimbursement
information for procedures and diagnoses, but do not have accurate measures for
the cost of care in these categories. Therefore, these providers cannot
accurately track profitability by procedure or diagnosis. Through an interface
with QuanTIM Clinical Performance Measurement, providers can benchmark the risk
adjusted outcomes and financial performance by physician, diagnosis, patient and
other variables. This application can also be used to analyze the profitability
of managed care and capitated contracts.
 
     QuanTIM Market Analysis Performance Measurement.  QuanTIM Market Analysis
Performance Measurement is a software application that consists of licensed
software and database information that is derived from statewide and national
hospital billing data sets and other demographic and population statistics.
 
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This application enables customers to perform market share, community health
assessment, managed care activity and physician admitting pattern analyses.
 
EDI PRODUCTS.
 
     The Company's EDI products, which are described below, enable providers to
edit claims at providers' sites and format detailed claims data for all payors,
giving the Company's customers access to a detailed database of information for
use with QuadraMed's financial management and decision support products.
 
     QuanTIM EDI.  QuanTIM EDI is a software application that downloads summary
and detailed claims data from existing legacy financial information systems, and
then edits this data and formats it to meet payor-specific requirements,
including unique data fields. As part of the editing process, QuanTIM EDI
screens the data for payor-specific demographic, diagnosis or procedure
information and identifies illogical data inputs that are not within expected
ranges. For example, the software would alert the operator if it encountered
inputs that indicated that a male patient had given birth. After the
standardized claim has been edited for payor-specific requirements, QuanTIM EDI
transmits the claim to the payor.
 
     QuanTIM ERA.  QuanTIM ERA is a software application that receives detailed
payment information, known as electronic remittance advices, from payors, posts
this information to a provider's legacy financial system and generates a
secondary bill for another insurance carrier, if appropriate.
 
     QuanTIM Payor Solutions. QuanTIM Payor Solutions is the core of QuadraMed's
electronic transaction management system. Designed to be implemented as a
complete turnkey solution, QuanTIM Payor Solutions fully automates health and
claims data interchange requirements in both indemnity and managed care
environments. The system creates an EDI foundation which allows for advanced
transaction clearinghouse services for a provider base while dramatically
lowering the cost of doing business. QuanTIM Payor Solutions gives insurance
payors of all types the power to process reimbursement transactions
electronically. QuanTIM Payor Solutions fully automates health data interchange
requirements. It provides receipt and transmission of multiple data formats and
payor specific validation of all transaction data, as well as reporting
capabilities for management of all healthcare transactions. This unique software
product acts as a front-end processor to a client's existing review process,
enabling a payor to communicate directly with healthcare providers.
 
OUTSOURCING AND CONSULTING BUSINESSES
 
     In addition to its QuanTIM software applications, the Company provides
business office outsourcing and reimbursement consulting services, which are
described below. The Company often makes use of its software applications in
delivering such services.
 
     Business Office Outsourcing.  The Company offers partial and full
outsourcing of business office services for hospitals, physicians, home health
care agencies and other providers. The focus of these services is to increase
cash flow and to improve operational efficiencies for health care providers.
Under full outsourcing arrangements, the Company hires and/or replaces existing
business office personnel and systems. The Company typically implements selected
components of its QuanTIM suite of products to enhance the efficiency of the
business office. Under partial outsourcing arrangements, the Company bills and
collects receivables that have aged beyond a certain point or that involve
selected payors.
 
     The infrastructure for the Company's outsourcing business was acquired by
the Company from Seton Financial in December 1993, and the Company typically
uses its software products to provide outsourcing services. As a result, the
Company has not been required to make significant investments since the
acquisition of Seton Financial in order to service existing outsourcing
contracts. However, if the Company experiences a period of substantial expansion
in its outsourcing business, the Company may be required to make substantial
investments in capital assets and personnel, and there can be no assurance that
the Company will be able to assess accurately the investment required and
negotiate and perform in a profitable manner any of the outsourcing contracts it
may be awarded. The Company's failure to estimate accurately the resources and
related expenses required for a project or its failure to complete its
contractual obligations in a manner
 
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consistent with the project plan upon which its contract was based could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's failure to meet a client's
expectations in the performance of its services could damage the Company's
reputation and adversely affect its ability to attract new business. Finally,
the Company could incur substantial costs and expend significant resources
correcting errors in its work, and could possibly become liable for damages
caused by such errors.
 
     Reimbursement Consulting Services.  The Company also provides reimbursement
consulting services to update and organize a provider's standard billing and
charge information to facilitate appropriate reimbursement for the provider. The
Company's reimbursement consulting services include reviewing Current Procedural
Terminology ("CPT") coding, which is a line item description of each outpatient
service offered by a provider, to ensure that the providers' CPT codes are
current, accurate and complete. The Company also reviews a customer's Charge
Description Master, which is a provider's comprehensive price list, to assure
that such charges are complete, accurate and considered to be reasonable and
customary for the provider's service area. The Company also provides clinical
pricing analysis and lost charge review and rebilling projects for hospitals and
other health care providers.
 
     Certain of the Company's products and services relate to the payment or
collection of health care claims. Any failure by employees of the Company or by
the Company's products to accurately process or collect such claims could result
in claims against the Company by its customers. The Company has been and
currently is involved in claims for money damages related to services provided
by its accounts receivable management business. The Company maintains insurance
to protect against certain claims associated with the use of its products, but
there can be no assurance that its insurance coverage would adequately cover any
claim asserted against the Company. A successful claim brought against the
Company in excess of, or excluded from, its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation, management time and resources. There can be
no assurance that the Company will not be subject to material claims in the
future, that such claims will not result in liability in excess of its insurance
coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the future
at commercially reasonable rates. In addition, if liability of the Company were
to be established, substantial revisions to its products could be required that
may cause the Company to incur additional unanticipated research and development
expenses.
 
PRODUCTS UNDER DEVELOPMENT AND JOINT DEVELOPMENT PRODUCTS
 
     The Company's development plans include enhancing the functionality of its
products and rewriting certain of its products to function with the Microsoft
Windows(TM) NT operating system. The Windows(TM) NT versions of some of the
Company's Products were released in late 1996, and the Company expects that the
Windows(TM) NT versions of some of its other products, which are currently under
development, will be released in 1997. The Company believes that rewriting
certain of its products for the Windows(TM) NT operating system will enhance the
integration of the QuanTIM suite of products through the sharing of a common
database and user interface.
 
     In addition, the Company is developing an Internet strategy with the goal
of facilitating customer access to QuadraMed products. The Company is evaluating
a number of potential methods for deriving revenue from providing Internet
access to its products. The Company markets selected products through a web site
that contains descriptions of the Company and these products. The Company plans
to enhance its customer support by disseminating operations reports and software
releases via the Internet and by establishing e-mail access to the Company's
customer support team. The Company is also developing a strategy for offering
Internet access to its proprietary and public databases to allow customers to
generate performance measurement reports, as well as access to its suite of EDI
software products for electronic claims submission and receipt of remittance
advices through the Company's claims network center.
 
     Some potential clients may delay purchasing decisions until Windows(TM) NT
versions of the Company's products are available. There can be no assurance that
the Company will not experience difficulties that could
 
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<PAGE>   9
 
delay or prevent the successful and timely development, introduction and
marketing of the new Windows(TM) NT versions of its products, or that such
products will achieve or sustain market acceptance. The occurrence of product
conversion problems or the failure to achieve or sustain market acceptance of
the Windows(TM) NT versions could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
     The Company has employed a joint development strategy to design certain of
its products, having worked with the New Jersey Hospital Association to develop
its DRGX product in 1989 and to develop QuanTIM Clinical Performance Measurement
in 1994. In exchange for joint development funding, the Company typically pays
its joint development partners royalties based on sales of the jointly developed
product. The Company is currently involved in two joint development projects
that are expected to result in new software products. Software products
currently under development include:
 
     - A capitation management application designed to manage capitation
       payments to providers, risk pool accounting, modeling and forecasting in
       both inpatient and outpatient settings. The capitation management
       application is being funded and developed jointly by the Company and
       UniHealth, a Southern California-based multi-hospital and medical group
       health care organization. The Company intends to market this product as
       its next generation contract management application. The Company
       anticipates that the capitation management application will be completed
       in 1997.
 
     - A bundled payment management application designed to administer the
       component claims processing and reporting for HCFA's Coronary Artery
       Bypass Graft ("CABG") demonstration project as well as HCFA and other
       payor bundled payment and global pricing methodologies. Currently, most
       payor and physician financial information systems generally cannot
       allocate bundled pricing reimbursement to physicians, hospitals and other
       providers. The bundled payment management application is being funded and
       developed jointly by the Company and St. Joseph's Hospital in Atlanta,
       Georgia, one of the CABG demonstration hospitals. The Company intends to
       market this application as its own product and intends to release the
       initial version in 1997.
 
     The Company's future performance will depend in large part upon the
Company's ability to provide the increasing functionality required by its
customers through the timely development and successful introduction of new
products and enhancements to its existing suite of products. The Company has
historically devoted significant resources to product enhancements and research
and development and believes that significant continuing development efforts
will be required to sustain the Company's operations. There can be no assurance
that the Company will successfully develop, acquire, introduce and market new
product enhancements or products, or that product enhancements or new products
developed by the Company will meet the requirements of hospitals and other
health care providers and achieve market acceptance.
 
     Moreover, products such as those offered by the Company frequently contain
errors or failures, especially when first introduced or when new versions are
released. Although the Company conducts extensive testing, the Company has
discovered software errors in certain of its enhancements and products after
their introduction. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors or performance failures
will not occur in these products under development or in other enhancements or
products after commencement of commercial shipments, resulting in loss of
revenues or delay in market acceptance, diversion of development resources,
damage to the Company's reputation or increased service and warranty costs, any
of which could have a material adverse effect upon the Company's business,
financial condition and results of operations.
 
CUSTOMERS
 
     Historically, QuadraMed has marketed its products primarily to hospitals,
with additional marketing to hospital associations, physician groups, payors and
self-administered employers. Substantially all of the Company's revenues in 1995
and 1996 were derived from the sale of software products and services to
hospitals. With the industry trend toward the formation of integrated health
care delivery systems ("IDSs"), the Company has designed its product suite to
accommodate this emerging industry sector.
 
                                        8
<PAGE>   10
 
     As of December 31, 1996, QuadraMed had more than 397 customers,
approximately 85% of which were hospitals, located in 33 states and the District
of Columbia. The Company expects to maintain a high percentage of hospital
customers, but also expects its customer mix to begin to shift toward other
providers, including integrated IDSs, as well as payors and employers.
 
SALES AND MARKETING
 
     As of December 31, 1996, the Company employed 15 direct sales
representatives and product managers, and a telemarketing and marketing support
staff of three individuals. The Company markets its sales and services through
direct sales contacts, through its strategic alliances, through participation in
trade shows and through advertisements in industry publications. In addition,
senior management plays an active role in the sales process by cultivating
industry contacts.
 
     Strategic Alliances.  The Company expects to supplement its direct sales
efforts through strategic alliances. To date, these alliances have taken two
forms: (i) agreement by the alliance partner to sell or sublicense certain of
the Company's products through such partner's sales force and (ii) agreement by
the alliance partner to endorse the Company's products with or without providing
sales representation. The Company has entered into most of its existing
strategic alliances in the last 18 months and, consequently, sales resulting
from these alliances have been immaterial. However, the Company's future
performance is dependent in part on the success of its marketing strategy which
involves, to a substantial degree, a reliance upon strategic alliance partners
to sell the Company's products as a component of the integrated systems being
marketed by such partner or to endorse the Company's products. If these
strategic alliance partners elect to remove their product endorsement or elect
not to include the Company's products as components in their integrated systems
or are unsuccessful in achieving significant sales of the systems into which the
Company's products are to be integrated, the Company's business, financial
condition and results of operations would be materially adversely affected.
 
     Strategic alliances currently in place include the following:
 
<TABLE>
<CAPTION>
                                                          QUANTIM PRODUCTS
                ALLIANCE PARTNER(1)                     ENDORSED/REPRESENTED
        ------------------------------------    ------------------------------------
        <S>                                     <C>
        The Compucare Company                   EDI
                                                ERA
 
        Health Communication Services, Inc.     DRGX
                                                Contract Management
 
        Health Systems Design Corporation(2)    EDI
 
        Kaden Arnone, Inc.                      All Current Products
 
        McFaul & Lyons, Inc.                    Performance Measurement
 
        Premier Health Alliance, Inc.(2)        Market Analysis Performance
                                                Measurement
 
        Shared Services Healthcare, Inc.(2)     Contract Management
</TABLE>
 
---------------
(1) In addition, Blue Cross of California may sublicense the Company's QuanTIM
    ERA product in the course of licensing its own products, but does not
    endorse this product in any manner. The Medicare program does not endorse or
    promote the Company's QuanTIM ERA product in any manner.
 
(2) Products endorsed without sales representation.
 
     Hospital Association Endorsements.  The Company has endorsement agreements
for certain of its products with state and regional hospital associations in New
Jersey, Iowa, Northern and Central California, Connecticut, Florida, Maryland,
New York, Ohio, Pennsylvania and West Virginia.
 
     The New Jersey Hospital Association ("NJHA") has been a strategic partner
with the Company since December 1989. The Company is also a subcontractor to the
Health Research and Education Trust of New Jersey ("HRET"), a subsidiary of
NJHA. QuadraMed provides information processing services to HRET to
 
                                        9
<PAGE>   11
 
assist HRET in fulfilling New Jersey state data reporting requirements,
including inpatient, same day surgical and uniform billing data. In addition,
the Company has a strategic marketing relationship with NJUP Plus, a for-profit
subsidiary of NJHA, for marketing and customer support assistance for its DRGX
customers.
 
     The Association of Iowa Hospitals & Health Systems selected QuadraMed in
mid-1994 as its sole endorsed vendor of EDI products and services. The need for
an EDI vendor in Iowa hospitals was brought about by state legislation requiring
that all health care transactions be conducted electronically. To date, the
Company has licensed its EDI products to 91 Iowa providers.
 
INDUSTRY ADVISORY COUNSEL
 
     In early 1996, QuadraMed established an Industry Advisory Counsel ("IAC")
and invited several senior executives from its customers and industry consulting
organizations to participate. The IAC meets quarterly to review and critique
sales and industry strategies, pricing and operational policies and other
matters which chart the direction and growth of the Company. Current IAC members
include:
 
<TABLE>
<CAPTION>
           NAME                          POSITION                           COMPANY
---------------------------  ---------------------------------  -------------------------------
<S>                          <C>                                <C>
Patrick Ahearn.............  Vice President Finance             Medical Center at Princeton,
                                                                Princeton, N.J.
John Comstock..............  President & Chief Executive        Sioux Valley Memorial Hospital,
                             Officer                            Cherokee, IA
Scott Gross................  Chief Executive Officer            Primus Management, San
                                                                Francisco, CA
Ed Heller..................  Consultant                         Weston, MA
Mark Scott.................  Executive Vice President & Chief   Pittsburgh Mercy Health System,
                             Financial Officer                  Pittsburgh, PA
</TABLE>
 
TECHNOLOGY
 
     Software Architecture.  The Company uses industry standard software
whenever possible to minimize development and maintenance costs. The QuanTIM
suite of products operates on the DOS and Novell Netware operating systems.
Certain of the Company's current products operate on all versions of the
Windows(TM) NT operating system. The Windows(TM) NT versions of some of the
Company's products were released in late 1996, and the Company expects that
Windows(TM) NT versions of certain other products, which are currently under
development, will be released in 1997. All major software components of QuanTIM
are assembled in a modular architecture for application independence and to
facilitate the replacement of modules as new technology becomes available and as
market demand dictates.
 
     The QuanTIM imaging product operates on a UNIX operating system in addition
to those described above. This client/server application was developed using C++
for the Windows(TM) for Workgroups client environment. The server uses Borland's
InterBase as its database engine. Industry standard image processor software
tools are also employed within the application.
 
     Hardware Platform.  The Company's software products operate on PC-based
single and multi-user hardware platforms. In addition, the Company also offers
its imaging product on Sun Microsystems platforms. These platforms also include
high capacity storage devices for the large storage requirements of document
imaging.
 
RESEARCH AND DEVELOPMENT
 
     The Company employs 38 people in the areas of product design, research and
development and 22 people in the areas of quality assurance and technical
support. In addition, the Company is currently involved in joint development
projects with UniHealth and St. Joseph's Hospital in Atlanta, Georgia and
provides all of the programmers for these projects. The Company's product
development strategy is focused on continually enhancing existing products by
increasing their functionality and ease of use. In addition, the Company is
enhancing the reporting capabilities for its performance measurement clinical
and financial applications,
 
                                       10
<PAGE>   12
 
expanding its outpatient and inpatient databases and improving its comparative
reporting and benchmarking capabilities with third-party databases. See
"-- Products Under Development and Joint Development Projects."
 
     In 1994, 1995 and 1996, the Company's research and development expenses
totalled $767,000, $653,000 and $2,499,000, respectively, representing 12.6%,
8.6% and 13.1%, respectively, of its total revenues. See "Item 6 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
COMPETITION
 
     Competition in the market for the Company's products and services is
intense and is expected to increase. The Company's competitors include other
providers of health care information software and services, as well as health
care consulting firms. The Company's principal competitors include CIS
Technologies, Inc., a division of National Data Corporation, and Sophisticated
Software, Inc. in the market for its EDI products; Healthcare Cost Consultants,
Inc. ("HCC"), a division of CIS Technologies, Inc., and Trego Systems, Inc. in
the market for its contract management products; IMNET Systems, Inc., Optika
Imaging Systems, Inc. and LanVision Systems, Inc. in the market for its
electronic document management products; Transition Systems, Inc. ("TSI") and
Healthcare Microsystems, Inc., a division of Health Management Systems Inc.
("HMS"), HCIA Inc. and MediQual Systems, Inc. in the market for its decision
support products; and HMS and ARTRAC, a division of Medaphis Corp., in the
market for its accounts receivable management services. In addition, current and
prospective customers evaluate the Company's capabilities against the merits of
their existing information systems and expertise. Furthermore, major health care
information companies not presently offering products that compete with those
offered by the Company may enter the Company's markets. Increased competition
could result in price reductions, reduced gross margins, and loss of market
share, any of which could materially adversely affect the Company's business,
financial condition and results of operations. In addition, many of the
Company's competitors and potential competitors have significantly greater
financial, technical, product development, marketing and other resources and
market recognition than the Company. Many of the Company's competitors also
currently have, or may develop or acquire, substantial installed customer bases
in the health care industry. As a result of these factors, the Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
and results of operations. The Company believes that the principal competitive
factors in its markets are product functionality and features, price, customer
support and firm reputation.
 
GOVERNMENT REGULATION AND UNCERTAINTY IN THE HEALTH CARE INDUSTRY
 
     The United States Food and Drug Administration (the "FDA") is responsible
for assuring the safety and effectiveness of medical devices under the Federal
Food, Drug and Cosmetic Act. Computer products are subject to regulation when
they are used or are intended to be used in the diagnosis of disease or other
conditions, or in the cure, mitigation, treatment or prevention of disease, or
are intended to affect the structure or function of the body. The FDA could
determine the future that any predictive aspects of the Company's products make
them clinical decision tools subject to FDA regulation. Compliance with these
regulations could be burdensome, time consuming and expensive. The Company also
could become subject to future legislation and regulations concerning the
development and marketing of health care software systems. These could increase
the cost and time necessary to market new products and could affect the Company
in other respects not presently foreseeable. The Company cannot predict the
effect of possible future legislation and regulation.
 
     The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
health care provider, regulations governing patient confidentiality rights are
 
                                       11
<PAGE>   13
 
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of health care providers to submit information from patient records
using the Company's products.
 
     The health care industry is highly regulated and subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operation of health care organizations. The Company's products are
designed to function within the structure of the health care financing and
reimbursement system currently being used in the United States. Changes in
current health care financing and reimbursement systems could result in the need
for unplanned product enhancements, delays or cancellations of product orders or
shipments, or the revocation of endorsement of the Company's products by
hospital associations or other customers. Any of such occurrences could have a
material adverse effect on the Company's business, financial condition and
results of operations. During the past several years, the United States health
care industry has been subject to an increase in governmental regulation of,
among other things, reimbursement rates. Certain proposals to reform the U.S.
health care system are periodically considered by Congress and certain state
legislatures. These programs may contain proposals to increase governmental
involvement in health care and otherwise change the operating environment for
the Company's customers and potential customers. Health care organizations may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's products.
On the other hand, changes in the regulatory environment have increased and may
continue to increase the needs of health care organizations for cost-effective
information management and thereby enhance the marketability of the Company's
products and services. The Company cannot predict with any certainty what
impact, if any, such proposals or health care reforms might have on the
Company's business, results of operations and financial condition. In addition,
many health care providers are consolidating to create integrated health care
delivery systems with greater regional market power. As a result, these emerging
systems could have greater bargaining power, which may lead to price erosion of
the Company's products. The failure of the Company to maintain adequate price
levels would have a material adverse effect on the Company's business, financial
condition and results of operations. Other legislative or market-driven reforms
could have unpredictable effects on the Company's business, financial condition
and results of operations.
 
INTELLECTUAL PROPERTY
 
     The Company considers its methodologies, computer software and many of its
databases to be proprietary. The Company seeks to protect its proprietary
information through nondisclosure agreements with its employees. The Company's
policy is to have employees enter into nondisclosure agreements containing
provisions prohibiting the disclosure of confidential information to anyone
outside the Company, requiring disclosure to the Company of any new ideas,
developments, discoveries or inventions conceived during employment, and
requiring assignment to the Company of proprietary rights to such matters that
are related to the Company's business.
 
     The Company also relies on a combination of trade secrets, copyright and
trademark laws, contractual provisions and technical measures to protect its
rights in various methodologies, systems, products and databases. The Company
has no patents or copyrights covering its software technology. Any infringement
or misappropriation of the Company's proprietary software and databases would
disadvantage the Company in its efforts to retain and attract new customers in a
highly competitive market and could cause the Company to lose revenues or incur
substantial litigation expense.
 
     There can be no assurance that measures taken by the Company to protect its
intellectual property will be adequate or that the Company's competitors will
not independently develop products and services that are substantially
equivalent or superior to those of the Company. Substantial litigation regarding
intellectual property rights exists in the software industry, and the Company
expects that software products may be increasingly subject to third-party
infringement claims as the number of competitors in the Company's industry
segment grows and the functionality of products overlaps. However, due to the
nature of its
 
                                       12
<PAGE>   14
 
application software, the Company believes that patent, trade secret and
copyright protection are less significant than the Company's ability to further
develop, enhance and modify its current products.
 
     Although the Company believes that its products do not infringe on the
intellectual rights of others, there can be no assurance that such a claim will
not be asserted against the Company in the future, or that a license or similar
agreement will be available on reasonable terms in the event of an unfavorable
ruling on any such claim. Any such claim may require the Company to incur
substantial litigation expenses or subject the Company to significant
liabilities and could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
EMPLOYEES
 
     As of December 31, 1996, the Company employed 171 people, including 23 in
general administration, 38 in product design, research and development, 20 in
sales and marketing and 90 in operations, quality assurance and technical
support. None of the Company's employees is represented by a union or other
collective bargaining group. The Company believes its relationship with its
employees to be satisfactory.
 
ITEM 2.  PROPERTIES
 
     The Company's executive and corporate offices are located in Larkspur,
California, in approximately 11,500 square feet of leased office space under a
lease that expires in June 1998. The Company also maintains offices in Fresno,
California; Neptune, New Jersey; Kansas City, Missouri; Atlanta, Georgia;
Denver, Colorado; Boca Raton, Florida; and Pittsburgh, Pennsylvania.
 
     The Company believes that its facilities are adequate for its current
operations.
 
ITEM 3.  LEGAL PROCEEDINGS
 
  Pendleton, et al. v. QuadraMed Corporation, et al.
 
     In February 1995, Richard W. Pendleton ("Pendleton") and Daniel T. Soldahl
("Soldahl") filed a lawsuit now pending in state court in Marin County,
California, naming QuadraMed, James D. Durham and Walter Channing, Jr. as
defendants (collectively, the "Defendants"). An amended complaint added Coast
Micro, Inc. ("Coast") as a plaintiff. The plaintiffs allege breach of contract,
breach of the implied covenant of good faith and fair dealing, intentional and
negligent misrepresentation, suppression of fact, breach of employment contract,
interference with contractual relationship and conspiracy in connection with the
October 1993 purchase by QuadraMed of the assets of Coast. Pendleton, Soldahl
and Coast allege money damages in the amount of $27 million and Pendleton and
Soldahl seek certain equitable relief, including the issuance of options
covering approximately two percent of the Company's outstanding Common Stock, as
well as punitive damages. In August 1995, QuadraMed filed a cross-complaint
naming Pendleton and VantageMed Corporation ("VantageMed") as cross-defendants
(collectively, the "Cross-Defendants") and alleging fraud, misappropriation of
trade secrets, interference with economic relations and conspiracy. QuadraMed is
seeking an unspecified amount of money damages and an injunction against
disclosure or use by Cross-Defendants of QuadraMed's confidential information
and against further interference by Cross-Defendants with QuadraMed's economic
relations with others. On February 26, 1997, the parties reached a settlement in
principle of this litigation, and the Company's Board of Directors subsequently
approved this settlement in principle on February 27, 1997. On March 5, 1997,
the parties agreed to a forty-five (45) day stay of all litigation activities in
this litigation, effective February 26, 1997, in order to allow the parties
adequate time for the preparation and execution of a written settlement
agreement. In the event that the parties do not execute the written settlement
agreement before the expiration of the forty-five (45) day stay, there shall be
no further stay of this litigation except by written agreement of all parties
and approval of the court.
 
     The Company believes, based in part on its discussions with its litigation
counsel, that it has meritorious defenses to the above-described claims and it
intends to defend the litigation vigorously. However, due to the nature of the
litigation and because the lawsuit is in the pre-trial discovery stage, the
Company cannot determine the total expense or possible loss, if any, that may
ultimately be incurred either in the context of a
 
                                       13
<PAGE>   15
 
trial or as a result of a negotiated settlement. With regard to Pendleton and
Soldahl's claims for the issuance of stock options, it is the Company's position
that such parties are only entitled to stock options covering less than one
percent of the Company's outstanding Common Stock. Regardless of the ultimate
outcome of the litigation, it could result in significant diversion of time by
the Company's personnel. While after consideration of the nature of the claims
and facts relating to the litigation, and after consultation with litigation
counsel, management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition and
results of operations, the results of these proceedings, including any potential
settlement, are uncertain, and there can be no assurance to that effect. The
proceedings are likely to cause the Company to issue stock options to each of
Pendleton and Soldahl, and, as a consequence, additional shares to certain
investors pursuant to an agreement, resulting in dilution to investors.
 
  Seton Financial
 
     Seton Financial, acquired by QuadraMed in December 1993 ("Seton"), is a
defendant in two separate lawsuits in which the plaintiffs allege losses
resulting from Seton's role in processing and collecting health care benefit
receivables for health care providers. The plaintiff in one action (filed in
January 1996 and pending in the United States District Court for the District of
New Jersey) is American Infusion, Inc. and the plaintiffs in the other action
(filed in October 1995 and pending in the Superior Court of California, Marin
County) are Option Care, Inc., River City Pharmacists, Inc., Jergensen/Zwick
Inc., Pharmacare, Inc., Pharmacare, Inc. Fresno, Pharmacare, Inc. Visalia,
Option Care Enterprises, Inc., and Owens Pharmacy, Inc. American Infusion
alleges damages in the amount of $5.3 million and plaintiffs in the other action
allege damages in excess of $800,000. Both plaintiffs also seek punitive
damages. Each of the plaintiffs alleges losses as a result of Seton's role in
collecting health care benefit receivables. These actions are being defended by
the Company's errors and omissions insurance carrier under a reservation of
rights that entitles the insurance carrier to seek reimbursement from the
Company of amounts paid if it later determines that the losses are not covered
by the policy. The errors and omissions insurance policy has a policy limit of
$1.0 million. The Company believes, based in part on its discussions with its
litigation counsel, that it has meritorious defenses to all of the claims, and
it intends to defend the litigation vigorously. However, due to the nature of
the litigation and because the lawsuits are at an early pre-trial stage, the
Company cannot determine the total expense or possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. While management believes that the resolution of these
matters will not have a material adverse effect on the Company's business,
financial condition and results of operations, the results of these proceedings,
including any potential settlement, are uncertain and there can be no assurance
to that effect.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
 
     No matters were submitted during the fourth quarter of fiscal 1996 to a
vote of securityholders, through the solicitation of proxies or otherwise.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
PRICE RANGE OF COMMON STOCK
 
     The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "QMDC" since October 10, 1996. The Company's initial public
offering price was $12.00 per share. No public trading market in the Company's
Common Stock existed prior to October 10, 1996. As of December 31, 1996, there
were approximately 38 holders of record of the Company's Common Stock. The
following table shows the high and low closing sales prices for the Common Stock
of the Company for the periods indicated, as reported by the Nasdaq National
Market:
 
<TABLE>
<CAPTION>
                                                                         HIGH     LOW
                                                                         ----     ---
        <S>                                                              <C>      <C>
        Quarter ended December 31, 1996 (beginning October 10, 1996)...  13 1/2   8 1/2
</TABLE>
 
                                       14
<PAGE>   16
 
DIVIDEND POLICY
 
     The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently intends to retain future earnings, if any, to fund
the development and growth of its business and does not anticipate paying any
cash dividends on the Common Stock in the foreseeable future. In addition, the
Company's credit agreement contains provisions that restrict the payment of
dividends.
 
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
SELECTED CONSOLIDATED FINANCIAL DATA
 
     The statement of operations data set forth below for the years ended
December 31, 1994, 1995 and 1996 and the balance sheet data at December 31, 1995
and 1996, are derived from, and are qualified by reference to, the audited
financial statements and should be read in conjunction with the consolidated
financial statements and the notes thereto.
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                       -------------------------------------------
                                                       1992    1993     1994      1995      1996
                                                       ----   ------   -------   -------   -------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>    <C>      <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
  Licenses...........................................  $175   $  482   $ 1,437   $ 4,420   $16,223
  Services...........................................    --       35     4,665     3,183     2,865
                                                       -----  ------   --------  --------  --------
          Total revenues.............................   175      517     6,102     7,603    19,088
Operating expenses:
  Cost of licenses...................................   138      349     2,557     2,676     7,294
  Cost of services...................................    --      117     3,476     3,657     2,683
  General and administration.........................    --      161     2,039     2,439     3,221
  Sales and marketing................................    51       91     1,874     1,225     2,434
  Research and development...........................    63      130       767       653     2,499
  Amortization of goodwill...........................    --        6       169        50       460
  Write-off of acquired research and development
     in process......................................    --      456        --     6,240        --
                                                       -----  ------   --------  --------  --------
          Total operating expenses...................   252    1,310    10,882    16,940    18,591
Income (loss) from operations........................   (77)    (793)   (4,780)   (9,337)      497
Interest income (expense), net.......................    (3)     (11)      (85)     (110)     (329)
Other income (expense), net..........................    --       --        --        13       (15)
                                                       -----  ------   --------  --------  --------
  Net income (loss)..................................  $(80)  $ (804)  $(4,865)  $(9,434)  $   153
                                                       =====  ======   ========  ========  ========
  Pro forma net loss per share.......................                            $ (2.13)       --
                                                                                 ========  ========
  Pro forma weighted average shares outstanding......                              4,435        --
                                                                                 ========  ========
  Net income per share...............................                                 --   $  0.10
                                                                                 ========  ========
  Weighted average shares outstanding................                                 --     5,089
                                                                                 ========  ========
</TABLE>
 
                                       15
<PAGE>   17
 
CONSOLIDATED BALANCE SHEET DATA:
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                      --------------------------------------------
                                                      1992    1993      1994      1995      1996
                                                      ----   -------   -------   -------   -------
                                                      (IN THOUSANDS)
<S>                                                   <C>    <C>       <C>       <C>       <C>
Cash and cash equivalents...........................  $ 19   $   253   $   164   $   266   $18,486
Working capital (deficit)...........................    46    (1,866)   (1,494)   (6,372)   18,357
Intangible assets...................................    --       669       125     4,289     3,655
Total assets........................................   130     2,123     2,801     9,533    29,569
Total debt..........................................    54     1,794     1,794    10,267       228
Stockholders' equity (deficit)......................    72      (667)   (1,457)   (5,817)   24,893
</TABLE>
 
OVERVIEW
 
     QuadraMed develops, markets and sells a suite of financial management,
decision support and electronic data interchange software products and services
designed to enable health care providers to increase operational efficiency and
measure the cost of care and to facilitate the negotiation of managed care
contracts and capitation agreements. The Company was formed in September 1993
and has completed a number of acquisitions. In October 1993, QuadraMed acquired
the net assets of Coast Micro, Inc., through which the Company acquired the
predecessor of the Company's EDI product. In December 1993, the Company acquired
the net assets of Seton Financial, through which the Company acquired the
foundation of its business office outsourcing business. In December 1995, the
Company purchased the net assets of Healthcare Design Systems, and thereby
acquired the predecessors of several of the Company's decision support and other
related software products. In December 1996, the Company acquired and merged
with InterMed Healthcare Systems Inc. ("InterMed"). The acquisition and merger
of Intermed was accounted for as a pooling of interests, as such, the Company's
results of operations for 1994 and 1995, respectively, have been restated to
reflect the pooling of interests. InterMed's EDI products primarily serve
healthcare payor organizations.
 
     The Company's suite of products, called QuanTIM, may be licensed either as
an integrated solution or as individual applications. The Company licenses its
software products pursuant to either a one-time payment for a perpetual license
with the option of purchasing support and maintenance or pursuant to annual
renewal licenses. The latter method provides the Company with a significant
recurring component to its revenues each year. Revenues from perpetual software
license agreements are recognized after installation and customer acceptance and
when no significant vendor obligations remain outstanding. To date, a
substantial majority of customers who have purchased perpetual licenses have
also purchased annual support and maintenance agreements, the revenues from
which are recognized monthly. Revenues from annual renewal license fees are
recognized on the contract anniversary date. Revenues for licenses related to
the use of EDI are recognized monthly.
 
     In addition to its software products, the Company provides business office
outsourcing and reimbursement consulting services. The Company often uses its
software products in delivering such services. The Company offers partial and
full outsourcing of business office functions for hospitals, physicians, home
health care agencies and other providers. The focus of these services is to
increase cash flow and to improve efficiencies of business operations for health
care providers. Business office outsourcing revenues typically consist of fixed
monthly fees plus incentive-based payments based on a percentage of dollars
recovered for the provider. The monthly fees from outsourcing services are
recognized as revenues on a monthly basis, and incentive fees are recognized as
revenues based on the collection of accounts from payors. Outsourcing revenues
declined from approximately $3.2 million in 1995 to $2.9 million in 1996
principally as a result of the completion of certain projects and the
discontinuation of such services by certain customers. Projects typically last
three to nine months. The Company plans on an increased marketing effort to
attract new customers in need of outsourcing services. The Company believes that
its planned augmentation in sales and marketing efforts for this business will
contribute to maintaining and perhaps increasing service revenues, although
there can be no assurance in this regard. Maintaining and increasing revenue
levels associated with this line of business depends on attracting new customers
due to the project-oriented nature of the business. The
 
                                       16
<PAGE>   18
 
Company also provides reimbursement consulting services to update and organize a
provider's standard billing and charge information to facilitate appropriate
reimbursement for the provider. Consulting services provided approximately
$800,000 and $480,000 in revenues in 1995 and 1996, respectively.
 
     The Company has experienced operating margins at differing levels related
to licenses and services. The service business has historically realized
fluctuating margins that were significantly lower than margins associated with
licenses.
 
     The Company believes it will experience seasonal patterns in its operating
results, with the second and fourth fiscal quarters having slightly higher
revenues and net income. The Company attributes this seasonality in large part
to software licenses that are based on annual renewals. In addition, the signing
of a major perpetual license agreement could generate an increase in revenues
and net income for any given quarter or fiscal year. The Company typically
experiences long sales cycles for new customers that may extend over several
quarters. As a result, the Company believes that quarterly results of operations
will continue to be subject to significant fluctuations and that its results of
operations for any particular quarter or year may not be indicative of results
of operations for future periods.
 
     The Company capitalizes a portion of its software costs for internally
developed products. These capitalized costs relate primarily to the development
of new products and the extension of applications to new markets or platforms
using existing technologies. The capitalized costs are amortized on a
straight-line basis over the estimated lives (usually three years), commencing
when each product is available to the market.
 
     The Company believes continued significant investment in the development of
new products and the further development and integration of technologies
acquired for Healthcare Design Systems into the Company's suite of products, as
well as the expansion of its direct sales force, are critical to its success.
Specifically, the Company's development plans include enhancing the
functionality of its products and rewriting certain of its products, including
those acquired from Healthcare Design Systems, to function within the Microsoft
Windows(TM) NT operating system. Accordingly, the aggregate amounts invested in
research and development and sales and marketing are expected to increase.
 
     As of December 31, 1996, QuadraMed had more than 397 customers,
approximately 85% of which were hospitals, located in 33 states and the District
of Columbia. The Company expects to maintain a high percentage of hospital
customers, but also expects its customer mix to begin to shift toward other
providers, including IDSs, as well as payors and employers. For the years ended
December 31, 1994 and 1995, respectively, revenues from one customer were 19%
and 11%, respectively.
 
                                       17
<PAGE>   19
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, certain items
from the consolidated statement of operations of QuadraMed expressed as a
percentage of total revenues.
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                                   ----------------------------
                                                                    1994       1995       1996
                                                                   ------     ------     ------
<S>                                                                <C>        <C>        <C>
Revenues:
  Licenses.......................................................    23.5%      58.1%      85.0%
  Services.......................................................    76.5       41.9       15.0
                                                                    -----      -----      -----
          Total revenues.........................................   100.0      100.0      100.0
Operating expenses:
  Cost of licenses...............................................    41.9       35.2       38.2
  Cost of services...............................................    57.0       48.1       14.1
  General and administrative.....................................    33.4       32.1       16.9
  Sales and marketing............................................    30.7       16.1       12.8
  Research and development.......................................    12.6        8.6       13.1
  Amortization of goodwill.......................................     2.8        0.7        2.4
  Write-off of acquired in process research and development......      --       82.1         --
                                                                    -----      -----      -----
          Total operating expenses...............................   178.4      222.9       97.5
                                                                    -----      -----      -----
Income (loss) from operations....................................   (78.4)    (122.9)       2.5
Interest income (expense), net...................................    (1.4)      (1.4)      (1.7)
Other income (expense), net......................................      --        0.2         --
                                                                    -----      -----      -----
Net income (loss) before tax provision...........................   (79.8)    (124.1)       0.8
Provision for income taxes.......................................      --         --         --
                                                                    -----      -----      -----
          Net income (loss)......................................   (79.8)    (124.1)       0.8
                                                                    =====      =====      =====
</TABLE>
 
  Years ended December 31, 1996 and 1995
 
     Revenues.  Revenues increased 151.1% to $19.1 million in 1996 from $7.6
million in 1995. Of these amounts, software license revenues, which include
license, installation, consulting and post-contract support fees, third-party
hardware sales and other revenues related to licensing of the Company's software
products, increased 267.0% to $16.2 million from $4.4 million in 1995. This
increase was slightly offset by a decrease in service revenues to $2.9 million
in 1996 from $3.2 million in 1995. The significant increase in software license
revenues was due principally to sales of products acquired in the past year,
sales attributed from the acquisition and merger of InterMed Healthcare Systems
Inc., and, to a lesser extent, integration of the Company's products and an
increase in new customers. The decline in service revenues reflects a decrease
in the number of customers in the Company's outsourcing business, which is
comprised of projects with a defined service period. The Company believes that
its planned augmentation in sales and marketing efforts for this business will
contribute to maintaining and perhaps increasing service revenues related to the
outsourcing business, although there can be no assurance in this regard.
 
     Cost of Licenses.  Cost of licenses increased 172.6% to $7.3 million in
1996 from $2.7 million in 1995. This increase reflects an increase in the number
of licensed installations. Cost of licenses includes installation, customer
support and royalties. As a percentage of license revenues, cost of licenses
decreased to 45.0% in 1996 from 60.5% in 1995. The decrease in cost of licenses
as a percentage of license revenues reflects the significant increase in license
revenues during 1996 combined with only a moderate increase in the costs
associated with such license revenues.
 
     Cost of Services.  Cost of services decreased 26.6% to $2.7 million in 1996
from $3.7 million in 1995. Cost of services includes expenses associated with
services performed in connection with business office outsourcing and
reimbursement consulting. As a percentage of service revenues, cost of services
decreased to
 
                                       18
<PAGE>   20
 
93.6% in 1996 from 114.9% in 1995. The decline in cost of services and as a
percentage of service revenues reflects a decrease in the number of personnel
who support the service business.
 
     General and Administration.  General and administration expenses increased
32.1% to $3.2 million in 1996 from $2.4 million in 1995. The increase in general
and administration expenses reflects the addition of personnel associated with
an acquisition in December 1995 and higher communication and travel costs
associated with establishing an office on the East Coast. As a percentage of
total revenues, general and administration expenses decreased to 16.9% in 1996
from 32.1% in 1995. The Company believes that general and administration
expenses will increase in the future, but should decline slightly as a
percentage of total revenues, although there can be no assurance in this regard.
 
     Sales and Marketing.  Sales and marketing expenses increased 98.7% to $2.4
million in 1996 from $1.2 million in 1995. The increase in sales and marketing
expenses resulted primarily from the addition of sales personnel and project
managers, whose responsibilities include selling and marketing their respective
products. The increase in sales and marketing expenses can also be attributed in
part to increased advertising expenditures. As a percentage of total revenues,
sales and marketing expenses declined to 12.8% in 1996 from 16.1% in 1995. The
Company believes sales and marketing expenses will continue to increase
primarily due to the hiring of additional sales and marketing personnel, but
should remain relatively constant as a percentage of total revenues, although
there can be no assurance in this regard.
 
     Research and Development.  Research and development expenses increased
282.7% to $2.5 million in 1996 from $653,000 in 1995. The increase in research
and development expenses represents a significant increase in the number of
personnel dedicated to the development and enhancement of the Company's
products. As a percentage of total revenues, research and development expenses
increased to 13.1% in 1996 from 8.6% in 1995. The Company intends to continue to
invest heavily in the development of new products and in the further integration
of acquired technologies into the Company's suite of products and, accordingly,
believes that these expenses will increase significantly in the future.
 
     Amortization of goodwill.  Amortization of goodwill increased to $460,000
in 1996 from $50,000 in 1995. The increase in amortization is primarily the
result of amortization of goodwill associated with an acquisition in December
1995.
 
  Years Ended December 31, 1995 and 1994
 
     Revenues.  Revenues increased 24.6% to $7.6 million in 1995 from $6.1
million in 1994. Of these amounts, software license revenues increased 207.6% to
$4.4 million in 1995 from $1.4 million in 1994, offsetting a 31.8% decline in
services revenues to $3.2 million in 1995 from $4.7 million in 1994. The
significant increase in license revenues was due principally to increased sales
of QuanTIM EDI, QuanTIM Contract Management and sales attributed from the
acquisition and merger of InterMed Healthcare Systems Inc. The decline in
services revenues resulted from the completion of certain projects and the loss
of several accounts in the Company's outsourcing business.
 
     Cost of Licenses.  Cost of licenses increased 4.7% to $2.7 million in 1995
from $2.6 million in 1994. The slight increase in cost of licenses resulted
primarily from increased costs related to customer support and installation
costs related to the increased license revenues. As a percentage of license
revenues, cost of licenses decreased to 60.5% in 1995 from 177.9% in 1994.
 
     Cost of Services.  Cost of services increased 5.2% to $3.7 million in 1995
from $3.5 million in 1994. The increase in cost of services resulted primarily
from decreased service revenues combined with the relatively fixed costs
associated with such revenues. As a percentage of service revenues, cost of
services increased to 114.9% in 1995 from 74.5% in 1994.
 
     General and Administration.  General and administration expenses increased
19.6% to $2.4 million in 1995 from $2.0 million in 1994, principally due to an
increase in the allowance for doubtful accounts, an increase in legal services,
a small increase in administrative support staff and an increase in travel due
to the acquisition and integration of Healthcare Design Systems. As a percentage
of total revenues, general and administration expenses decreased to 32.1% in
1995 from 33.4% in 1994.
 
                                       19
<PAGE>   21
 
     Sales and Marketing.  Sales and marketing expenses decreased 34.6% to $1.2
million in 1995 from $1.9 million in 1994. This decrease resulted primarily from
a temporary reduction in sales personnel during the year and a redirection of
sales emphasis toward software sales rather than service contracts. As a
percentage of total revenues, sales and marketing expenses declined to 16.1% in
1995 from 30.7% in 1994.
 
     Research and Development.  Research and development expenses decreased
14.9% to $653,000 in 1995 from $767,000 in 1994 as a result of the completion of
QuanTIM EDI and the capitalization of certain other software development costs.
As a percentage of total revenues, research and development expenses decreased
to 8.5% in 1995 from 12.6% in 1994.
 
     Amortization of Goodwill.  Goodwill amortization decreased 70.4% to $50,000
in 1995 from $169,000 in 1994, reflecting a post-acquisition adjustment to
accurately represent the purchase of net assets from Coast Micro, Inc. and Seton
Financial.
 
     Write-Off of Acquired In-Process Research and Development.  In 1995, in
connection with the acquisition of the net assets of Healthcare Design Systems,
the Company wrote off $6.2 million as a result of the purchase of in-process
research and development that had not reached feasibility and had no probable
future use.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since inception, the Company's primary source of working capital has been
private placements of Preferred Stock through which it has raised approximately
$12.8 million, net of expenses. In 1994 and 1995, Series A Preferred Stock was
issued for cash and forgiveness of indebtedness totalling $4.2 million. Also in
1995, Series B Preferred Stock was issued for cash of $4.0 million and the
conversion of notes payable and accrued interest of $680,000. In June 1996, the
Company completed a second Series B Preferred Stock financing for the conversion
of notes payable of $3.9 million, which provided the downpayment for the
acquisition of the net assets of Healthcare Design Systems. In October 1996, the
Company completed its initial public offering of 2.5 million shares of common
stock, which raised net proceeds of approximately $26.4 million.
 
     Net cash used in operating activities was $584,000, $3.7 million and $3.2
million in 1996, 1995 and 1994, respectively. Net cash used in operating
activities in 1996 was principally due to earnings before depreciation and
amortization, offset by an increase in the Company's accounts receivable and a
decrease in deferred revenue. The increase in accounts receivable was primarily
due to an increase in volume of monthly billings associated with the increase in
revenues in 1996, while deferred revenue decreased primarily due to the timing
of payments from customers. Net cash used in operating activities in 1995 and
1994 was related to investments in the Company's infrastructure and research and
development.
 
     Net cash used in investing activities was $1.7 million, $678,000 and
$750,000 in 1996, 1995 and 1994, respectively. Investing activities primarily
included additions to capital equipment and the capitalization of computer
software development costs.
 
     Net cash provided by financing activities was $20.5 million, $4.5 million
and $3.9 million in 1996, 1995 and 1994 respectively. Financing activities in
1996 related to the issuance of convertible Preferred Stock and the net proceeds
from the Company's initial public offering in October 1996. This was offset by
the repayments of all outstanding notes and loans payable from the proceeds from
the initial public offering.
 
     The Company had a line of credit agreement to borrow up to $1.2 million at
the bank's prime rate plus 1.5% for additional working capital, and financing
equipment purchases, which expired on January 2, 1997. There were no outstanding
balances under the line of credit at December 31, 1996. The line of credit
contains certain restrictions, including, among others, obtaining written
approval from the bank prior to the payment of dividends, as well as maintaining
minimum liquidity, tangible net worth and net income levels. The Company was in
compliance with these financial covenants at December 31, 1996. The Company is
currently negotiating a new line of credit arrangement.
 
                                       20
<PAGE>   22
 
     In connection with the acquisition of the net assets of Healthcare Design
Systems, the Company paid $3.75 million at the closing and issued a note payable
for the purchase price of $5 million. After the closing of the initial public
offering in October 1996, the Company paid the $5 million due under the note
payable, of which $1.5 million was deposited into an escrow account until
purchase price adjustments have been finalized.
 
     In connection with the acquisition and merger of InterMed Healthcare
Systems Inc., the Company assumed $1.1 million of loans outstanding, which were
repaid by the Company in December 1996.
 
               FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS
 
DEPENDENCE ON HOSPITAL MARKET; MARKET ACCEPTANCE; DEPENDENCE ON STRATEGIC
ALLIANCES; SYSTEM ENHANCEMENTS
 
     The Company's customers are typically hospitals and other health care
providers, and substantially all of the Company's revenues in 1996 and 1995 were
derived from the sale of software products and services to hospitals. The
Company's performance is dependent on continued demand for its products in the
health care information systems and services industry. Consolidation in the
health care information systems and services industry could have a material
adverse effect on the Company due to the decrease in the number of potential
purchasers of the Company's products and services or the acquisition of one or
more of the Company's customers by an acquiror that uses products that compete
with those of the Company. Legislative or market-driven reforms could also have
unpredictable effects on the Company's business, financial condition and results
of operations. In addition, the decision to purchase the Company's products
often involves the approval of several individuals within hospitals and other
health care providers. Consequently, it is difficult for the Company to predict
the timing or outcome of the buying decisions of customers or potential
customers.
 
     The Company's future performance is also dependent in part on the success
of its marketing strategy which involves, to a substantial degree, a reliance
upon strategic alliance partners to sell the Company's products as a component
of the integrated systems being marketed by such partner or to endorse the
Company's products. If these strategic alliance partners elect to remove their
product endorsement or elect not to include the Company's products as components
in their integrated systems or are unsuccessful in achieving significant sales
of the systems into which the Company's products are to be integrated, the
Company's business, financial condition and results of operations would be
materially adversely affected.
 
     Moreover, the Company's future performance will depend in large part upon
the Company's ability to provide the increasing functionality required by its
customers through the timely development and successful introduction of new
products and enhancements to its existing suite of products. The Company has
historically devoted significant resources to product enhancements and research
and development and believes that significant continuing development efforts
will be required to sustain the Company's operations. There can be no assurance
that the Company will successfully develop, acquire, introduce and market new
product enhancements or products, or that product enhancements or new products
developed by the Company will meet the requirements of hospitals and other
health care providers and achieve market acceptance.
 
RISKS ASSOCIATED WITH ACQUISITIONS
 
     The Company has expanded, and intends to continue to expand, in substantial
part through acquisitions of products, technologies and businesses. The
Company's ability to expand successfully through acquisitions depends on many
factors, including the successful identification and acquisition of products,
technologies or businesses and management's ability to effectively negotiate and
consummate acquisitions and integrate and operate the new products, technologies
or businesses. There is significant competition for acquisition opportunities in
the Company's industry, which may intensify due to consolidation in the health
care industry, increasing the costs of capitalizing on acquisition
opportunities. The Company competes for acquisition opportunities with other
companies that have significantly greater financial and management resources
than the Company. The inability to successfully identify appropriate acquisition
opportunities, consummate acquisitions or successfully integrate acquired
products, technologies, operations, personnel or businesses could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
                                       21
<PAGE>   23
 
In addition, acquisitions may divert management's attention from other business
concerns, expose the Company to the risks of entering markets in which the
Company has no direct prior experience or to risks associated with the market
acceptance of acquired products and technologies, or result in the loss of key
employees of the Company or the acquired company. Moreover, future acquisitions
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt and the recognition of
amortization expenses related to goodwill and other intangible assets, which
could adversely affect the Company's business, financial condition and results
of operations.
 
     The acquisition and merger of InterMed Healthcare Systems Inc. in December
1996 substantially increased the number and complexity of the software products
offered by the Company. The further integration of this company's products and
operations into the products and operations of the Company will divert
management attention from other matters, will place further pressure on the
Company's executive officers and may result in additional administrative
expense. Failure to complete successfully this integration of products and
operations could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
 
     The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Quarterly revenues and operating results may fluctuate as
a result of a variety of factors, including the following: variability in demand
for the Company's products and services; the number, timing and significance of
announcements and releases of product enhancements and new products by the
Company and its competitors; the timing and significance of announcements
concerning the Company's present or prospective strategic alliances; the
termination of, or a reduction in, offerings of the Company's products and
services; the loss of customers due to consolidation in the health care
industry, delays in product delivery requested by customers; the timing of
revenue recognition; the amount of backlog at the beginning of any particular
quarter; customer budgeting cycles and changes in customer budgets; investments
by the Company in marketing, sales, research and development, and administrative
personnel necessary to support the Company's anticipated operations; marketing
and sales promotional activities; software defects and other quality factors;
and general economic conditions.
 
     In particular, the timing of revenue recognition can be affected by many
factors, including the timing of customer purchases which are difficult to
predict given the complex procurement decision process that exists in most
health care providers. As a result, the Company typically experiences sales
cycles that extend over several quarters for new customers. There can be no
assurance that the Company will not experience delays in recognizing revenues in
the future. Moreover, the Company's operating expense levels are relatively
fixed and, to a large degree, are based on anticipated revenues. If revenues are
below expectations, net income is likely to be disproportionately affected.
Further, it is likely that in some future quarter the Company's revenues,
backlog or operating results will be below the expectations of securities
analysts and investors. In such event, the trading price of the Company's Common
Stock would likely be materially adversely affected.
 
HIGHLY COMPETITIVE MARKET
 
     Competition in the market for the Company's products and services is
intense and is expected to increase. The Company's competitors include other
providers of health care information software and services, as well as health
care consulting firms. The Company's principal competitors include CIS
Technologies, Inc., a division of National Data Corporation, Inc., and
Sophisticated Software, Inc. in the market for its EDI products; HCC, a division
of CIS Technologies, Inc. and Trego Systems, Inc. in the market for its contract
management products; IMNET Systems, Inc., Optika Imaging Systems, Inc. and
LanVision Systems, Inc. in the market for its electronic document management
products; Transition Systems, Inc. (TSI) and Healthcare Microsystems, Inc., a
division of Health Management Systems Inc. (HMS), HCIA Inc. and MediQual
Systems, Inc. in the market for its decision support products; and HMS and
ARTRAC, a division of Medaphis Corp., in the market for its business office
outsourcing services. In addition, current and prospective customers evaluate
the Company's capabilities against the merits of their existing information
systems and expertise. Furthermore, major health care information companies not
presently offering products that compete
 
                                       22
<PAGE>   24
 
with those offered by the Company may enter the Company's markets. Increased
competition could result in price reductions, reduced gross margins, and loss of
market share, any of which could materially adversely affect the Company's
business, financial condition and results of operations. In addition, many of
the Company's competitors and potential competitors have significantly greater
financial, technical, product development, marketing and other resources and
market recognition than the Company. Many of the Company's competitors also
currently have, or may develop or acquire, substantial installed customer bases
in the health care industry. As a result of these factors, the Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
and results of operations.
 
NEED TO MANAGE CHANGING OPERATIONS; DEPENDENCE UPON KEY PERSONNEL
 
     The Company's anticipated future operations may place a strain on its
management systems and resources. The Company expects that it will be required
to continue to improve its financial and management controls, reporting systems
and procedures, and will need to expand, train and manage its work force. There
can be no assurance that the Company will be able to effectively manage these
tasks, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. In 1994, 1995
and 1996 the Company experienced significant turnover in its sales personnel,
including its Senior Vice President of Sales. The Company has hired in the last
year and intends to continue to hire a significant number of additional sales
personnel. Thus, a substantial percentage of the Company's sales force is
currently inexperienced in selling the Company's products and will remain so for
some time. In addition, competition for experienced sales personnel is intense,
and there can be no assurance that the Company will be able to attract,
assimilate or retain highly qualified employees in the future. If the Company is
unable to hire and retain such personnel, particularly those in key positions,
the Company's business, financial condition and results of operations could be
materially adversely affected. The Company's future success also depends in
significant part upon the continued service of its executive officers, its
product managers and other key sales, marketing, and development personnel.
 
     The loss of the services of any of its executive officers or other key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. Additions of new and departures
of existing personnel can be disruptive and could have a material adverse effect
on the Company's business, financial condition and results of operations.
 
LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
 
     The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. The Company has not filed any patent applications covering
its technology or registered any of its copyrights with state or federal
agencies. There can be no assurance that measures taken by the Company to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products and services that are
substantially equivalent or superior to those of the Company. Substantial
litigation regarding intellectual property rights exists in the software
industry, and the Company expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in the
Company's industry segment grows and the functionality of products overlaps.
Although the Company believes that its products do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that a license or similar agreement will be available on reasonable terms in the
event of an unfavorable ruling on any such claim. In addition, any such claim
may require the Company to incur substantial litigation expenses or subject the
Company to significant liabilities and could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
                                       23
<PAGE>   25
 
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
 
     Products such as those offered by the Company frequently contain errors or
failures, especially when first introduced or when new versions are released.
Although the Company conducts extensive testing, the Company has discovered
software errors in certain of its enhancements and products after their
introduction. The Company is currently developing various new applications as
well as new versions of certain of its existing applications designed to
function with the Microsoft Windows(TM) NT operating system. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors or performance failures will not occur in these products under
development or in other enhancements or products after commencement of
commercial shipments, resulting in loss of revenues or delay in market
acceptance, diversion of development resources, damage to the Company's
reputation or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
 
RISKS ASSOCIATED WITH PENDING LITIGATION
 
     The Company is a defendant in several legal proceedings any of which, if
resolved adversely to the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company has agreed to issue to certain principal stockholders additional
shares of Common Stock without payment of further consideration in the event
that the Company is required to pay damages or issue equity securities in excess
of agreed-upon amounts to the plaintiffs in certain pending litigation. Any
issuance of Common Stock under this arrangement or in the related litigation
will cause dilution to the Company's other stockholders, and such dilution could
be significant.
 
RISK OF INTERRUPTION OF DATA PROCESSING
 
     The Company currently processes large amounts of customer data at its
facilities in Larkspur, California and Neptune, New Jersey. While the Company
has safeguards for emergencies such as power interruption or breakdown in
temperature controls, the Company has no mirror processing site to which
processing could be transferred in the case of a catastrophic event at either of
these facilities. The occurrence of a major catastrophic event at either the
Larkspur facility or the Neptune facility could lead to an interruption of data
processing and could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
RISKS RELATED TO PRODUCT CONVERSION TO WINDOWS
 
     The Company intends to enhance its products to run on the Microsoft
Windows(TM) NT operating system. Some potential clients may delay purchasing
decisions until Windows(TM) NT versions of the Company's products are available.
There can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful and timely development, introduction and
marketing of the new Windows(TM) NT versions of its products, or that such
products will achieve or sustain market acceptance. The occurrence of product
conversion problems or the failure to achieve or sustain market acceptance of
the Windows(TM) NT versions could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
RISKS RELATED TO OUTSOURCING BUSINESS
 
     The Company provides business office outsourcing, including the billing and
collection of receivables. The infrastructure for the Company's outsourcing
business was acquired by the Company from Seton Financial in November 1993, and
the Company typically uses its software products to provide outsourcing
services. As a result, the Company has not been required to make significant
investments since the acquisition of Seton Financial in order to service
existing outsourcing contracts. However, if the Company experiences a period of
substantial expansion in its outsourcing business, the Company may be required
to make substantial investments in capital assets and personnel, and there can
be no assurance that the Company will be able to assess accurately the
investment required and negotiate and perform in a profitable manner any of the
 
                                       24
<PAGE>   26
 
outsourcing contracts it may be awarded. The Company's failure to estimate
accurately the resources and related expenses required for a project or its
failure to complete its contractual obligations in a manner consistent with the
project plan upon which its contract was based could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company's failure to meet a client's expectations in the
performance of its services could damage the Company's reputation and adversely
affect its ability to attract new business. Finally, the Company could incur
substantial costs and expend significant resources correcting errors in its
work, and could possibly become liable for damages caused by such errors.
 
GOVERNMENT REGULATION
 
     The FDA is responsible for assuring the safety and effectiveness of medical
devices under the Federal Food, Drug and Cosmetic Act. Computer products are
subject to regulation when they are used or are intended to be used in the
diagnosis of disease or other conditions, or in the cure, mitigation, treatment
or prevention of disease, or are intended to affect the structure or function of
the body. The FDA could determine in the future that any predictive aspects of
the Company's products make them clinical decision tools subject to FDA
regulation. Compliance with these regulations could be burdensome, time
consuming and expensive. The Company also could become subject to future
legislation and regulations concerning the development and marketing of health
care software systems. These could increase the cost and time necessary to
market new products and could affect the Company in other respects not presently
foreseeable. The Company cannot predict the effect of possible future
legislation and regulation.
 
     The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
health care provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of health care providers to submit information from patient records
using the Company's products.
 
UNCERTAINTY IN THE HEALTH CARE INDUSTRY
 
     The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care organizations. Changes in current health care financing and
reimbursement systems could result in the need for unplanned product
enhancements, in delays or cancellations of product orders or shipments or in
the revocation of endorsement of the Company's products by hospital associations
or other customers. Any of such occurrences could have a material adverse effect
on the Company's business, financial condition and results of operations. During
the past several years, the United States health care industry has been subject
to an increase in governmental regulation of, among other things, reimbursement
rates. Certain proposals to reform the U.S. health care system are periodically
under consideration by Congress. These programs may contain proposals to
increase government involvement in health care and otherwise change the
operating environment for the Company's customers. Health care organizations may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments in cost containment tools and related
technology such as the Company's products. The Company cannot predict what
impact, if any, such factors might have on its business, financial condition and
results of operations. In addition, many health care providers are consolidating
to create integrated health care delivery systems with greater regional market
power. As a result, these emerging systems could have greater bargaining power,
which may lead to price erosion of the Company's products. The failure of the
Company to maintain adequate price levels would have a material adverse effect
on the Company's business, financial condition and results of operations. Other
legislative or market-driven reforms could have unpredictable effects on the
Company's business, financial condition and results of operations.
 
                                       25
<PAGE>   27
 
RISK OF PRODUCT-RELATED CLAIMS
 
     Certain of the Company's products and services relate to the payment or
collection of health care claims. Any failure by employees of the Company or by
the Company's products to accurately process or collect such claims could result
in claims against the Company by its customers. The Company has been and
currently is involved in claims for money damages related to services provided
by its accounts receivable management business. The Company maintains insurance
to protect against certain claims associated with the use of its products, but
there can be no assurance that its insurance coverage would adequately cover any
claim asserted against the Company. A successful claim brought against the
Company in excess of, or excluded from, its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources. There can
be no assurance that the Company will not be subject to material claims in the
future, that such claims will not result in liability in excess of its insurance
coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the future
at commercially reasonable rates. In addition, if liability of the Company were
to be established, substantial revisions to its products could be required that
may cause the Company to incur additional unanticipated research and development
expenses.
 
POSSIBLE VOLATILITY OF STOCK PRICE
 
     The stock market historically has experienced volatility which has affected
the market price of securities of many companies and which has sometimes been
unrelated to the operating performance of such companies. The trading price of
the Company's Common Stock could also be subject to significant fluctuations in
response to variations in quarterly results of operations, announcements of new
products or acquisitions by the Company or its competitors, governmental
regulatory action, other developments or disputes with respect to proprietary
rights, general trends in the industry and overall market conditions, and other
factors. The market price may also be affected by movements in prices of equity
securities in general.
 
                                       26
<PAGE>   28
 
ITEM 7.  FINANCIAL STATEMENTS
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
QuadraMed Corporation:
  Report of Independent Public Accountants............................................   28
  Consolidated Balance Sheets as of December 31, 1995 and 1996........................   29
  Consolidated Statements of Operations for the years ended December 31, 1994, 1995
     and 1996.........................................................................   30
  Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years
     ended December 31, 1994, 1995 and 1996...........................................   31
  Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
     and 1996.........................................................................   32
  Notes to Consolidated Financial Statements..........................................   33
</TABLE>
 
                                       27
<PAGE>   29
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To QuadraMed Corporation:
 
     We have audited the accompanying consolidated balance sheets of QuadraMed
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, statements of
changes in stockholders' equity (deficit) and cash flows each of the three years
in the period ended December 31, 1996. These consolidated financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QuadraMed
Corporation as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
 
     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
 
                                          ARTHUR ANDERSEN LLP
San Jose, California
March 5, 1997
 
                                       28
<PAGE>   30
 
                             QUADRAMED CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                      --------------------------
                                                                          1995            1996
                                                                      -------------     --------
                                                                       (RESTATED)
                                                                      (SEE NOTE 10)
<S>                                                                   <C>               <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.........................................    $     266       $ 18,486
  Restricted cash...................................................          163             30
  Accounts receivable, net of allowance for uncollectible accounts
     of $229 and $239, respectively.................................        2,426          4,040
  Prepaid expenses and other........................................          261            328
                                                                         --------       --------
          Total current assets......................................        3,116         22,884
                                                                         --------       --------
EQUIPMENT, at cost:
  Equipment.........................................................        2,265          3,528
  Less -- Accumulated depreciation and amortization.................         (787)        (1,533)
                                                                         --------       --------
     Equipment and software, net....................................        1,478          1,995
                                                                         --------       --------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net.........................          520            950
ACQUIRED SOFTWARE, net of accumulated amortization of $0 and $323,
  respectively......................................................        1,940          1,617
GOODWILL, net of accumulated amortization of $225 and $568,
  respectively......................................................        2,349          2,038
OTHER...............................................................          130             85
                                                                         --------       --------
                                                                        $   9,533       $ 29,569
                                                                         ========       ========
     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Current maturities of capital lease obligations...................    $     155       $     79
  Accounts payable..................................................        1,169          1,523
  Accrued liabilities...............................................        1,869          1,410
  Amount payable related to acquisition of Healthcare Design
     Systems........................................................        4,250             --
  Deferred revenue..................................................        2,045          1,515
                                                                         --------       --------
          Total current liabilities.................................        9,488          4,527
AMOUNT PAYABLE RELATED TO ACQUISITION OF HEALTHCARE DESIGN SYSTEMS,
  less current portion..............................................        4,500             --
LOANS PAYABLE.......................................................        1,125             --
CAPITAL LEASE OBLIGATIONS, less current portion.....................          237            149
                                                                         --------       --------
          Total liabilities.........................................       15,350          4,676
                                                                         --------       --------
CONTINGENCIES (Note 11)                                                        --             --
STOCKHOLDERS' EQUITY (DEFICIT):
  Preferred stock, $0.01 par, 5,000 shares authorized, 1,804 and 0
     shares issued and outstanding, respectively....................           18             --
  Common stock, $0.01 par, 20,000 shares authorized, 626 and 6,011
     shares issued and outstanding, respectively....................            6             57
  Additional paid-in capital........................................        9,384         40,244
  Deferred compensation.............................................           --           (336)
  Accumulated deficit...............................................      (15,225)       (15,072)
                                                                         --------       --------
          Total stockholders' equity (deficit)......................       (5,817)        24,893
                                                                         --------       --------
                                                                        $   9,533       $ 29,569
                                                                         ========       ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       29
<PAGE>   31
 
                             QUADRAMED CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                     FOR THE YEARS ENDED
                                                                        DECEMBER 31,
                                                         -------------------------------------------
                                                             1994              1995           1996
                                                         -------------     -------------     -------
                                                          (RESTATED)        (RESTATED)
                                                         (SEE NOTE 10)     (SEE NOTE 10)
<S>                                                      <C>               <C>               <C>
REVENUES:
  Licenses.............................................     $ 1,437           $ 4,420        $16,223
  Services.............................................       4,665             3,183          2,865
                                                            -------           -------        -------
          Total revenues...............................       6,102             7,603         19,088
                                                            -------           -------        -------
OPERATING EXPENSES:
  Cost of licenses.....................................       2,557             2,676          7,294
  Cost of services.....................................       3,476             3,657          2,683
  General and administration...........................       2,039             2,439          3,221
  Sales and marketing..................................       1,874             1,225          2,434
  Research and development.............................         767               653          2,499
  Amortization of goodwill.............................         169                50            460
  Write-off of acquired research and development in
     process...........................................          --             6,240             --
                                                            -------           -------        -------
          Total operating expenses.....................      10,882            16,940         18,591
                                                            -------           -------        -------
INCOME (LOSS) FROM OPERATIONS..........................      (4,780)           (9,337)           497
                                                            -------           -------        -------
OTHER INCOME (EXPENSE):
  Interest income......................................          --                66            214
  Interest expense.....................................         (85)             (176)          (543)
  Other income (expense), net..........................          --                13            (15)
                                                            -------           -------        -------
          Total other income (expense).................         (85)              (97)          (344)
                                                            -------           -------        -------
NET INCOME (LOSS)......................................     $(4,865)          $(9,434)       $   153
                                                            =======           =======        =======
PRO FORMA NET LOSS PER SHARE...........................                       $ (2.13)       $    --
                                                                              =======        =======
PRO FORMA WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
  SHARES...............................................                         4,435             --
                                                                              =======        =======
NET INCOME PER SHARE...................................                            --        $  0.03
                                                                              =======        =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES...                            --          5,089
                                                                              =======        =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       30
<PAGE>   32
 
                             QUADRAMED CORPORATION
 
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(DEFICIT)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                        SERIES A           SERIES B
                                      CONVERTIBLE        CONVERTIBLE
                                    PREFERRED STOCK    PREFERRED STOCK            COMMON STOCK             ADDITIONAL
                                    ----------------   ----------------   -----------------------------      PAID IN
                                    SHARES   AMOUNTS   SHARES   AMOUNTS      SHARES          AMOUNTS         CAPITAL
                                    ------   -------   ------   -------   -------------   -------------   -------------
                                                                           (RESTATED)      (RESTATED)      (RESTATED)
                                                                          (SEE NOTE 10)   (SEE NOTE 10)   (SEE NOTE 10)
<S>                                 <C>      <C>       <C>      <C>       <C>             <C>             <C>
BALANCE, DECEMBER 31, 1993........     --      $--        --     $  --          314            $ 3           $   248
Issuance of Series A preferred
 stock at $4.79 per share, net of
 issuance costs...................    480        5        --        --           --             --             2,236
Conversion of notes payable to
 related parties to Series A
 preferred stock at $4.79 per
 share............................    342        3        --        --           --             --             1,637
Conversion of notes payable to
 related parties to common
 stock............................     --       --        --        --          330              3               197
Conversion of common stock at
 $2.50 per share to Series A
 preferred stock at $4.79 per
 share............................     13       --        --        --          (23)            --                --
Net loss..........................     --       --        --        --           --             --                --
                                    ------     ---     ------     ----        -----            ---           -------
BALANCE, DECEMBER 31, 1994........    835        8        --        --          621              6             4,318
Issuance of warrant to purchase
 common stock.....................     --       --        --        --           --             --                57
Issuance of common stock at $2.50
 per share........................     --       --        --        --            5             --                12
Conversion of notes payable to
 related parties to Series A
 preferred stock at $4.79 per
 share............................     77        1        --        --           --             --               367
Conversion of notes payable to
 related parties to Series B
 preferred stock at $5.25 per
 share, net of issuance costs.....     --       --       892         9           --             --             4,630
Net loss..........................     --       --        --        --           --             --                --
                                    ------     ---     ------     ----        -----            ---           -------
BALANCE AT DECEMBER 31, 1995......    912        9       892         9          626              6             9,384
Issuance of common stock at $3.75
 per share........................     --       --        --        --           56              1               209
Conversion of notes payable to
 related parties to Series B
 preferred stock at $5.25 per
 share, net of issuance costs.....     --       --       740         7           --             --             3,862
Issuance of warrant to purchase
 common stock.....................     --       --        --        --           --             --               381
Amortization of deferred
 compensation.....................     --       --        --        --           --             --                --
Issuance of Series A preferred
 stock under exchange agreement
 (Note 6).........................    251       --        --        --           --             --                --
Repurchase of Series B preferred
 stock............................     --       --        (6)       --           --             --               (53)
Conversion of Series A and B
 preferred stock to common
 stock............................  (1,163)     (9)    (1,626)     (16)       2,789             25                --
Exercise of common stock
 options..........................     --       --        --        --           40             --               100
Issuance of common stock from
 initial public offering, net of
 issuance costs...................     --       --        --        --        2,500             25            26,361
Net income........................     --       --        --        --           --             --                --
                                    ------     ---     ------     ----        -----            ---           -------
BALANCE, DECEMBER 31, 1996........     --      $--        --     $  --        6,011            $57           $40,244
                                    ======     ===     ======     ====        =====            ===           =======
 
<CAPTION>
 
                                                                       TOTAL
                                                                   STOCKHOLDERS'
                                      DEFERRED      ACCUMULATED       EQUITY
                                    COMPENSATION      DEFICIT        (DEFICIT)
                                    ------------   -------------   -------------
                                                    (RESTATED)      (RESTATED)
                                                   (SEE NOTE 10)   (SEE NOTE 10)
<S>                                 <C>            <C>             <C>
BALANCE, DECEMBER 31, 1993........     $   --        $    (926)       $  (675)
Issuance of Series A preferred
 stock at $4.79 per share, net of
 issuance costs...................         --               --          2,241
Conversion of notes payable to
 related parties to Series A
 preferred stock at $4.79 per
 share............................         --               --          1,640
Conversion of notes payable to
 related parties to common
 stock............................         --               --            200
Conversion of common stock at
 $2.50 per share to Series A
 preferred stock at $4.79 per
 share............................         --               --             --
Net loss..........................         --           (4,865)        (4,865)
                                        -----         --------        -------
BALANCE, DECEMBER 31, 1994........         --           (5,791)        (1,459)
Issuance of warrant to purchase
 common stock.....................         --               --             57
Issuance of common stock at $2.50
 per share........................         --               --             12
Conversion of notes payable to
 related parties to Series A
 preferred stock at $4.79 per
 share............................         --               --            368
Conversion of notes payable to
 related parties to Series B
 preferred stock at $5.25 per
 share, net of issuance costs.....         --               --          4,639
Net loss..........................         --           (9,434)        (9,434)
                                        -----         --------        -------
BALANCE AT DECEMBER 31, 1995......         --          (15,225)        (5,817)
Issuance of common stock at $3.75
 per share........................         --               --            210
Conversion of notes payable to
 related parties to Series B
 preferred stock at $5.25 per
 share, net of issuance costs.....         --               --          3,869
Issuance of warrant to purchase
 common stock.....................       (381)              --             --
Amortization of deferred
 compensation.....................         45               --             45
Issuance of Series A preferred
 stock under exchange agreement
 (Note 6).........................         --               --             --
Repurchase of Series B preferred
 stock............................         --               --            (53)
Conversion of Series A and B
 preferred stock to common
 stock............................         --               --             --
Exercise of common stock
 options..........................         --               --            100
Issuance of common stock from
 initial public offering, net of
 issuance costs...................         --               --         26,386
Net income........................         --              153            153
                                        -----         --------        -------
BALANCE, DECEMBER 31, 1996........     $ (336)       $ (15,072)       $24,893
                                        =====         ========        =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       31
<PAGE>   33
 
                             QUADRAMED CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                     FOR THE YEARS ENDED
                                                                        DECEMBER 31,
                                                         -------------------------------------------
                                                             1994              1995           1996
                                                         -------------     -------------     -------
                                                           RESTATED          RESTATED
                                                         (SEE NOTE 10)     (SEE NOTE 10)
<S>                                                      <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)....................................     $(4,865)          $(9,434)       $   153
  Adjustments to reconcile net income (loss) to net
     cash used for operating activities --
     Depreciation and amortization.....................         395               531          1,409
     Amortization of deferred compensation.............          --                --             45
     Write-off of in-process research and
       development.....................................          --             6,240             --
  Cash acquired in acquisition of Healthcare Design
     Systems...........................................          --                13             --
  Changes in assets and liabilities --
     Accounts receivable...............................        (348)             (223)        (1,614)
     Restricted cash...................................          --              (163)           132
     Prepaid expenses and other........................         (32)               86           (120)
     Other assets......................................          99                (9)            45
     Accounts payable and accrued liabilities..........       1,444              (528)          (104)
     Borrowings to fund advances to customers..........          29              (241)            --
     Deferred revenue..................................          52                53           (530)
                                                         -------------     -------------     -------
          Cash used for operating activities...........      (3,226)           (3,675)          (584)
                                                         -------------     -------------     -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to equipment and software..................        (688)             (253)        (1,263)
  Capitalization of computer software development
     costs.............................................         (62)             (425)          (460)
                                                         -------------     -------------     -------
          Cash used for investing activities...........        (750)             (678)        (1,723)
                                                         -------------     -------------     -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments of principal on capital lease obligations...         (17)              (64)          (163)
  Borrowings (repayments) under notes and loans
     payable...........................................       1,664             4,507         (9,875)
  Issuance of convertible preferred stock, net of
     issuance costs....................................       2,241                --          3,869
  Issuance of common stock, net of issuance costs......          --                12         26,596
  Proceeds from exercise of common stock options.......          --                --            100
                                                         -------------     -------------     -------
          Cash provided by financing activities........       3,888             4,455         20,527
                                                         -------------     -------------     -------
  Net increase (decrease) in cash and cash
     equivalents.......................................         (88)              102         18,220
CASH AND CASH EQUIVALENTS, beginning of period.........         253               164            266
                                                         -------------     -------------     -------
CASH AND CASH EQUIVALENTS, end of period...............     $   164           $   266        $18,486
                                                         ==========        ==========        =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid for interest...............................     $    66           $    --        $   543
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
  FINANCING TRANSACTIONS:
  Purchase of equipment subject to capital lease.......         186                17            128
  Repurchase of Series B preferred stock in exchange
     for extinguishment of shareholder receivable......          --                --             53
  Conversion of notes payable to related parties to
     convertible preferred stock.......................       1,640             5,007          3,869
  Conversion of notes payable to related parties to
     common stock......................................         200                --             --
  Conversion of common stock to convertible preferred
     stock.............................................          60                --             --
  Conversion of convertible preferred stock to common
     stock.............................................          --                --             25
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       32
<PAGE>   34
 
                             QUADRAMED CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1996
 
1.  THE COMPANY
 
     QuadraMed Corporation (the Company) was incorporated in California in
September 1993. In August 1996, the Company reincorporated in Delaware. The
Company operates in a single industry segment and offers a suite of decision
support, financial management and electronic data interchange (EDI) software
products that are designed to enable health care providers to increase
operational efficiency and measure the cost of care and to facilitate the
negotiation of managed care contracts and capitation agreements. In addition to
its software products, the Company provides business office outsourcing and
reimbursement consulting services.
 
     The Company is subject to a number of risks, including, but not limited to,
successful integration of acquired subsidiaries, competition from larger
companies, market acceptance of the Company's products and uncertainty in the
health care industry. There can be no assurance that the Company will
successfully integrate acquired subsidiaries or be able to increase market share
for its products from larger competitors.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
 
  Cash and Cash Equivalents
 
     For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. The Company's investments have consisted of certificates of
deposit, money market accounts and commercial paper, all with original
maturities of three months or less.
 
  Equipment
 
     Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets which
is generally three to seven years.
 
  Software Development Costs
 
     Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," software development costs are capitalized upon the establishment of
technological feasibility, which the Company defines as establishment of a
working model which is typically the beta version of the software. Capitalized
software development costs require a continuing assessment of their
recoverability. This assessment requires considerable judgment by management
with respect to various factors, including, but not limited to, anticipated
future gross product revenues, estimated economic lives and changes in software
and hardware technology. The Company capitalized software development costs of
$62,000, $497,000, including $72,000 which was acquired from Healthcare Design
Systems, and $460,000 in 1994, 1995 and 1996, respectively. Amortization of
capitalized software development costs was $47,000 and $32,000 for the years
ended December 31, 1995 and 1996, respectively. Amortization is based upon the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues
for that product or (b) the straight-line method over the remaining estimated
economic life of the product, generally five years.
 
                                       33
<PAGE>   35
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Revenue Recognition
 
     The Company licenses a variety of products and provides a variety of
services. License revenue includes license, installation, consulting and
post-contract customer support fees, third-party hardware sales and other
revenues related to licensing of the Company's software products. Service
revenue is composed of business office outsourcing and reimbursement consulting
services. The product suite is comprised of three primary elements: financial
management, decision support and EDI software. Each of these elements includes a
variety of products which can be licensed individually or as a suite of
interrelated products. Products are generally licensed under term arrangements
(which range from one year to three years) which typically include monthly
payments over the term of the arrangement. However, the product suite can also
be licensed on a perpetual basis.
 
     Revenues from term licenses of decision support and EDI products are
recognized ratably over the term of the license arrangement, beginning at the
date of installation. Revenues from perpetual licenses of the financial
management and decision support products are recognized upon shipment of the
software if there are no significant post-delivery obligations, payment of the
license fee is due within one year and collectibility is probable. If an
acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period.
 
     The Company provides business office outsourcing and reimbursement
consulting services to certain hospitals under contract service arrangements.
Business office outsourcing revenues typically consist of fixed monthly fees
plus incentive-based payments that are based on a percentage of dollars
recovered for the provider for which the service is being performed. The monthly
fees are recognized as revenue on a monthly basis at the end of each month.
Incentive fees are recognized as the conditions upon which such fees are based
are realized based on collection of accounts from payors. Reimbursement
consulting services typically consist of fixed fee services and additional
incentive payments based on a certain percentage of revenue returns realized by
the customer as a result of the services provided by the Company. The fixed fee
portion is recognized as revenue upon the completion of the project. Incentive
amounts are recognized upon cash collection from the customer.
 
     Other services are also provided to certain of the Company's licensees of
software product, which consist primarily of consulting and post-contract
customer support. Consulting services generally consist of installation of
software at customer sites and is recognized upon completion of installation.
Such services generally do not include customization or modification of the
underlying software code. If included in a license agreement, such services are
unbundled at their fair market value based on the value established by the
independent sale of such services to customers. If customization of the software
code is performed, the license and service fees are recognized together on a
percentage-of-completion basis during the customization period. Post-contract
customer support is recognized ratably over the term of the support period. If
support is included in a perpetual license agreement such amounts are unbundled
from the license fee at its fair market value based on the value established by
the independent sale of such support to customers.
 
     Cost of license revenues consist primarily of salaries, benefits and
allocated costs related to the installation process and customer support and
royalties to third parties.
 
     Cost of service revenues consist primarily of salaries, benefits and
allocated costs related to providing such services.
 
     Deferred revenue primarily consists of revenue deferred under annual
maintenance and annual license agreements.
 
                                       34
<PAGE>   36
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Major Customers
 
     For the years ended December 31, 1994, 1995 and 1996, respectively, the
Company had the following customers who accounted for greater than 10% of
revenues:
 
<TABLE>
<CAPTION>
                                                DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                                    1994             1995             1996
                                                ------------     ------------     ------------
        <S>                                     <C>              <C>              <C>
        Customer A............................    19   %            *                *
        Customer B............................     *               11   %            *
</TABLE>
 
---------------
* These customers did not account for over 10% of revenue in these periods.
 
  Concentration of Credit Risk
 
     Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company does not require collateral on trade accounts receivable as the
Company's customer base consists primarily of hospitals and to a lesser extent
hospital associations, physician groups, medical payors and self-administered
employers. The Company provides reserves for credit losses.
 
  Fair Value of Financial Instruments
 
     The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable, approximate
their fair values.
 
  Goodwill
 
     Goodwill represents the amount of purchase price in excess of the fair
value of the tangible net assets, purchased software and acquired in-process
research and development purchased in acquisitions completed by the Company and
is amortized on a straight-line basis over five years. Acquired software
purchased in acquisitions and completed by the Company, is amortized on a
straight-line basis over six years. Goodwill is evaluated annually for
impairment and written down to net realizable value if necessary. No impairment
has been recorded to date.
 
  Net Income Per Share and Pro Forma Net Loss Per Share
 
     For periods after the Company's initial public offering in October 1996,
net income per share has been computed using the weighted average number of
common and common equivalent shares (using the treasury stock method for
outstanding stock options and warrants).
 
     For the year ended December 31, 1995 and for the portion of 1996 preceding
the initial public offering, net loss per share was computed on a pro forma
basis.
 
     Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of Convertible Preferred Stock (using the if converted
method) and stock options and warrants (using the treasury stock method). Common
stock options and warrants are excluded from the computation if their effect is
antidilutive except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins and staff policy, such computations include all
common and common equivalent shares issued within the 12 months preceding the
filing date as if they were outstanding for all periods presented (under the
treasury stock method using an assumed initial public offering price).
Convertible Preferred Stock outstanding during the period is included (using the
if converted method) in the computation as common equivalent shares. Primary and
fully diluted earnings per share were substantially the same in all periods
presented.
 
                                       35
<PAGE>   37
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Use of Estimates in Preparation of Financial Statements
 
     The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
RECENT PRONOUNCEMENTS
 
     During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company
to review for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. Effective January 1,
1996, the Company adopted SFAS No. 121. The adoption of SFAS No. 121 did not
have a material impact on the financial statements taken as a whole.
 
     In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies who elect not to
adopt the new method of accounting. The Company has adopted SFAS No. 123 in
fiscal 1996, and in accordance with the provisions of SFAS No. 123, the Company
applies APB Opinion 25 and related interpretations in accounting for its stock
option and stock purchase plans.
 
3.  LINE OF CREDIT
 
     In January 1996, the Company arranged a line of credit agreement (the
agreement) with a bank which expired on January 2, 1997. There were no
outstanding borrowings under the line of credit at December 31, 1996. Borrowings
bore interest at the bank's prime rate plus 1.5%. Borrowings were limited to the
lesser of 80% of eligible borrowing base (accounts receivable) or $1,200,000.
Borrowings were secured by all of the Company's assets and a perfected security
interest on $500,000 of accounts receivable acquired in the acquisition of
Healthcare Design Systems. In addition, warrants were issued to the bank for the
purchase of $50,000 worth of Series B Preferred Stock at $5.25 per share. Under
the Agreement, the Company was required to maintain certain financial covenants,
including a minimum quick ratio, a minimum net worth of $6,800,000, a maximum
ratio of total liabilities to tangible net worth of $1.4 million and losses not
to exceed $250,000 in the quarter ending June 30, 1996 and after-tax
profitability on a quarterly basis beginning the quarter ending June 30, 1996.
The Company was in compliance with these financial covenants as of December 31,
1996. The Company is currently negotiating a new line of credit arrangement.
 
                                       36
<PAGE>   38
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4.  CAPITAL AND OPERATING LEASE OBLIGATIONS
 
     The Company leases its headquarters and certain other facilities under
operating leases and a portion of its equipment under capital lease
arrangements. The minimum future lease payments required under the Company's
capital and operating leases are as follows at December 31, 1996 (in thousands):
 
<TABLE>
<CAPTION>
                                                                    CAPITAL     OPERATING
                                                                    LEASES       LEASES
                                                                    -------     ---------
        <S>                                                         <C>         <C>
        1997......................................................   $  90       $   810
        1998......................................................      71           422
        1999......................................................      45           246
        2000......................................................      37           240
        2001......................................................       6            88
        Thereafter................................................      --            --
                                                                      ----         -----
                  Total minimum payments..........................     249       $ 1,806
                                                                                   =====
        Interest on capital lease obligations at a rate of 8.5
          percent.................................................     (21)
                                                                      ----
        Net minimum principal payments............................     228
        Current maturities........................................     (79)
                                                                      ----
                                                                     $ 149
                                                                      ====
</TABLE>
 
     The net book value of assets acquired under capital leases was $228,000 at
December 31, 1996. Rental expense was approximately $560,000, $741,000 and
$906,000 for fiscal 1994, 1995 and 1996, respectively.
 
5.  BRIDGE FINANCING
 
     In January 1996, the Company entered into a bridge loan agreement with
certain stockholders of the Company (the "Bridge Investors"), pursuant to which
such Bridge Investors loaned an aggregate of $3,869,160 to the Company. In
addition, the Bridge Investors were issued warrants to purchase an aggregate of
957,376 shares of Common Stock at a purchase price of $3.75 per share. The
warrants expire on January 31, 2001. In June 1996, the notes issued in
connection with the Bridge Loan Agreement were converted into an aggregate of
734,000 shares of Series B Preferred Stock. The 250,653 shares of the Company's
Series A Preferred Stock issuable under the exchange agreement discussed in Note
6 were issued at the time of the conversion of notes into Series B Preferred
Stock. The proceeds from the Bridge Financing were used to pay down a portion of
the amounts payable to the sellers of Healthcare Design Systems.
 
6.  CONVERTIBLE PREFERRED STOCK
 
     Upon the initial public offering, all outstanding shares of Convertible
Preferred Stock were converted into Common Stock.
 
     In 1994, 835,509 shares of Series A Preferred Stock were issued at $4.79
per share for cash of $2,241,325, net of issuance costs, conversion of notes
payable and accrued interest of $1,640,000 and conversion of Common Stock of
$60,000. In 1995, 76,805 shares of Series A Preferred Stock were issued at $4.79
for conversion of notes payable and accrued interest of $367,703 and 891,519
shares of Series B Preferred Stock were issued at $5.25 per share for cash of
$3,959,450, net of issuance costs and conversion of notes payable and accrued
interest of $680,475.
 
     In June 1996, 6,400 shares of Series B Preferred Stock was returned to the
Company in exchange for the extinguishment of a shareholder receivable for
approximately $53,000.
 
                                       37
<PAGE>   39
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Exchange Agreements
 
     As part of the original capitalization of the Company, the Company entered
into an agreement with the Company's original three investors, whereby the
original investors had the right to exchange the investors Common Stock of THCS
Holding, Inc. (THCS) for 250,653 shares of the Company's Series A Preferred
Stock. As of December 31, 1996 all such shares have been issued under this
right.
 
  Warrants
 
     In connection with a bridge financing in 1994 the Company issued warrants
to purchase 16,000 shares of Series A Preferred Stock at $4.79 per share. Each
of such warrants expire on September 29, 1999. The value of the warrants at the
date of issuance was nominal; therefore, no value was assigned to the warrants
for accounting purposes.
 
7.  COMMON STOCK
 
     In October 1996, the Company completed its initial public offering of
2,500,000 shares of its common stock, which raised $26,386,000, net of offering
costs and the underwriters discount of $3,614,000.
 
     In June 1996, the Company effected a 1-for-25 reverse stock split. In
October 1996, the Company effected a change in the authorized number of Common
and Preferred shares, respectively. The authorized number of Common shares
increased from 1,162,000 to 20,000,000. The authorized number of Preferred
shares increased from 2,795,467 to 5,000,000. The accompanying financial
statements have been restated to reflect this increase in authorized shares and
the reverse stock split.
 
     In September 1995 and June 1996, the Company issued warrants to its Chief
Executive Officer to purchase up to 254,000 and 101,600 shares respectively, of
Common Stock at $3.75 per share. In connection with the warrant issued in June
1996, the Company recorded deferred compensation for $381,000, representing the
intrinsic value of the warrant at the date of issuance. The Company will record
a charge to compensation expense ratably over the fifty-one month vesting
period. The Company recorded compensation expense of $45,000 for the year ended
December 31, 1996. Provided he is performing services for the Company in the
capacity of an employee, consultant or director at September 26, 2001, the
warrants will then become exercisable in full and shall remain exercisable until
September 26, 2002, when they expire. The warrants will become exercisable prior
to September 26, 2001 upon certain events, which include (i) the sale of all or
substantially all of the Company's assets or the sale of 80% or more of the
Company's outstanding capital stock, in each case for cash in an amount that
exceeds certain valuation thresholds; (ii) a merger of the Company with another
entity that has a publicly traded security, and which meets certain valuation
thresholds; or (iii) not less than six nor more than eighteen months following
the Company's initial public offering if certain valuation thresholds are met.
 
     In September 1994, the Company entered into consulting arrangements with
two individuals pursuant to which each individual has warrants to purchase
17,000 shares of Common Stock at a purchase price of $4.79 per share for an
aggregate of 34,000 shares of Common Stock. The warrants expire on October 31,
2004.
 
     In October 1995, the Company entered into a joint development arrangement
with another software company pursuant to which the Company issued a warrant to
purchase 28,560 shares of Common Stock at a purchase price of $5.25 per share.
The warrant expires on June 25, 2001.
 
     In December 1995, the Company issued a warrant to KTU, an affiliate of its
Chief Executive Officer to purchase up to 134,574 shares of Common Stock at an
exercise price of $3.75 per share. In June 1996, the Chief Executive Officer
transferred the warrant to Trigon Resources Corporation, a corporation owned by
him and his children.
 
                                       38
<PAGE>   40
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In connection with the acquisition of the net assets of Healthcare Design
Systems, the Company issued rights to two former Healthcare Design Systems
employees as part of their employment agreement with the Company whereby these
employees were granted the right to purchase 73,333 shares of common stock at
$3.75 per share of which 55,786 shares were exercised in April through
September, 1996. The right to purchase the remaining 17,547 shares has expired.
 
8.  STOCK OPTION AND PURCHASE PLANS
 
  Stock Option Plan
 
     Under the Company's 1994 Stock Option Plan and its successor plan, the 1996
Stock Incentive Plan, which became effective in October 1996, (collectively, the
"Option Plan"), the Board of Directors may grant incentive and nonqualified
stock options to employees, directors and consultants. The exercise price per
share for an incentive stock option cannot be less than the fair market value,
on the date of grant. The exercise price per share for a nonqualified stock
option cannot be less than 85% of the fair market value on the date of grant.
Option grants under the Option Plan generally expire ten years from the date of
grant and generally vest over a four-year period. Options granted under the
Option Plan are exercisable, subject to the vesting schedule. As of December 31,
1996, a total of 1,369,391 shares of common stock have been authorized by the
Company's stockholders for grant under the Option plan.
 
     The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan. Accordingly, no compensation cost has been
recognized for its Option Plan. Had compensation cost for the Company's Option
Plan been determined based on the fair value at the grant dates for the awards
calculated in accordance with the method prescribed by FASB Statement No. 123,
the Company's net income (loss) and net income (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
 
<TABLE>
<CAPTION>
                                                                      1995        1996
                                                                     -------     ------
        <S>                                          <C>             <C>         <C>
        Net income (loss)..........................  As Reported     $(9,434)    $  153
                                                     Pro forma       $(9,484)    $ (327)
        Net income (loss) per share................  As Reported     $ (2.13)    $ 0.03
                                                     Pro forma       $ (2.14)    $(0.06)
</TABLE>
 
     The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
 
<TABLE>
                <S>                                                 <C>
                Expected dividend yield...........................       0.00%
                Expected stock price volatility...................      79.00%
                Risk-free interest rate...........................       6.80%
                Expected life of options..........................   4.5 years
</TABLE>
 
                                       39
<PAGE>   41
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The weighted average fair value of options granted during 1995 and 1996
were $3.75 and $7.49 per share, respectively. Option activity under the option
plan is as follows:
 
<TABLE>
<CAPTION>
                                                                   OPTIONS OUTSTANDING
                                                           ------------------------------------
                                                                                       WEIGHTED
                                                                                       AVERAGE
                                                           AVAILABLE     NUMBER OF     EXERCISE
                                                           FOR GRANT      SHARES        PRICE
                                                           ---------     ---------     --------
                                                                      (IN THOUSANDS)
    <S>                                                    <C>           <C>           <C>
    Balance, December 31, 1993...........................       --            --            --
      Adoption of stock plan.............................      212            --            --
      Granted............................................     (192)          192        $ 2.56
      Canceled...........................................       14           (14)       $ 2.52
                                                              ----          ----
    Balance, December 31, 1994...........................       34           178        $ 2.57
      Authorized.........................................      328            --            --
      Granted............................................     (353)          353        $ 3.75
      Canceled...........................................      106          (106)       $ 2.95
                                                              ----          ----
    Balance, December 31, 1995...........................      115           425        $ 3.45
      Authorized.........................................      830            --            --
      Granted............................................     (247)          247        $ 7.49
      Exercised..........................................       --           (40)       $ 2.54
      Canceled...........................................       39           (39)       $ 3.48
                                                              ----          ----
    Balance, December 31, 1996...........................      737           593        $ 5.18
                                                              ====          ====
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1996:
 
<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
                         ------------------------------------                  ----------------------------
                             NUMBER              WEIGHTED         WEIGHTED         NUMBER          WEIGHTED
                           OUTSTANDING           AVERAGE          AVERAGE        EXERCISABLE       AVERAGE
                         AT DECEMBER 31,        REMAINING         EXERCISE     AT DECEMBER 31,     EXERCISE
      EXERCISE PRICES         1996           CONTRACTUAL LIFE      PRICE            1996            PRICE
    -------------------  ---------------     ----------------     --------     ---------------     --------
    <S>                  <C>                 <C>                  <C>          <C>                 <C>
    $1.98..............       13,000               9.93            $ 1.98               --              --
    $2.18..............       12,000               9.93            $ 2.18               --              --
    $2.50..............       44,000               4.62            $ 2.50           26,000          $ 2.50
    $3.75..............      306,000               6.82            $ 3.75          104,000          $ 3.75
    $7.50..............      188,000               7.08            $ 7.50               --              --
    $12.00.............       30,000               2.78            $12.00               --              --
                             -------                                               -------
                             593,000                                               130,000
                             =======                                               =======
</TABLE>
 
  Stock Purchase Plan
 
     The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in June 1996. A total of 200,000
shares of Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan will enable eligible employees to purchase Common Stock at 85%
of the lower of the fair market value of the Company's Common Stock on the first
day or the last day of each six-month purchase period. No shares have been
issued under the Purchase Plan as of December 31, 1996.
 
                                       40
<PAGE>   42
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9.  EMPLOYEE BENEFIT PLAN
 
     The Company maintains a 401(k) Savings Plan (the Plan). All eligible
employees can participate in the Plan. Under the terms of the Plan, employees
may elect to contribute 1% to 15% of their pre-tax compensation to the Plan.
Employee contributions are 100% vested at all times. The Company may make
discretionary contributions to the Plan, which vest annually over the four year
vesting period. No Company contributions were made to the Plan in 1994, 1995 or
1996.
 
10.  ACQUISITIONS
 
     In October 1993, the Company acquired the net assets of Coast Micro for
$350,000 in cash. Accounted for as a purchase, $152,000 was allocated to
goodwill that is being amortized over a five-year period and $230,000 was
determined to be acquired research and development costs for which technological
feasibility had not yet been achieved. This amount was expensed upon completion
of the acquisition. The remaining purchase price was allocated to tangible
assets.
 
     In December 1993, the Company acquired the net assets of Seton Financial
for $1,000,000 in cash. The acquisition was accounted for as a purchase. Assets
acquired included certain intangible assets consisting of in-process research
and development. In the opinion of management, the acquired in-process research
and development had not yet reached technological feasibility and had no
alternative future use. Accordingly, the Company recorded a charge of $226,000
in the 1993 financial statements. Intangible assets acquired also included
goodwill of approximately $57,000, which is being amortized over a five-year
period. The remaining purchase price was allocated to tangible assets.
 
     In December 1995, the Company acquired the net assets of Healthcare Design
Systems for a purchase price of approximately $8,750,000, which was comprised of
$3,750,000 in cash paid in February 1996 and a note payable of $5,000,000. The
note bore interest at the prime rate as established by Bank of America. The note
and accrued interest were repaid in full in October 1996. Costs and fees related
to the acquisition totaled approximately $110,000.
 
     In connection with the acquisition, which was accounted for as a purchase,
the Company allocated the purchase price based upon the estimated fair value of
the assets acquired and liabilities assumed. Intangible assets acquired
aggregated $10,209,000, of which $1,940,000, $2,029,000 and $6,240,000 were
assigned to acquired software, goodwill and acquired research and development
in-process, respectively. Because there was no assurance that the Company would
be able to successfully complete the development and integration of the acquired
research and development in-process or that it had alternative future use at the
acquisition date, the acquired in-process product development was charged to
expense by the Company in its quarter ended December 31, 1995. Net tangible
liabilities assumed in the acquisition totaled approximately $1,348,000. No fair
value adjustments to net tangible and intangible assets and liabilities were
recorded in the purchase accounting outside of the appraised intangible assets
listed above.
 
     The components of the acquired research and development in process and
acquired software capitalized by product group were as follows (expressed as a
percentage of the amounts recorded in the purchase accounting for such items):
 
<TABLE>
<CAPTION>
                                                                                 ACQUIRED
                                                                ACQUIRED       RESEARCH AND
                                                                SOFTWARE       DEVELOPMENT
                                                               CAPITALIZED      IN PROCESS
                                                               -----------     ------------
        <S>                                                    <C>             <C>
        Financial Management Products........................       45%              71%
        Decision Support Products............................       49%              23%
        Service Products.....................................        6%               6%
                                                                   ---              ---
                                                                   100%             100%
                                                                   ===              ===
</TABLE>
 
                                       41
<PAGE>   43
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The unaudited pro forma results of operations for the years ended December
1994 and 1995 are as follows (In thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                                      YEARS ENDED
                                                                     DECEMBER 31,
                                                                 ---------------------
                                                                   1994         1995
                                                                 --------     --------
        <S>                                                      <C>          <C>
        Net revenues.........................................    $ 11,537     $ 13,986
        Net loss.............................................    $ (5,247)    $(10,798)
        Pro forma net loss per share.........................    $     --     $  (2.43)
</TABLE>
 
     Prior to the acquisition, Healthcare Design Systems acted as a distributor
of certain of QuadraMed's products. Sales by Healthcare Design Systems were
approximately $60,000 in fiscal year 1995.
 
     In December 1996, the Company acquired InterMed Healthcare Systems Inc.
("InterMed") through the issuance of common stock and options to purchase common
stock in the aggregate of 316,287 shares (including 25,208 options to purchase
common stock), of which 29,108 shares of common stock have been placed into
escrow subject to the satisfaction of all representations and warranties under
the terms and conditions of the acquisition agreement, in exchange for all the
capital stock of InterMed. The acquisition was accounted for as a pooling of
interests. The accompanying consolidated financial statements have been restated
to reflect the acquisition of InterMed on a pooling of interests basis. Upon the
closing of the acquisition the assets and liabilities of InterMed were recorded
at net book value and consisted primarily of accounts receivable, fixed assets
and capitalized software development costs. Liabilities assumed consisted of
vendor payables and two loans payable. The outstanding balances on the loans
payable of $1,125,000 were repaid by the Company in December 1996.
 
     The unaudited pro forma results from operations of the Company and Intermed
for the year ended December 31, 1996 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                 QUADRAMED
                                                CORPORATION     INTERMED     CONSOLIDATED
                                                -----------     --------     ------------
        <S>                                     <C>             <C>          <C>
        Revenues..............................    $17,304        $1,784        $ 19,088
        Net income (loss).....................    $   268        $ (115)       $    153
</TABLE>
 
11.  CONTINGENCIES
 
     Seton Financial, acquired by QuadraMed in December 1993 ("Seton"), is a
defendant in two separate lawsuits in which the plaintiffs allege losses
resulting from Seton's role in processing and collecting health care benefit
receivables for health care providers. The plaintiff in one action (filed in
January 1996 and pending in the United States District Court for the District of
New Jersey) is American Infusion, Inc. and the plaintiffs in the other action
(filed in October 1995 and pending in the Superior Court of California, Marin
County) are Option Care, Inc., River City Pharmacists, Inc., Jergensen/Zwick
Inc., Pharmacare, Inc., Pharmacare, Inc. Fresno, Pharmacare, Inc. Visalia,
Option Care Enterprises, Inc., and Owens Pharmacy, Inc. American Infusion
alleges damages in the amount of $5.3 million and plaintiffs in the other action
allege damages in excess of $800,000. Both plaintiffs also seek punitive
damages. Each of the plaintiffs alleges losses as a result of Seton's role in
collecting health care benefit receivables. These actions are being defended by
the Company's errors and omissions insurance carrier under a reservation of
rights that entitles the insurance carrier to seek reimbursement from the
Company of amounts paid if it later determines that the losses are not covered
by the policy. The errors and omissions insurance policy has a policy limit of
$1.0 million. The Company believes that it has meritorious defenses to these
claims and intends to defend the litigation vigorously. Management believes that
the resolution of these matters will not have a material adverse effect on the
Company's financial condition or results of operations.
 
                                       42
<PAGE>   44
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In February 1995, Richard W. Pendleton ("Pendleton") and Daniel T. Soldahl
("Soldahl") filed a lawsuit in the Superior Court of California for the County
of Contra Costa naming QuadraMed, James Durham and Walter Channing as defendants
(collectively, the "Defendants"). An amended complaint added Coast Micro, Inc.
("Coast") as a plaintiff. The plaintiffs allege breach of contract, breach of
the implied covenant of good faith and fair dealing, intentional and negligent
misrepresentation, suppression of fact, breach of employment contract,
interference with contractual relationship and conspiracy. Pendleton, Soldahl
and Coast allege money damages in the amount of $27,000,000, and seek
reformation of contract and specific performance. In August 1995, QuadraMed
filed a cross-complaint naming Pendleton and VantageMed Corporation
("VantageMed") as defendants (collectively, the "Cross-Defendants"), and
alleging fraud, misappropriation of trade secrets, interference with economic
relations and conspiracy. QuadraMed is seeking an unspecified amount of money
damages and an injunction against disclosure or use by Cross-Defendants of
QuadraMed's confidential information and against further interference by
Cross-Defendants with QuadraMed's economic relations with others. The lawsuit
arises out of events relating to the October 1993 purchase by QuadraMed of the
assets of Coast. On February 26, 1997, the parties reached a settlement in
principle of this litigation, and the Company's Board of Directors subsequently
approved this settlement in principle on February 27, 1997. On March 5, 1997,
the parties agreed to a forty-five (45) day stay of all litigation activities in
this litigation, effective February 26, 1997, in order to allow the parties
adequate time for the preparation and execution of a written settlement
agreement. In the event that the parties do not execute the written settlement
agreement before the expiration of the forty-five (45) day stay, there shall be
no further stay of this litigation except by written agreement of all parties
and approval of the court. The Company believes that it has meritorious defenses
to such claims and intends to defend the litigation vigorously. Management
believes that the resolution of this matter will not have a material adverse
effect on the Company's financial condition or results of operations.
 
12.  INCOME TAXES
 
     The Company has accounted for income taxes pursuant to Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes," since its inception. SFAS No. 109 provides for an asset and liability
approach to accounting for income taxes under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable. The Company had incurred net operating losses in
each year through December 31, 1995.
 
     The components of the net deferred tax asset are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                                   -------------------
                                                                    1995        1996
                                                                   -------     -------
        <S>                                                        <C>         <C>
        Deferred tax assets:
          Net operating loss carryforwards.....................    $ 2,699     $ 2,240
          Accruals and reserves................................        338         367
          Writeoff of acquired research and development in           3,053       3,749
             process...........................................
                                                                   -------     -------
                                                                     6,090       6,356
        Deferred tax liabilities:
          Depreciation.........................................        145         294
          Capitalized software costs...........................        123         198
                                                                   -------     -------
                                                                       268         492
        Net deferred tax asset before allowance................      5,822       5,864
        Valuation allowance....................................     (5,822)     (5,864)
                                                                   -------     -------
          Net deferred tax asset...............................    $    --     $    --
                                                                   =======     =======
</TABLE>
 
                                       43
<PAGE>   45
 
                             QUADRAMED CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A valuation allowance has been recorded for the entire deferred tax asset
as a result of uncertainties regarding the realization of the asset including
the limited operating history of the Company.
 
     As of December 31, 1996, the Company had net operating loss carryforwards
for Federal and state income tax reporting purposes of approximately $4,745,000
and $2,000,000, respectively. These carryforwards expire in various periods from
2008 to 2010. The Tax Reform Act of 1986 contains provisions which may limit the
net operating loss and research and development credit carryforwards to be used
in any given year upon the occurrence of certain events, including a significant
change in ownership interest.
 
                                       44
<PAGE>   46
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
     The registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which, when filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, will be incorporated by reference in this Annual Report on
Form 10-KSB pursuant to General Instruction E(3) of Form 10-KSB, provides the
information required under Part III -Items 9, 10, 11, and 12.
 
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.
 
(A) EXHIBITS.
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                   DOCUMENT DESCRIPTION
------   ------------------------------------------------------------------------------------
<S>      <C>
 2.1     Form of Agreement and Plan of Merger by and between QuadraMed Corporation, a
         Delaware corporation and QuadraMed Corporation, a California corporation.(1)
 2.2     Assets Purchase Agreement dated December 31, 1995, by and among QuadraMed
         Acquisition Corporation, Kaden Arnone, Inc. and its stockholders.(1)
 2.3     Exchange Agreement dated June 25, 1996, by and among QuadraMed Holdings, Inc.,
         QuadraMed Corporation, and certain stockholders listed on Schedule A thereto.(1)
 2.4     Acquisition Agreement and Plan of Merger dated December 2, 1996, between the Company
         and InterMed Acquisition Corporation, a wholly owned subsidiary of the Company and
         InterMed Healthcare Systems Inc. and its Stockholders.(2)
 3.1     Reserved.
 3.2     Second Amended and Restated Certificate of Incorporation of the Company.(1)
 3.3     Reserved.
 3.4     Amended and Restated Bylaws of the Company.(1)
 4.1     Reference is made to Exhibits 3.2 and 3.4.(1)
 4.2     Form of Common Stock certificate.(1)
 4.3     Form of Exchange Agreement dated March 16, 1994, by and among the Company, THCS
         Holding, Inc. and certain stockholders listed on Schedule A thereto.(1)
 4.4     Reserved.
 4.5     Reserved.
 4.6     Reserved.
 4.7     Amended and Restated Agreement Regarding Adjustment Shares dated June 25, 1996, by
         and among the Company, QuadraNet Corporation and the individuals listed on Schedule
         A thereto.(1)
 4.8     Amended and Restated Shareholder Rights Agreement dated June 25, 1996, by and
         between the Company and the investors listed on Schedule A thereto.(1)
 4.9     Stock Purchase Warrant dated September 27, 1995 issued to James D. Durham.(1)
 4.10    Stock Purchase Warrant dated June 26, 1996 issued to James D. Durham.(1)
 4.11    Form of Warrant to Purchase Common Stock.(1)
 4.12    Reserved.
10.1     1996 Stock Incentive Plan of the Company.(1)
10.2     1996 Employee Stock Purchase Plan of the Company.(1)
10.3     Summary Plan Description, QuadraMed Corporation 401(k) Plan.(1)
10.4     Form of Indemnification Agreement to be entered into between the Company and its
         directors and executive officers.(1)
10.5     Reserved.
</TABLE>
 
                                       45
<PAGE>   47
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                   DOCUMENT DESCRIPTION
------   ------------------------------------------------------------------------------------
<S>      <C>
10.6     Lease dated February 26, 1996 for facilities located at 1345 Campus Parkway,
         Building M, Block #930, Lot #51.02, Neptune, New Jersey.(1)
10.7     Lease dated May 23, 1994 for facilities located at 80 East Sir Francis Drake
         Boulevard, Suite 2A, Larkspur, California.(1)
10.8     Lease Agreement dated December 14, 1989 for facilities located at 1130 East Shaw
         Avenue, Suites 108 and 209, Fresno, California.(1)
10.9     Employment Agreement dated March 1, 1994 by and between James D. Durham and the
         Company.(1)
10.10    Stock Purchase Agreement dated March 3, 1994, by and between the Company and James
         D. Durham.(1)
10.11    Letter dated April 17, 1995 from James D. Durham, as President and Chief Executive
         Officer of QuadraMed Corporation, to John V. Cracchiolo regarding terms of
         employment.(1)
10.12    Letter dated March 14, 1996 from James D. Durham, as President and Chief Executive
         Officer of QuadraMed Corporation, to Robert Burrows regarding terms of
         employment.(1)
10.13    Letter from Walter Channing to Thomas McNulty effective December 1995, regarding
         service as Chairman of the Board of Directors.(1)
10.14    Agreement dated May 11, 1994, by and between Colson Investments and the Company.
10.15    Credit Terms and Conditions dated January 18, 1996, by and between Imperial Bank and
         the Company, with addendum thereto.(1)
10.16    Security and Loan Agreement (Accounts Receivable) dated January 18, 1996, by and
         between Imperial Bank and the Company.(1)
10.16.1  Amendment No. 1, dated September 5, 1996, to Security and Loan Agreement (Accounts
         Receivable) dated January 18, 1996, by and between Imperial Bank and the Company.(3)
10.17    General Security Agreement (Tangible and Intangible Personal Property) dated January
         18, 1996, by and between Imperial Bank and the Company.(1)
10.18    ERA/Secondary Billing and Claimstar Licenses Agreement dated April 10, 1995, by and
         between the Company and Blue Cross of California, as amended by the Second Amendment
         dated April 19, 1995.(1)
10.19    Cooperative Agreement dated June 30, 1995, by and between The Compucare Company and
         the Company, with Amendment thereto.(1)
10.20    Agreement dated April 1, 1995, by and between the Company and National Electronic
         Information Corporation (now Envoy Corporation).(1)
10.21    QuadraMed Corporation Cooperative Marketing Agreement dated August 15, 1995, by and
         between the Company and Health Systems Design Corporation.(1)
10.22    Agreement to Market QuadraMed Software dated June 1, 1996 between the Company and
         Health Communication Services, Inc.(1)
10.23    Joint Marketing and Services Agreement dated November 1, 1995, by and between
         QuadraMed Acquisition Corporation, the Company and Kaden Arnone, Inc.(1)
10.24    License Agreement dated November 1, 1994, by and between the Company and
         Learned-Mahn, Inc.(1)
10.25    Master Agreement dated June 1, 1995, by and between Premier Health Alliance, Inc.
         and the Company.(1)
10.26    Agreement dated October 3, 1995, by and between Shared Services Healthcare, Inc. and
         the Company.(1)
10.27    Letter Agreement dated March 3, 1994 by and between NJUP Plus and the Company.
10.28    Endorsement Agreement dated November 1, 1994, by and between ServiShare of Iowa and
         the Company, relating to ContraQ.(1)
10.29    Endorsement Agreement dated November 1, 1994, by and between ServiShare of Iowa and
         the Company, relating to ClaimStar.(1)
10.30    Memorandum of Understanding dated October 24, 1995, by and between the Company and
         St Anthony Publishing. Inc. (now NexUS Capital Healthcare Information Corp.).(1)
10.31    Software Development Agreement dated August 3, 1995, by and between St. Joseph's
         Hospital of Atlanta, Inc. and the Company.(1)
</TABLE>
 
                                       46
<PAGE>   48
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                   DOCUMENT DESCRIPTION
------   ------------------------------------------------------------------------------------
<S>      <C>
10.32    Letter Agreement dated December 27, 1995, by and between the Company and UniHealth,
         with related Joint Development Proposal for a Capitation Management System dated
         October 20, 1995.(1)
10.33    Employment Agreement with Kevin H. Arner, President of EDI Services Division.(4)
10.34    Letter dated March 6, 1997 from James D. Durham, as President and Chief Executive
         Officer of QuadraMed Corporation, to Keith M. Roberts regarding terms of employment.
11.1     Calculation of Net Income (Loss) Per Share.
23.1     Consent of Arthur Andersen LLP, Independent Public Accountants, dated March 28,
         1997.
21.1     Subsidiaries of the Company.(1)
27.1     Financial Data Schedule.
</TABLE>
 
---------------
(1) Incorporated herein by reference from the exhibit with the same number to
    the Company's Registration Statement on Form SB-2, No. 333-5180-LA, as filed
    with the Commission on June 28, 1996, as amended by Amendment No. 1,
    Amendment No. 2 and Amendment No. 3 thereto, as filed with the Commission on
    July 26, 1996, September 9, 1996, and October 2, 1996, respectively
    (collectively "Form SB-2").
 
(2) Incorporated herein by reference from the exhibit with the same number to
    the Company's Current Report on Form 8-K, as filed with the Commission on
    January 9, 1997.
 
(3) Incorporated herein by reference from Exhibit 10.16 to the Company's
    Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996, as
    filed with the Commission on November 14, 1996.
 
(4) Incorporated herein by reference from Exhibit 10.32 to the Company's Current
    Report on Form 8-K, as filed with the Commission on January 9, 1997.
 
(B) REPORTS ON FORM 8-K.
 
     No reports on Form 8-K were filed during the fourth quarter of the fiscal
year ended December 31, 1996.
 
     The Company filed a report on Form 8-K on January 9, 1996 in which it
reported the acquisition and merger of InterMed Healthcare Systems Inc. through
the Company's wholly owned subsidiary InterMed Acquisition Corporation.
 
                                       47
<PAGE>   49
 
                                   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.
 
                                          QUADRAMED CORPORATION
 
                                          By:       /s/ JAMES D. DURHAM
 
                                            ------------------------------------
                                            James D. Durham
                                            Chief Executive Officer, President
                                          and Chairman of the Board
Dated: March 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 the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                  SIGNATURE                                 TITLE                    DATE
---------------------------------------------    ---------------------------    ---------------
<C>                                              <S>                            <C>
 
             /s/ JAMES D. DURHAM                 Chief Executive Officer,        March 28, 1997
---------------------------------------------    President and Chairman of
               James D. Durham                   the Board (Principal
                                                 Executive Officer)
 
           /s/ JOHN V. CRACCHIOLO                Executive Vice President        March 28, 1997
---------------------------------------------    and Chief Financial Officer
             John V. Cracchiolo                  (Principal Financial
                                                 Officer and Accounting
                                                 Officer)
 
          /s/ JOHN H. AUSTIN, M.D.               Director                        March 28, 1997
---------------------------------------------
            John H. Austin, M.D.
 
            /s/ THOMAS F. MCNULTY                Director                        March 28, 1997
---------------------------------------------
              Thomas F. McNulty
 
           /s/ JOAN P. NEUSCHELER                Director                        March 28, 1997
---------------------------------------------
             Joan P. Neuscheler
 
            /s/ CORNELIUS T. RYAN                Director                        March 28, 1997
---------------------------------------------
              Cornelius T. Ryan
 
            /s/ LAURIE J. THOMSEN                Director                        March 28, 1997
---------------------------------------------
              Laurie J. Thomsen
</TABLE>
 
                                       48
<PAGE>   50
 
                                                                     SCHEDULE II
 
                             QUADRAMED CORPORATION
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               ADDITIONS
                                          BALANCE AT           CHARGED TO                       BALANCE AT
             DESCRIPTION               BEGINNING OF YEAR   COSTS AND EXPENSES   DEDUCTIONS      END OF YEAR
-------------------------------------  -----------------   ------------------   ----------   -----------------
<S>                                    <C>                 <C>                  <C>          <C>
Year ended December 31, 1994
  Allowance for doubtful accounts....           --                $  4                --           $   4
Year ended December 31, 1995
  Allowance for doubtful accounts....        $   4                $250            $  (25)          $ 229
Year ended December 31, 1996
  Allowance for doubtful accounts....        $ 229                $140            $ (130)          $ 239
</TABLE>
 
                                       49
<PAGE>   51
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                   DOCUMENT DESCRIPTION
------   ------------------------------------------------------------------------------------
<S>      <C>
10.34    Letter dated March 6, 1997 from James D. Durham, as President and Chief Executive
         Officer of QuadraMed Corporation, to Keith M. Roberts regarding terms of employment.
11.1     Calculation of Net Income (Loss) Per Share.
23.1     Consent of Arthur Andersen LLP, Independent Public Accountants, dated March 28,
         1997.
27.1     Financial Data Schedule.
</TABLE>
 
                                       50