QUADRAMED CORP, 10KSB/A, 1997-04-18

QUADRAMED CORP
10KSB/A, 1997-04-18
COMPUTER PROGRAMMING SERVICES

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<PAGE> 1

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

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-KSB/A
AMENDMENT NO. 1

[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).

================================================================================
<PAGE> 2

FORM 10-KSB/A
------------------------

AMENDMENT NO. 1

The undersigned Registrant hereby:

1. amends Item 6 of its Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996 (the "Form 10-KSB") and files such amended
Item 6 herewith:

2. amends Item 13 of the Form 10-KSB and files such amended Item 13
herewith; and

3. files Exhibits 10.35 and 10.36 herewith.
<PAGE> 3

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............................... -- $ 0.03
======= =======
Weighted average shares outstanding................ -- 5,089
======= =======
</TABLE>

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 $ 252 $ 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>

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<PAGE> 4

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 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

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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 five 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.

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>

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<PAGE> 6

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 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.

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<PAGE> 7

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.

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.

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<PAGE> 8

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.

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

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<PAGE> 9

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. 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.

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<PAGE> 10

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 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.

9
<PAGE> 11

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.

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.

10
<PAGE> 12

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
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.

11
<PAGE> 13

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.

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.

12
<PAGE> 14

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.
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)
</TABLE>

13
<PAGE> 15

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
10.9 Reserved.
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)
</TABLE>

14
<PAGE> 16

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
10.31 Software Development Agreement dated August 3, 1995, by and between St. Joseph's
Hospital of Atlanta, Inc. and the Company.(1)
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 dated December 5, 1996 by and between Kevin H. Arner and
InterMed Acquisition Corporation.(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.
10.35 Employment Agreement dated December 19, 1996 by and between Frederick Stodolak and
the Company.
10.36 Letter dated January 1, 1997 from the Company to James D. Durham 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.

15
<PAGE> 17

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment 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: April 18, 1997

16
<PAGE> 18

EXHIBIT INDEX

17
<PAGE> 19

18
<PAGE> 20

(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.

<PAGE> 1
EXHIBIT 10.35

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (the "Agreement"), is made and effective as
of this 19th day of December, 1996 (the "Effective Date"), by and between
QUADRAMED CORPORATION, a California corporation ("QuadraMed"), with its
executive offices at 80 East Sir Francis Drake Boulevard, Suite 2A, Larkspur,
California 94939 and FREDERICK STODOLAK ("Employee"), residing at 16 Gladiola
Drive, Howell, New Jersey 07731.

NOW, THEREFORE, in consideration of the mutual promises and of the
mutual covenants and obligations created or affected in the Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which
consideration are hereby acknowledged, the parties agree as follows:

1. Term of Employment. QuadraMed agrees to employ Employee from
the date hereof until December 31, 1998 (hereinafter the "Term"). For and in
consideration of his entering into the Agreement, Employee shall not be an
employee-at-will, but shall hereafter be employed for a definite term. The
employment of Employee shall continue for the Term unless sooner terminated or
otherwise extended as provided for in the Agreement or as the parties shall
mutually agree in writing. Unless QuadraMed shall notify Employee in writing
of its intention not to renew or extend the Agreement at least ninety (90) days
prior to the expiration of the Term, the Term shall be extended to an
expiration date which is ninety (90) days following the delivery of such
written notice. Neither Employee nor QuadraMed shall be obligated to consent to
the renewal or extension of the Agreement, which consent either party may
withhold in his or its respective sole and absolute discretion. In the absence
of a written agreement signed by QuadraMed, after the expiration of the Term
and any extension thereof provided for in this Section 1, Employee shall be an
employee "at-will" and the terms of Section 4 of this Agreement shall be of no
further force or effect.

2. Termination With Cause by Employee. The Employees may terminate
his employment hereunder in advance of the expiration of the Term on sixty (60)
days prior written notice to QuadraMed upon the occurrence of any of the
following events:

A. Employee's principal place of employment is moved to a
location that is more than fifty (50) miles from Howell, New Jersey;

B. Employee no longer functions as Divisional President or
a new position is created for Employee requiring Employee to report to
anyone other than the Chief Executive Officer, President or Board of
Directors of QuadraMed;
<PAGE> 2
C. Employee is required by QuadraMed's Board of Directors
or its Chief Executive Officer after Employee's written objection
thereto to engage in business practices or implement policies or
practices that are unethical, immoral or illegal;

D. Employee is wrongfully induced to resign his position as
a direct result of QuadraMed's actions taken in bad faith or
constituting willful misconduct.

Upon such termination of employment, Employee shall no longer be
bound by any of the terms or provisions hereof other than Sections 12,
13, 16 and 20.

3. Termination Without Cause by Employee. Employee shall be
entitled to resign from QuadraMed's employment hereunder on sixty (60) days
prior written notice in his sole and absolute discretion for any reason prior to
the expiration of the Term. Following such resignation Employee shall continue
to be bound and obligated by the terms and provisions Sections 12, 13, 16 and 20
and, except as provided in Section 8, QuadraMed shall be released and discharged
from any further liability, obligation or duty arising in connection with the
Agreement or in connection with Employee's employment.

4. Termination With Cause by QuadraMed. QuadraMed may terminate the
Employee's employment hereunder in advance of the expiration of the Term upon
the occurrence of any of the following events:

A. Death. The death of Employee;

B. Disability. Upon prior written notice to Employee
following the physical or mental disability of Employee that prevents
him from performing effectively the duties of his employment for a time
period greater than six (6) consecutive months. For purposes of this
Section 4.B., in the event of any dispute among the parties hereto as to
physical or mental disability, the determination of whether Employee has
been physically or mentally disabled for more than six consecutive
months shall be made in the majority, written opinion of a three person
licensed medical doctor panel made up of one licensed medical doctor
appointed by Employee (or his legal representative, which representative
may be his closest living relation if no legal representative exists),
one licensed medical doctor appointed by QuadraMed and the third member
a licensed medical doctor selected by the other two panel members; or

C. Cause. Immediately upon written notice to Employee, if
Employee, at any time, (i) has engaged in gross misconduct, including an
act of dishonesty, fraud, theft, embezzlement or moral turpitude or
conviction of a felony, or (ii) has unlawfully appropriated a corporate
opportunity involving the business of QuadraMed, or (iii) has violated
in any material respect any covenant, term or condition contained in
this

2
<PAGE> 3
Agreement or any policy or policies of QuadraMed that are annexed to
this Agreement as Exhibit A or any supplements or amendments thereto,
provided such supplements or amendments have been approved by the Board
of Directors in the exercise of their good faith reasonable business
judgment and are as described in the last sentence of Section 14 of this
Agreement, or (iv) has materially breached any obligation,
representation, warranty, covenant or agreement by Employee under that
certain Assets Purchase Agreement entered into effective as of December
31, 1995 by and among Kaden Arnone, Inc.,Eugene M. Arnone, David S.
Rikkola, Frederick Stodolak, Marc A. Stahl, Joanne H. Vaul, Gregory M.
Adams, Samuel Donio, Jr. and QuadraMed Acquisition Corporation or made
any representation or warranty therein or any document furnished
thereunder which was materially false.

Upon termination of Employee's employment pursuant to this Section, the
Agreement shall be deemed terminated except as to any provision of the
Agreement which is intended by its terms to survive and continue, including,
but not limited to, the provisions of Sections 8, 12, 13, 16 and 20.

5. Termination Without Cause by QuadraMed. QuadraMed shall be
entitled to terminate Employee's employment hereunder in its sole and absolute
discretion for any reason prior to the expiration of the Term on thirty (30)
days prior written notice to Employee.

6. Title and Duties Of Employee. Employee shall serve as
Divisional President and in connection therewith Employee shall report to the
Board of Directors, Chief Executive Officer, or a corporate officer of
QuadraMed. Employee shall perform operational, managerial and executive duties
which are consistent with the duties of Divisional President which shall
include, without limitation, supervision of the personnel, decision making
authority and accountability over expenditures and customer contracts within the
scope of overall approved operating budgets, capital budgets, pricing policies,
standard contract terms and revenue recognition policies, budgeting and sales
and development functions of the business, and providing input to the Board of
Directors of QuadraMed with respect to the long range objectives, policies and
plans of the Business.

Employee agrees to devote his entire time, skill, labor, and attention
exclusively to the business of QuadraMed throughout the period of his
employment hereunder; provided that employee shall be entitled to make
investments in and participate in businesses and ventures that do not directly
compete with the Business or with QuadraMed's other business and which do not
materially impair the Employee's ability to perform his duties hereunder.

7. Best Efforts of Employee. Employee agrees he will at all times
faithfully, industriously, and to the best of his ability, experience, and
talent, perform all of duties required of and from him pursuant to this
Agreement. During the Term, Employee shall not

3
<PAGE> 4
enter into the services of, or be employed in any capacity or for any purpose
whatsoever by any person, firm or corporation other than QuadraMed, or actively
participate, other than an investment capacity as specified in Section 6, in any
business enterprise or undertaking other than his employment under the
Agreement, unless the prior, written consent of QuadraMed shall be obtained by
the specific written authorization of a duly authorized officer of QuadraMed,
which authorization may be withheld in the reasonable discretion of QuadraMed,
QuadraMed agrees that it will at all times faithfully, industriously, and to the
best of its ability, perform all obligations required to be performed by it
under the Agreement.

8. Base Compensation. For all services rendered by him during the
Term, Employee shall be paid an annual base salary of One Hundred Seventy-Five
Thousand Dollars ($175,000) (the "Base Salary").

The Base Salary shall be paid to Employee on the same periodic basis as
other QuadraMed officers, but in no event less frequently than monthly, minus
standard deductions for all applicable state and federal taxes and other bona
fide deductions.

In the event the Employee's employment is terminated by the Employee
under Section 2 or by QuadraMed under Section 5, Employee shall be entitled to
Base Salary and bonus and all other applicable benefits that would otherwise
have been paid or provided to Employee pursuant to Sections 8, 9 or 11 through
the effective date of such termination or with respect to any period ending on
or prior to such effective date. Following such termination of employment,
Employee shall, as severance, receive payments over a one-year time period equal
to One Hundred Seventy-Five Thousand Dollars ($175,000). Such severance payments
shall be payable in the manner provided under this Section 8 as if Employee were
continuing as an employee for the balance of the Term; provided that following
such termination Employee shall not be entitled to any bonus and/or other
benefits with respect to any period following the effective date of such
termination.

In the event Employee resigns pursuant to Section 3 or the Employee's
employment is terminated by QuadraMed pursuant Section 4 (other than subpart B,
thereof), Employee shall be entitled to Base Salary and bonus and all other
applicable benefits that would otherwise have been paid or provided to Employee
pursuant to Sections 8, 9 or 11 through the effective date of such resignation
or termination, as applicable, or with respect to any period ending on or prior
to such effective date, but Employee shall forfeit any right to receive any
further payments or benefits pursuant to the Agreement, with respect to any
periods commencing on or after such effective date.

In the event Employee's employment is terminated by QuadraMed pursuant
to Section 4.B. Employee shall be entitled to Base Salary and bonus and all
other applicable benefits that would otherwise have been paid or provided to
Employee pursuant to Sections 8, 9 or 11 through the effective date of such
termination or with respect to any period ending on or prior

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<PAGE> 5
to such effective date. Following such termination of employment, Employees
shall, as severance, receive payments equal to One Hundred Seventy-Five
Thousand Dollars ($175,000) payable over a period of one year (less any
disability insurance payments payable under insurance provided by QuadraMed);
provided that following such termination Employee shall not be entitled to any
Base Salary, bonus and/or other benefits with respect to any period following
the effective date of such termination.

9. Bonus. During the Term, in addition to the Base Salary payable
pursuant to Section 8, Employee shall be entitled to such annual bonus
payments, as the Board of Directors of QuadraMed shall determine in their sole
and absolute discretion, which shall be consistent with the review of other
officers for annual bonuses and based on individual performance and on the
performance of the Business and any other lines of business for which Employee
has responsibility.

10. Stock. As of the date hereof Employee shall continue to hold
his previous grant of an incentive stock option pursuant to QuadraMed's 1994
Qualified Incentive Stock Option Plan (the "Plan") to purchase 24,000 shares of
Common Stock, at a price of $3.75/share, subject to the vesting restrictions
and other terms of his applicable option agreement.

11. Benefits and Perquisites. In addition to the Base Salary,
bonus payments and stock described in Sections 8, 9 and 10, Employee shall be
entitled to (a) reimbursement with respect to the automobile leased or owned by
Employee with respect to mileage driven by Employee in accordance with the
Company's then existing policies; (b) a paid annual vacation of at least four
(4) weeks; and such other benefits and perquisites provided to other executive
officers of QuadraMed.

12. Confidential and Proprietary Information. The Employee
acknowledges that Employee has knowledge of information of substantial value
regarding the Company's business, and will have access to the same with respect
to QuadraMed's business pursuant to the terms of the Employment Agreement,
which is not generally known and which gives QuadraMed an advantage over
competitors who do not know or use it, including (without limitation) know-how,
trade secrets, marketing strategies, sales, customer lists, business and
financial information relating to the business, services, practices or
techniques of QuadraMed (hereinafter referred to as the "Confidential
Information"). The term "Confidential Information" shall not include
information which is generally or readily obtainable by the public or the
trade, or is publicly known or becomes known, through no fault or activity of
Employee. Employee hereby expressly acknowledges and agrees that the
Confidential Information constitutes confidential and valuable trade secret
business information of QuadraMed. Employee agrees, at all times during the
Term and for a period of three (3) years thereafter (the "Restricted Period"),
to regard and preserve as confidential such Confidential Information, and to
refrain from publishing or disclosing any part of it or from using, copying or
duplicating it in any way or by any means whatsoever for purposes other than
as absolutely

5
<PAGE> 6
necessary to perform Employee's duties under the Employment Agreement. Employee
further agrees, at all times during the Restricted Period, that such
Confidential Information will not be disclosed by Employee to any person or
entity without the prior written consent of QuadraMed, which may be withheld in
its sole discretion. Employee acknowledges that the disclosure or use of any
Confidential Information could gravely affect the effective and successful
conduct of the business of QuadraMed and the value of its goodwill, and that
breach of the terms of this Section 12 is a material breach of the terms of
this Employment Agreement.

In the event that Employee becomes legally compelled (by deposition,
interrogatory, request for documents, order, subpoena, civil investigative
demand or similar process issued by a court of competent jurisdiction or by a
governmental body) to disclose any of the Confidential Information, prompt
prior written notice of such requirement shall be provided to QuadraMed so that
QuadraMed may seek a protective order or other appropriate remedy and/or waive
compliance with the terms of this Agreement. In the event that such protective
order or other remedy is not obtained, and irrespective of whether or not
compliance with the provisions hereof is waived, then it is agreed that only
that portion of the Confidential Information which Employee is advised in
writing by its counsel is legally required to be disclosed shall be disclosed
and reasonable efforts shall be made to obtain assurance that confidential
treatment will be accorded such Information.

Notwithstanding anything to the contrary contained herein, in the event
the Employee's employment shall be terminated by the Employee under Section 2
or by the Company under Section 5, the Restricted Period shall commence upon
the effective date of such termination and continue for a period of three (3)
years thereafter.

13. Documents, Written Materials and Tangible Properties. To the
extent not otherwise provided for in the Agreement, Employee agrees that all
documents, written materials and other tangible property, including copies
thereof, relating in any way to the business of QuadraMed, shall be and remain
the exclusive property of QuadraMed and shall be returned to QuadraMed by
Employee immediately upon termination of his employment by QuadraMed or at the
request of QuadraMed. Employee shall be entitled to retain his card file or
rolodex containing names, addresses and telephone numbers and personal diaries
and calendars; provided, however, that Employee shall continue to be bound by
the terms of Section 12 hereof to the extent such retained materials constitute
"Confidential Information" as defined herein.

14. QuadraMed Policies. Employee acknowledges that, as a condition
of this Agreement, Employee is to be bound by the policies established by
QuadraMed that are annexed hereto as Exhibit A and any amendments or
supplements thereto that are approved by the Board of Directors of QuadraMed in
the exercise of their good faith reasonable business judgment; and that, in the
event there are any inconsistencies between said policies and this Agreement,
the provisions of this Agreement shall govern. For purposes of this Agreement,

6
<PAGE> 7
the policies of QuadraMed shall (i) not include any policies directed
individually at Employee, but rather shall be intended to include only policies
applicable to all executive personnel of QuadraMed, and (ii) not include
policies establishing standards for the financial performance of the Business.
QuadraMed shall not be bound by any policy which is not in writing and signed
by an officer of QuadraMed.

15. Proprietary Information. Employee acknowledges that, as a
condition to the effectiveness of this Agreement, Employee will continue to be
bound by the terms of that certain Proprietary Information Agreement in the
form originally annexed to Employee's original Employment Agreement with
QuadraMed. To the extent that any provision in the Proprietary Information
Agreement or and the exhibits thereto signed by Employee conflicts with or is
inconsistent with this Agreement, the applicable provisions of this Agreement
shall govern.

16. Non-Solicitation. Employee hereby agrees that, during the Term
and for a one (1) year period thereafter (the "Non-Solicitation Period"),
Employee shall not, whether for his own account or for the account of any other
individual, partnership, firm, corporation or other business organization,
attempt to solicit for the purposes of selling healthcare software that competes
in any way with the healthcare software products of QuadraMed, any customers of
QuadraMed who had been customers of QuadraMed during the Term, or induce or
attempt to induce, directly or indirectly, any person to terminate his or her
employment or other business association with QuadraMed. Notwithstanding
anything to the contrary contained herein, in the event the Employee's
employment shall be terminated by the Employee under Section 2 or by the
Company under Section 5, the Non-Solicitation Period shall commence upon the
effective date of such termination and continue for a period of one (1) year
thereafter.

17 Waiver of Breach. A waiver by QuadraMed of a breach of any
provision of the Agreement shall not operate or be construed as a waiver of any
subsequent breach by Employee of the same or any other provision of the
Agreement.

18. Notices. Any notice required to be given under the Agreement
shall be deemed sufficient, if in writing, and sent by certified mail, return
receipt requested, or hand delivered, to the other party at the address shown
below:

For QuadraMed: QuadraMed Corporation
80 East Sir Francis Drake Blvd., Suite 2A
Larkspur, California 94939
Attn: John V. Cracchiolo

with a copy to: Zevnik Horton Guibord & McGovern, L.L.P.
101 West Broadway, 17th Floor
San Diego, California 92101

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<PAGE> 8
Attn: Steven G. Rowles, Esq.

For Employee: 16 Gladiola Drive
Howell, New Jersey 07731

with a copy to: Matthew P. DeMaria, Esq.
550 Boulevard
Elwood Park, New Jersey 07407

Either party may change its or his address for notices under this section by
giving notice of the change to the other pursuant to this section.

19. Applicable Law. By express agreement of the parties, the
Agreement, and all of its terms and conditions, shall be governed, controlled
and construed by the internal laws of the State of California.

20. Dispute Resolution. Should either party, at any time, claim
there to be a breach of this Agreement, specifically including any claims
arising out of the termination of employment, the parties hereby agree that the
sole and exclusive recourse for any such claims shall be to arbitrate as herein
provided, with the exception of actions for injunctive and other relief which
may be pursued by QuadraMed as set forth herein. Submission for arbitration
shall be by written notice to the San Francisco, California office of the
American Arbitration Association, with a copy to the other party. The
arbitration process shall be governed by the then current Employment Dispute
Arbitration Rules of the American Arbitration Association. Should an arbitration
hearing be necessary, it shall take place in San Francisco, California. The fees
and expenses of the Arbitrator and the administrative fees of the American
Arbitration Association will be paid by the party initiating the arbitration
process; however, the prevailing party shall be entitled to reimbursement of any
such fees paid, as well at its attorneys and witness fees, if any.

21. Entire Agreement. The agreement contains the entire agreement
between the parties. The Agreement shall not be amended except by a written
agreement signed by both parties. That certain first Amendment to the
Employment Agreement and Stock Option Agreement dated June 1, 1996, shall have
no further effect and shall not be binding upon the parties except to the
extent of rights, duties and obligations accrued as of the Effective Date.

22. Severability. If any of the provisions of the Agreement are
determined to be invalid or unenforceable in part, the remaining provisions,
and the enforceable portions of any partially unenforceable provisions, shall
nevertheless be binding and enforceable.
<PAGE> 9
23. Binding Effect. The Agreement shall inure to the benefit of and
shall be binding upon QuadraMed and its successors and assigns, and upon
Employee and his heirs, legatees, executors, administrators, successors and
beneficiaries.

24. Assignment. The Agreement shall not be assignable either by
QuadraMed or by Employee.

25. Prompt Action. Time is of the essence with respect to each
provision of the Agreement.

26. Captions. Captions of Sections are inserted only as a matter of
convenience and reference and in no way define, limit or describe the substance
or scope of the Agreement or the intent of any of its provisions.

27. Rules of Construction. The Agreement has been negotiated by the
parties and is to be interpreted according to its fair meaning as if the parties
had prepared it together and not strictly for or against any party. All
references in the Agreement to "parties" refer to parties in the Agreement
unless expressly indicated otherwise. References in the Agreement to sections
are to sections of the Agreement unless expressly indicated otherwise.
References in the Agreement to "provisions" of the Agreement refer to the terms,
conditions and promises contained in the Agreement. At each place in the
Agreement where the context so requires, the masculine, feminine or neuter
gender includes the others and the singular or plural number includes the other.
Forms of the verb "including" mean "including without limitation." The word "or"
is inclusive and includes "and."

28. Counterpart. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered by the parties by
facsimile transmission or otherwise.

28. Indemnification. QuadraMed shall indemnify Employee to the
extent and in such fashion as it indemnifies other executive officers of
QuadraMed, but in no event shall such indemnification be less than provided for
by Section 317 of the California Corporations Code.

[Remainder of Page Intentionally Left Blank]

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<PAGE> 10
IN WITNESS WHEREOF the Employee has executed the Agreement, by his hand
and under seal, QuadraMed has caused the Agreement to be executed in its name
by its general partner, all as of the date first above written.

QUADRAMED CORPORATION, a California
corporation

By: /s/ JAMES D. DURHAM
--------------------------------
Title: CEO
-----------------------------

/s/ FREDERICK STODOLAK
-----------------------------------
FREDERICK STODOLAK

[Signature Page to Employment Agreement]

<PAGE> 1
EXHIBIT 10.36

January 1, 1997

James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
157 West Blithedale
Mill Valley, California 94941

Dear Mr. Durham:

We are pleased to inform you that the Board of Directors (the "Board")
of QuadraMed Corporation (the "Company") has authorized an employment package
for you which will provide certain assurances concerning the terms and
conditions of your continued employment with the Company and will allow you to
participate in a program of severance benefit payments should your employment
terminate. The purpose of this letter agreement (the "Agreement") is to
document the terms of your employment package by providing you with a formal
employment contract.

The Company considers it essential to the continuing operation of the
Company and in the best interests of its stockholders to assure the continuous
dedication of key management personnel. It is recognized in the context of
public ownership that a termination of an employee's employment without cause
may be sought and that such circumstances could prove distracting to key
executives and detrimental to the ongoing management and administration of the
Company. Such distraction is not in the best interest of the stockholders of
the Company. Accordingly, the Board has determined to discourage the inevitable
distraction to you in the face of potentially disturbing circumstances inherent
in any uncertainty regarding your employment status. This Agreement is intended
to secure and encourage your ongoing retention by providing separation benefits
in the event that your employment is altered as hereinafter described. In order
to induce you to remain in the employ of the Company, and in consideration of
your agreement set forth in Sections 10, 11, 12 and 13 of Part Two hereof, the
Company agrees to pay the severance payments and benefits set forth in this
Agreement, under the circumstances described herein.

This Agreement supersedes any written employment agreement between you
and the Company prior to the date hereof.

Part One of this Agreement sets forth certain definitional provisions
to be in effect for purposes of determining your benefit entitlements. Part Two
specifies the terms and conditions which will apply to your continued
employment with the Company, including the severance payments and benefits to
which you will become entitled in the event your employment should be
terminated. Part Two concludes this Agreement with a series of general terms
and conditions applicable to your employment benefits.

<PAGE> 2
PART ONE - DEFINITIONS

DEFINITIONS. For purposes of this Agreement, including in particular
the severance payments and benefits to which you may become entitled under Part
Two, the following definitions will be in effect:

"CHANGE IN CONTROL" means:

(i) a merger or acquisition in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State of the Company's incorporation;

(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company in liquidation or dissolution of the Company.

(iii) a transfer of all or substantially all of the Company's assets
pursuant to a partnership or joint venture agreement or similar arrangement
where the Company's resulting interest is less than fifty percent (50%);

(iv) any reverse merger in which the Company is the surviving
entity but in which fifty percent (50%) or more of the Company's outstanding
voting stock is transferred to holders different from those who held the stock
immediately prior to such merger;

(v) on or after the date hereof, a change in ownership of the
Company through an action or series of transactions, such that any person is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing fifty percent (50%) of more of the securities of the
combined voting power of the Company's outstanding securities;

(vi) a majority of the members of the Board are replaced during any
twelve-month period by directors whose appointment or election is not endorsed
by a majority of the members of the Board prior to the date of such appointment
of election; or

(vii) the occurrence of any other event constituting a "change in
control" under Code Section 280G or the Treasury regulations promulgated
thereunder.

"CODE" means the Internal Revenue Code of 1986, as amended from time
to time.

"EMPLOYEE" means James D. Durham.

"EMPLOYEE BENEFIT PLAN" shall have the meaning given the term under
Section 3 of ERISA.

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<PAGE> 3
"EMPLOYMENT PERIOD" means the period of your employment with the
Company governed by the terms and provisions of this Agreement.

"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as in effect from time to time.

"INVOLUNTARY TERMINATION" means the termination of your employment with
the Company:

(i) involuntarily upon your discharge, dismissal or the Company's
failure to renew this Agreement pursuant to Section 3 of Part Two, whether or
not in connection with a Change in Control; or

(ii) voluntarily or involuntarily, provided such termination occurs
in connection with (a) a change in your position with the Company which
materially reduces your level of responsibility or changes your title from
Chief Executive Officer, (b) a reduction in your level of compensation
(including base salary, fringe benefits and any non-discretionary bonuses or
other incentive payments earned pursuant to objective standards or criteria) or
(c) a relocation of your principal place of employment by more than forty-five
(45) miles and such change, reduction or relocation is effected without your
written concurrence.

"OPTION" means any option granted to you under the Stock Option Plan
which is outstanding at the time of your Involuntary Termination.

"STOCK OPTION PLAN" means the Company's 1996 Stock Incentive Plan
(including the predecessor 1994 Stock Option Plan), as amended through the date
hereof.

"TERMINATION FOR CAUSE" will mean an Involuntary Termination of your
employment for (i) one or more alleged acts of fraud, embezzlement,
misappropriation of proprietary information, misappropriation of the Company's
trade secrets or other confidential information, a verifiable breach of your
fiduciary duties to the Company or any other verifiable misconduct adversely
affecting the business reputation of the Company in a material manner or (ii)
your failure to devote your full working time and effort to the performance of
your duties hereunder; provided, however, you will have the right to perform
incidental services as are necessary in connection with (a) your private
passive investments, (b) your charitable or community activities and (c) your
participation in trade or professional organizations, but only to the extent
such incidental services do not materially interfere with the performance of
your services hereunder.

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<PAGE> 4
PART TWO -- TERMS AND CONDITIONS OF EMPLOYMENT

The following terms and conditions will govern your employment with the
Company throughout the Employment Period and will also, to the extent indicated
below, remain in effect following your termination date.

1. EMPLOYMENT AND DUTIES. The Company will continue to employ you
as an executive officer in the position of Chief Executive Officer. You agree
to continue in such employment for the duration of the Employment Period and to
perform in good faith and to the best of your ability all services which may be
required of you in your executive position and to be available to render such
services at all reasonable times and places in accordance with reasonable
directives and assignments issued by the Board. During your Employment Period,
you will devote your full time and effort to the business and affairs of the
Company within the scope of your executive office. Your principal place of
operations will be at the Company's corporate offices in Larkspur, California.

2. TERM OF AGREEMENT. This Agreement shall be effective as of the
date hereof. The term of this Agreement shall continue in effect from such date
for a period of two (2) years from such date, subject to the provisions of this
Part Two, unless sooner terminated by the parties in accordance with the
provisions hereof. For and in consideration of his entering into this
Agreement, Employee shall not be an employee-at-will, but shall be hereafter
employed for a definite term. No termination or expiration of this Agreement
shall affect any rights, obligations or liabilities of Employee or the Company
that shall have accrued on or prior to the date of termination or expiration.

3. AUTOMATIC EXTENSION. Commencing on the second anniversary of
the effective date hereof, and on each succeeding anniversary of the date
hereof, the term of this Agreement shall automatically be extended for one (1)
additional year unless, not later than three (3) months preceding such
anniversary date, the Company shall have given written notice pursuant to
Section 7 of Part Three that it will not extend the term of this Agreement.

4. COMPENSATION.

A. For service in the 1997 calendar year, your base salary
will be paid at the annual rate of Two Hundred Twenty Five Thousand Dollars
($225,000). Your annual rate of base salary may be subject to adjustment each
calendar year by the Board.

B. Your base salary will be paid at periodic intervals in
accordance with the Company's payroll practices for salaried employees.

C. You will be entitled to such bonuses (if any) for
service rendered during the Employment Period as the Board may determine in its
sole discretion and based upon the recommendation of the Company's Compensation
Committee and such additional factors as the

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<PAGE> 5

Board deems appropriate, including your individual performance and the
Company's financial results.

D. The Company will deduct and withhold, from the
compensation payable to you hereunder, any all applicable federal, state and
local income and employment withholding taxes and any other amounts required to
be deducted or withheld by the Company under applicable statute or regulation.

5. EXPENSE REIMBURSEMENT. You will be entitled to reimbursement
from the Company for all customary, ordinary and necessary business expenses
incurred by you in the performance of your duties hereunder, provided you
furnish the Company with vouchers, receipts and other substantiation of such
expenses in accordance with Company policies. You will also be entitled to
continued reimbursement of $500 per month with respect to the automobile
currently leased by or owned by yourself or as otherwise approved by the Board
and with respect to mileage driven in accordance with the Company's then
existing policies. The Company will also pay or reimburse you for the costs of
the preparation of your federal, state and local income tax returns by the
Company's independent certified public accounting firm.

6. FRINGE BENEFITS. During the Employment Period, you will be
eligible to participate in any group life insurance plan, group medical and/or
dental insurance plan, accidental death and dismemberment plan, short-term
disability program and other employee benefit plans, including profit sharing
plans, cafeteria benefit programs and stock purchase and option plans, which
are made available to executives and for which you qualify.

7. VACATION. You will accrue four (4) weeks of paid vacation
benefits during each calendar year of the Employment Period in accordance with
the Company policy in effect for executive officers.

8. DEATH OR DISABILITY.

A. Upon your death or disability during the Employment
Period, the employment relationship created pursuant to this Agreement will
immediately terminate, and no further compensation will become payable to you
pursuant to Part Two, Section 4. In connection with such termination by reason
of death, the Company will only be required to pay you (or your estate) any
unpaid compensation earned under Part Two, Section 4 for services rendered
through the date of your death, together with a special termination payment
equal to the additional amount of base salary you would have earned hereunder
had your employment continued for an additional thirty (30) days. In connection
with such termination by reason of disability, the Company will be required to
pay to you any unpaid compensation earned under Part Two, Section 4 for
services rendered through the date of your disability, together with the
severance benefits set forth in Section 9 below.

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<PAGE> 6
B. You will be deemed disabled if you are so characterized
pursuant to the terms of the Company's disability insurance policies applicable
to you from time to time.

C. Upon death or disability the terms of the Stock Option
Plan will apply.

9. SEVERANCE BENEFITS.

A. You will be entitled to receive the severance benefits
specified below in the event there should occur on the termination of your
employment by reason of disability or an Involuntary Termination of your
employment (other than a Termination for Cause) which is not effected in
connection with a Change in Control:

(i) SEVERANCE BENEFIT. The Company will make a
severance payment to you, in one lump sum within thirty (30) days of the date
of your Involuntary Termination, in an aggregate amount equal to the sum of (a)
the average annual rate of base salary and (b) the average bonus paid to you by
the Company, in each case for service rendered in the two (2) immediately
preceding calendar years. If a bonus was paid for only one of those calendar
years, then the clause (b) amount will be equal to that bonus. You may elect,
in your sole discretion, to have the severance benefit payable pursuant to this
Section 9.A.(i) in monthly installments over a one year period following the
date of your Involuntary Termination.

(ii) WELFARE BENEFITS. For a period of twelve (12)
months, Employee (and his dependents, as applicable) shall be provided by the
Company with the same life, health and disability plan participation, benefits
and other coverages to which he was entitled as an employee immediately before
the disability or the Involuntary Termination. In the event that under
applicable law or the terms of the relevant Employee Benefit Plans such
participation, benefits and/or coverage cannot be provided to Employee
following his Involuntary Termination, such coverage and/or benefits shall be
provided directly by the Company pursuant to this Agreement on a comparable
basis. In its sole discretion, the Company may obtain such coverage and
benefits for Employee through private insurance acquired at the Company's
expense. Amounts paid or payable to or on behalf of Employee pursuant to any
"employee welfare benefit plan," as defined in ERISA, providing health and/or
disability benefits, that is sponsored by the Company or an affiliate of the
Company, shall be credited against amounts due under this Section 9.A.(ii). To
the maximum extent permitted by applicable law, the benefits provided under
this Section 9.A.(ii) shall be in discharge of any obligations of the Company
or any rights of Employee under the benefit continuation provisions under
Section 4980A of the Code and Part VI of Title I of ERISA ("COBRA") or any
other legislation or similar import.

(iii) OPTION ACCELERATION. Solely in connection with
the Involuntary Termination of your employment (other than Termination for
Cause), each of your Options under the Stock Option Plan will (to the extent
not then otherwise exercisable) automatically

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<PAGE> 7
accelerate so that each such Option will become immediately exercisable for the
total number of shares purchasable thereunder. Each such accelerated Option,
together with all of your other vested Options, will remain exercisable for a
period of three (3) years following your Involuntary Termination and may be
exercised for any or all of the accelerated shares in accordance with the
exercise provisions of the Option agreement evidencing the grant.

B. You will be entitled to receive the severance benefits
specified below in the event there should occur an Involuntary Termination of
your employment (other than a Termination for Cause) which is effected in
connection with a Change in Control:

(i) SEVERANCE BENEFIT. The Company will make a severance
payment to you, in one lump sum within thirty (30) days of the date of your
Involuntary Termination, in an aggregate amount equal to two (2) times the sum
of (a) the average annual rate of base salary and (b) the average bonus paid to
you by the Company, in each case for service rendered in the two (2)
immediately preceding calendar years. If a bonus was paid for only one of those
calendar years, then the clause (b) amount will be equal to that bonus. You may
elect, in your sole discretion, to have the severance benefit payable pursuant
to this Section 9.B.(i) in monthly installments over a one year period
following the date of your Involuntary Termination.

(ii) WELFARE BENEFITS. For a period of twenty-four (24)
months, Employee (and his dependents, as applicable) shall be provided by the
Company with the same life, health and disability plan participation, benefits
and coverage to which he was entitled as an employee immediately before the
Involuntary Termination. In the event that under applicable law or the terms of
the relevant Employee Benefit Plans such participation, benefits and/or
coverage cannot be provided to Employee following his Involuntary Termination,
such coverage and/or benefits shall be provided directly by the Company
pursuant to this Agreement on a comparable basis. In its sole discretion, the
Company may obtain such coverage and benefits for Employee through private
insurance acquired at the Company's expense. Amounts paid or payable to or on
behalf of Employee pursuant to any "employee welfare benefit plan", as defined
in ERISA, providing health and/or disability benefits, that is sponsored by the
Company or an affiliate of the Company, shall be credited against amounts due
under this Section 9.B.(ii). To the maximum extent permitted by applicable law,
the benefits provided under this Section 9.B.(ii) shall be in discharge of any
obligations of the Company or any rights of Employee under the benefit
continuation provisions under COBRA or any other legislation of similar import.

(iii) OPTION ACCELERATION. Each of your Options under the
Stock Option Plan will (to the extent not then otherwise exercisable)
automatically accelerate so that each such Option will become immediately
exercisable for the total number of shares purchasable thereunder. Each such
accelerated Option, together with all of your other vested Options, will remain
exercisable for a period of three (3) years following your Involuntary

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Termination and may be exercised for any or all of the accelerated shares in
accordance with the exercise provisions of the Option agreement evidencing the
grant.

10. RESTRICTIVE COVENANT. During the Employment Period, you will
not directly or indirectly, whether for your own account or as an employee,
consultant or advisor, provide services to any business enterprise other than
the Company, unless otherwise authorized by the Company in writing.

11. NON-SOLICITATION AND NON-DISPARAGEMENT. During any period for
which you are receiving compensation payments pursuant to Part Two, Section 4
and one (1) year thereafter, you will not directly or indirectly (i) solicit
any Company employee, independent contractor or consultant to leave the
Company's employ or otherwise terminate such person's relationship with the
Company for any reason or interfere in any other manner with the employment or
other relationships at the time existing between the Company and its current
employees, independent contractors or consultants, (ii) solicit any of the
Company's customers for products or services substantially similar to those
offered by the Company, or (iii) disparage the Company or any of its
shareholders, directors, officers, employees or agents.

12. CONFIDENTIALITY.

A. You hereby acknowledge that the Company may, from time
to time during the Employment Period, disclose to you confidential information
pertaining to the Company's business and affairs and client base, including
(without limitation) customer lists and accounts, other similar items
indicating the source of the Company's income and information pertaining to
the salaries, duties and performance levels of the Company's employees. You
will not, at any time during or after such Employment Period, disclose to any
third party or directly or indirectly make use of any such confidential
information, including (without limitation) the names, addresses and telephone
numbers of the Company's customers, other than in connection with, and in
furtherance of, the Company's business and affairs. Nothing contained in this
paragraph shall be construed to prevent Employee from disclosing the amount of
his salary.

B. All documents and data (whether written, printed or
otherwise reproduced or recorded) containing or relating to any such
proprietary information of the Company which come into your possession during
the Employment Period will be returned by you to the Company immediately upon
the termination of the Employment Period or upon any earlier request by the
Company, and you will not retain any copies, notes or excerpts thereof.
Notwithstanding the foregoing, Employee shall be entitled to retain his file or
rolodex containing names, addresses and telephone numbers and personal diaries
and calendars; provided, however, that Employee shall continue to be bound by
the terms of Section 12.A. above to the extent such retained materials
constitute confidential information.

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<PAGE> 9
C. Your obligations under this Section 12 will continue in
effect after the termination of your employment with the Company, whatever the
reason or reasons for such termination, and the Company will have the right to
communicate with any of your future or prospective employers concerning your
continuing obligations under this Section 12.

13. OWNERSHIP RIGHTS.

A. All materials, ideas, discoveries and inventions
pertaining to the Company's business or clients, including (without limitation)
all patents and copyrights, patent applications, patent renewals and extensions
and the names, addresses and telephone numbers of customers, will belong solely
to the Company.

B. All materials, ideas, discoveries and inventions which
you may devise, conceive, develop or reduce to practice (whether individually
or jointly with others) during the Employment Period will be the sole property
of the Company and are hereby assigned by you to the Company, except for any
idea, discovery or invention (i) for which no Company equipment, supplies,
facility or trade secret information is used, (ii) which is developed entirely
on your own time and (iii) which neither (a) relates at the time of conception
or reduction to practice, to the Company's business or any actual or
demonstrably-anticipated research or development program of the Company nor (b)
results from any work performed by you for the Company. The foregoing exception
corresponds to the assignment of inventions precluded by California Labor Code
Section 2870, attached as Exhibit A.

C. You will, at all times whether during or after the Employment
Period, assist the Company, at the Company's sole expense, in obtaining,
maintaining, defending and enforcing all legal rights and remedies of the
Company, including, without limitation, patents, copyrights and other
proprietary rights of the Company. Such assistance will include (without
limitation) the execution of documents and assistance and cooperation in legal
proceedings.

D. You will continue to be bound by all the terms and
provisions of your existing Proprietary Information Agreement with the Company,
and nothing in this document will be deemed to modify or affect your duties and
obligations under those other agreements.

14. TERMINATION OF EMPLOYMENT.

A. The Company (or any successor entity resulting from a
Change in Control) may terminate your employment under this Agreement at any
time for any reason, with or without cause, by providing you with at least
seven (7) days prior written notice. However, such notice requirement will not
apply in the event there is a Termination for Cause under subparagraph D below.

B. In the event there is a termination of your employment
by reason of disability or is an Involuntary Termination of your employment
with the Company (other than

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<PAGE> 10
Termination for Cause) during the Employment Period, you will become entitled
to the benefits specified in Part Two, Section 9 in addition to any unpaid
compensation earned by you under Part Two, Section 4 for services rendered
prior to such termination.

C. Should your employment with the Company terminate by
reason of your death during the Employment Period, no severance benefits will
be payable to you under Part Two, Section 9, and only the limited death
benefits provided under Part Two, Section 8 will be payable.

D. The Company may at any time, upon written notice,
terminate your employment hereunder for any act qualifying as a Termination for
Cause. Such termination will be effective immediately upon such notice.

E. Upon such Termination for Cause, the Company will only
be required to pay you any unpaid compensation earned by you pursuant to Part
Two, Section 4 for services rendered through the date of such termination, and
no termination or severance benefits will be payable to you under Part Two,
Section 9.

PART THREE - MISCELLANEOUS PROVISIONS

1. MITIGATION. Employee shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other
employment or otherwise. The provisions of this Agreement, and any payment
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish Employee's existing rights which would accrue solely as a
result of the passage of time, under any Company Employee Benefit Plan,
"Payroll practice" (as defined in ERISA), compensation arrangement, incentive
plan, stock option or other stock-related plan.

2. SUCCESSORS. This Agreement shall be binding upon and inure to
the benefit of the Company and any successor of the Company, including, without
limitation, any corporation or corporations acquiring directly or indirectly
all or substantially all of the stock, business or assets of the Company
whether by merger, consolidation, division, sale or otherwise (and such
successor shall thereafter be deemed "the Company" for the purposes of this
Agreement). The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
satisfactory to Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement entitling Employee to
the benefits hereunder, as though Employee was subject to Involuntary
Termination. This Agreement shall be binding upon and inure to the benefit of
Employee, his successors, assigns, executors, administrators or beneficiaries.

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<PAGE> 11
3. DEATH. Should you die before receipt of all the separation
payments to which you may become entitled under Part Two, Section 8, then such
payment or payments will be made, on the due date or dates hereunder had you
survived, to the executors or administrators of your estate. Should you die
before you exercise your outstanding vested options, then each such option may
be exercised, within twelve (12) months after your death, by the executors or
administrators of your estate or by person to whom the option is transferred
pursuant to your will or in accordance with the laws of inheritance. In no
event, however, may any such vested option be exercised after the specified
expiration date of the option term.

4. INDEMNIFICATION. The indemnification provisions for officers
and directors under the Company's Bylaws will (to the maximum extent permitted
by law) be extended to you, during the period following your Involuntary
Termination, with respect to any and all matters, events or transactions
occurring or effected during your Employment Period.

5. MISCELLANEOUS. The provisions of this Agreement will be
construed and interpreted under the laws of the State of California. This
Agreement incorporates the entire Agreement between you and the Company
relating to the terms of your employment and the subject of severance benefits
and supersedes all prior agreements and understandings with respect to such
subject matter. This Agreement may only be amended by written instrument signed
by you and an authorized officer of the Company.

6. ARBITRATION. Any controversy which may arise between you and
the Company with respect to the construction, interpretation or application of
any of the terms, provisions, covenants or conditions of this Agreement or any
claim arising from or relating to this Agreement will be submitted to final and
binding arbitration in San Francisco, California in accordance with the rules
of the American Arbitration Association then in effect.

7. NOTICES. Any notice required to be given under this Agreement
shall be deemed sufficient, if in writing, and sent by certified mail, return
receipt requested, via overnight courier, or hand delivered to the Company at
80 East Sir Francis Drake Boulevard, Suite 2A, Larkspur, California 94939, and
to Employee at his most recent address reflected in the permanent Company
records. Copies of each such notice delivered by either the Company or Employee
shall be provided to each current member of the Board at each such director's
current address as listed in the Company's records.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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Please indicate your acceptance of the foregoing provisions of this
Agreement by signing the enclosed copy of this Agreement and returning it to
the Company.

Very truly yours,

QUADRAMED CORPORATION

By: /s/ John Cracchiolo
---------------------------------
Title: CFO
ACCEPTED BY AND AGREED TO:

/s/ James D. Durham
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James D. Durham

Dated: 1/1/97

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EXHIBIT A

Section 2870. APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE WILL
ASSIGN OR OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER.

(a) Any provision in an employment agreement which provides that an
employee will assign, or offer to assign, any of his or her rights in an
invention to his or her employer will not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:

(1) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer;

(2) Result from any work performed by the employee for
his employer.

(b) To the extent a provision in an employment agreement purports
to require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.

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