QUADRAMED CORP, 8-K, 1999-03-15

QUADRAMED CORP
8-K, 1999-03-15
COMPUTER PROGRAMMING SERVICES

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) March 12, 1998

QUADRAMED CORPORATION
---------------------
(Exact name of registrant as specified in charter)

Delaware 0-21031 52-1992861
---------------------------------------------------------------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)

1003 WEST CUTTING BOULEVARD, 2ND FLOOR, RICHMOND CA 94804
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (510) 620-2340

NONE
----
(Former name or former address, if changed since last report.)
<PAGE> 2
This Current Report of Form 8-K is being filed to amend and restate
QuadraMed Corporation's (the "Company") Consolidated Balance Sheets as of
December 31, 1996 and 1997 and the Company's Consolidated Statements of
Operations, Consolidated Statements of Changes in Stockholder' Equity (Deficit)
and Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997 to reflect the pooling of interests for accounting purposes for
the Company's acquisitions of (i) Pyramid Health Group, Inc. ("Pyramid")
pursuant to an Acquisition Agreement and Plan of Merger dated June 1, 1998 and
(ii) IMN Corp. ("IMN") pursuant to an Acquisition Agreement and Plan of Merger
dated September 30, 1998. Furthermore, pursuant to Item 5 hereof, the Company
has determined to update its "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in connection with the filing of the
foregoing restated financial statements.

ITEM 5. OTHER INFORMATION

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

OVERVIEW

QuadraMed develops, markets and sells software products and services designed
to enable health care providers and payors to increase operational efficiency,
improve cash flow, measure the cost of care and effectively administer managed
care contracts. In addition, QuadraMed provides business office outsourcing,
compliance and consulting services. QuadraMed and its subsidiaries have
approximately 3,700 healthcare customers. In addition, QuadraMed has received
endorsements from 15 state and regional hospital associations.

The Company has expanded significantly since its inception in 1993, primarily
through the acquisition of other businesses, products and services. Accordingly,
the Company's consolidated financial statements have been restated to include
historical results of entities acquired on a pooling of interests basis. The
addition of historical results of acquired entities should be considered when
reading the period to period comparisons for fiscal years 1995, 1996 and 1997.
Additionally, reference is made to the consolidated financials statements and
notes thereto for the effect of such acquisitions.

Since December 1995, the Company has completed the following significant
acquisitions:

<TABLE>
<CAPTION>
DESCRIPTION OF
COMPANY ACQUIRED COMPANY ACQUIRED POOLING/PURCHASE DATE ACQUIRED
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C>
Health care financial
management and decision
Healthcare Design Systems support software Purchase December 1995

Medicus Systems Corporation Health care financial Purchase November 1997*
management and decision
support software

Rothenberg Health Systems, Inc. Capitation management software Pooling December 1997
and and
Healthcare Research Affiliates, H.E.D.I.S. reporting
Inc. (collectively, "Rothenberg")

Cabot Marsh Corporation Health care compliance and Purchase February 1998
consulting company

Pyramid Health Group, Inc. Cash flow management services Pooling June 1998
("Pyramid") company

Integrated Medical Networks, Inc. Health care financial Pooling September 1998
("IMN") management
</TABLE>

- ----------

* QuadraMed acquired 56.7% of the outstanding capital stock of Medicus Systems
Corporation on November 9, 1997. The remaining 43.3% shares of capital stock
were purchased by the Company in May 1998.

<PAGE> 3
As indicated in the table above, the acquisition of Rothenberg was accounted
for on a pooling of interests basis. In accordance with pooling accounting
rules, the Company's consolidated financial statements have been restated to
include the historical operating results of Rothenberg for the twelve months of
the 1997 and 1996 fiscal years and for the last two calendar months of 1995. As
a result, the period to period comparison of the Company's operating results for
fiscal years 1995 and 1996 reflect increases from 1995 to 1996 that are
attributable to Rothenberg's short operating history in 1995.

The acquisition of Pyramid was also accounted for on a pooling of interests
basis. In accordance with pooling accounting rules, the Company's consolidated
financial statements have been restated to include the historical operating
results of Pyramid for the 1997, 1996 and 1995 fiscal years.

The acquisition of IMN was accounted for on a pooling of interests basis. In
accordance with pooling accounting rules, the Company's consolidated financial
statements have been restated to include the historical operating results of
IMN for 1997, 1996 and 1995 fiscal years.

In November 1997, the Company acquired 56.7% of Medicus Systems Corporation
("Medicus"). The Company's purchase price for the 56.7 percent interest in
Medicus which it acquired was approximately $26.3 million, which was comprised
of a cash payment of $21.7 million, the issuance of a note payable for
approximately $1.6 million to one selling stockholder, the value of warrants
issued to the selling stockholders of $700,000, and transaction costs of $2.3
million. In connection with the acquisition, which was accounted for as a
purchase, the Company allocated the purchase price based upon the estimated fair
value of the Company's proportionate share of the assets acquired and
liabilities assumed. Intangible assets acquired aggregated to $30.2 million, of
which $1.7 million, $6.7 million and $21.8 million were assigned to acquired
software, acquired intangible assets, and acquired research and development
in-process, respectively. Because there was no assurance that the Company would
be able to successfully complete the development and integration of the acquired
research and development in-process or that it had alternative future use at the
acquisition date, the acquired research and development in-process was charged
to expense by the Company in the year ended December 31, 1997. The Company's
proportionate share of net tangible liabilities assumed in the acquisition
totaled approximately $12.8 million. In May 1998, the Company completed its
acquisition of Medicus by purchasing the remaining 43.3% interest in Medicus.
The Company allocated the remaining 43.3% purchase price based on the estimated
fair value of the assets and liabilities assumed. The SEC recently formulated
revised methodology regarding the valuation of acquired research and development
in-process. The SEC has indicated in certain cases that these guidelines should
be applied retroactively while it is the Company's belief that its original
treatment of this transaction was appropriate. The Company has elected to
retroactively adjust its charge for the write-off of acquired research and
development in-process for the remaining 43.3% acquisition of Medicus. The
Company has adjusted the amount of intangibles assigned to acquired in-process
research and development and written-off from the previously reported
$17,146,000 to $4,763,000 in the quarter ended June 30, 1998. The remaining
intangible balance will be amortized over a 7 year average period.

In February 1997, the Company entered into an arrangement to provide EDI
processing and management services to EDI USA, Inc. an organization owned and
established by thirteen independent Blue Cross and Blue Shield Plans to build
and operate an EDI transaction network. The Company and EDI USA, Inc. terminated
this arrangement in December 1997. The Company recorded non-recurring charges of
$2,492,000 for the year ended December 31, 1997, related to costs incurred in
connection with the processing arrangement and the termination thereof.

As of December 31, 1998, QuadraMed and its subsidiaries had approximately
3,700 customers, approximately 80% of which were hospitals, located in all 50
states, the District of Columbia, Canada, Puerto Rico, South Africa and the
Philipines. The Company expects to maintain a high percentage of hospital
customers, but also expects its customer mix to transition to a higher
percentage of other providers, including integrated delivery health care systems
("IDSs"), as well as physicians, payors and employers. No single customer
accounted for more than 10% of the Company's revenues in 1995, 1996 and 1997.

The Company's suite of products 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 renewable
licenses. The latter method provides the Company with a recurring component to
its revenues each year. Revenues from annual renewable license fees are
recognized on the contract anniversary date. Revenues from perpetual software
license agreements are significantly greater than license fees under contracts
that have annual renewal provisions and are generally recognized upon shipment
and involve one-time license fees, which can cause the Company's revenues to
vary from quarter to quarter. 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.

In addition to its software products, the Company provides business office
and health information management outsourcing and cash flow management services.
The Company offers partial and full outsourcing of health information management
and business office functions for hospitals, physicians, home health care
agencies and other providers. The Company often uses its software products in
delivering these services. The focus of these services is to increase the cash
flow and improve the efficiencies of business operations for health care
providers. The Company also provides cash flow management services to update and
organize a provider's standard billing and charge information to facilitate
appropriate reimbursement for the provider. Business office outsourcing and cash
flow management service revenues typically consist of fixed monthly fees, in the
case of business office outsourcing, plus incentive-based payments based on a
percentage of dollars received for the provider. The monthly fees from
<PAGE> 4

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. 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 capitalizes a portion of its software costs for internally
developed software 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) of the
products, commencing when each product is available to the market.

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,
---------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
Licenses ................... 22.8% 46.7% 44.5%
Services ................... 77.2 53.3 55.5
Total revenues ............. 100.0 100.0 100.0
Operating expenses:
Cost of licenses ........... 14.9 19.5 18.5
Cost of services ........... 53.4 34.0 35.8
General and administration . 30.6 29.0 26.4
Sales and marketing ........ 7.5 10.2 10.0
Research and development ... 3.1 6.8 11.1
Amortization of intangibles 0.2 1.6 1.7
Non-recurring charges ...... -- -- 7.9
Write-off of acquired in-
process research and
development .............. 32.2 -- 21.9
----- ----- -----
Total operating expenses.. 141.9 101.1 133.3
----- ----- -----
Loss from operations ............ (41.9) (1.1) (33.3)
Interest income (expense), net .. (4.1) (3.7) (0.5)
Other income (expense), net ..... 0.1 0.5 0.7
----- ----- -----
Net loss before provision
for income taxes .............. (45.9) (4.3) (33.1)
Provision for income taxes ...... 0.4 0.2 1.1
Income (loss) from discontinued
operations ...................... (4.8) (1.4) 0.1
----- ----- -----
Net loss ........................ (51.1) (5.9) (34.1)
----- ----- -----
</TABLE>

Years Ended December 31, 1997 and 1996

Revenues

Licenses. License revenues increased 28.0% to $44.4 million in 1997 from
$34.7 million in 1996. The increase was due to license revenues from new
customers and an increase in perpetual license agreements entered into during
the latter half of 1997. Software license revenues include license,
installation, consulting and post-contract customer support fees, third-party
hardware sales and other revenues related to licensing of the Company's software
products.

Services. Service revenues increased 39.5% to $55.3 million in 1997 from
$39.6 million in 1996. The increase in service revenues was primarily due to new
customers associated with the health information management outsourcing business
and to a lessor extent, new customers acquired in the Synergy acquisition in
April 1997 and Healthcare Revenue Management, Inc. in September 1997.

Cost of Revenues

Cost of Licenses. Cost of license revenues increased 27.5% to $18.5 million
in 1997 from $14.5 million in 1996. Cost of licenses consists primarily of
salaries, benefits and allocated costs related to software installations,
hardware costs, customer support and royalties to third parties. As a percentage
of license revenues, cost of licenses decreased slightly to 41.6% in 1997 from
41.8% in

<PAGE> 5

1996. The increase in cost of licenses was principally due to additional
personnel hired during 1997 to support software installations and, to a lesser
extent, increases in third-party hardware sales.

Cost of Services. Cost of service revenues increased 41.1% to $35.6 million
in 1997 from $25.3 million in 1996. Cost of services includes expenses
associated with services performed primarily in connection with health
information management outsourcing and consulting services. As a percentage of
service revenues, cost of services increased to 64.5% in 1997 from 63.8%
in 1996. The increase in cost of services was principally due to additional
operating costs associated with the Company's health information management
outsourcing business and to a lessor extent, the acquisitions of Synergy and
Healthcare Revenue Management, Inc., acquired in April 1997 and
September 1997, respectively.

Operating Expenses

General and Administration. General and administration expenses increased
21.8% to $26.3 million in 1997 from $21.6 million in 1996, and decreased as a
percentage of total revenues to 26.4% in 1997 from 29.0% in 1996. The increase
in general and administration expenses reflects costs associated with the
Company's health information management outsourcing business, the hiring of
additional senior officers in 1997 and an increase in the number of offices
throughout the United States. The Company also incurred significant legal and
other costs during 1997 to settle certain litigation initiated in prior years.
As a percentage of total revenues, general and administration costs decreased
primarily due to a larger revenue base in 1997.

Sales and Marketing. Sales and marketing expenses increased 32.0% to $10.0
million in 1997 from $7.6 million in 1996, and decreased as a percentage of
total revenues to 10.0% in 1997 from 10.2% in 1996. The increase in sales and
marketing expenses resulted principally from the addition of sales and marketing
personnel and increased advertising efforts associated with advertising in
publications, creating product brochures and participating in industry
conferences during 1997.

Research and Development. Research and development expenses increased 119.3%
to $11.0 million in 1997 from $5.0 million in 1996, and increased as a
percentage of total revenues to 11.1% in 1997 from 6.8% in 1996. The increase in
research and development expenses is principally due to the hiring of additional
personnel for various software development projects . The Company capitalized
$673,000, $745,000 and $671,000 of software development costs in fiscal 1997,
1996 and 1995, respectively, which represented 5.8%, 12.9% and 32.1% of total
research and development expenditures in fiscal 1997, 1996 and 1995.
Amortization of capitalized software development costs totaled $155,000, $32,000
and $47,000 in fiscal 1997, 1996 and 1995, respectively. The Company believes
that research and development expenditures are essential to maintaining its
competitive position. As a result, the Company intends to continue to make
investments in the development of new products and in the further integration of
acquired technologies into the Company's suite of products. The Company believes
that these expenses will increase in the future, but should remain relatively
constant as a percentage of total revenues, although there can be no assurance
in this regard.

Amortization of Intangibles. Amortization of intangibles increased to $1.7
million in 1997 from $1.2 million in 1996. The increase in the amortization of
intangibles is due to the acquisitions of Synergy in April 1997, Healthcare
Revenue Management, Inc. in September 1997 and 56.7% of Medicus in November
1997.

Non-Recurring Charges. The Company recorded non-recurring charges of $7.8
million in 1997. These non-recurring charges were comprised of $2.5 million
related to the termination of the claims processing arrangement with EDI USA,
Inc. in December 1997, $3.1 million relating to two acquisitions in 1997 (which
were accounted for on a pooling of interests basis) and other charges associated
with the write down of certain assets which were determined to have no future
realizable value.

Acquired In-Process Research and Development. In connection with the
acquisition of 56.7% of the outstanding stock of Medicus in November 1997, the
Company recorded a $21.9 million write-off related to acquired in-process
research and development that had not achieved technological feasibility and had
no alternative future use.

Interest Income (Expense). Interest expense decreased to $473,000 in 1997
compared to $2.7 million in 1996. The decrease in interest expense was primarily
due to various notes payable assumed from acquired companies, which was offset
by interest

<PAGE> 6

earned on higher cash balances, resulting from the Company's initial public
offering of common stock in October 1996 and follow-on common stock offering in
October 1997. The Company's public equity offerings raised net proceeds of
approximately $26.4 million and $57.3 million, respectively. Interest expense in
1996 was principally the result of debt the Company incurred in connection with
the acquisition of Healthcare Design Systems, Inc. and for working capital
purposes.

Provision for Income Taxes. The Company recorded a provision for income taxes
of $1.1 million in 1997 compared $147,000 in 1996. The provision for income
taxes in 1997 relates to state and alternative minimum tax liabilities of the
Company. For financial reporting purposes, a 100% valuation allowance of $16.3
million and $10.0 million has been recorded against the Company's deferred tax
assets in 1997 and 1996, respectively, under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."

Years Ended December 31, 1996 and 1995

Revenues

Licenses. License revenues increased 229.5% to $34.7 million in 1996 from
$10.5 million in 1995. The significant increase in license revenues was due
principally to sales associated with businesses acquired in pooling transactions
that are included in revenues for 1996 and, to a lesser extent, an increase in
new customers.

Services. Service revenues increased 10.9% to $39.6 million in 1996 from
$35.7 million in 1995. The increase was primarily due to new customers from the
Company's health information management business in 1996, which was slightly
offset by a decrease in the number of customers using the Company's accounts
receivable management services, which were comprised of projects with a defined
service period, as a result of certain projects that expired and were not
replaced with other service contracts.

Cost of Revenues

Cost of Licenses. Cost of license revenues increased 109.7% to $14.5 million
in 1996 from $6.9 million in 1995. This increase is principally due to the cost
of licenses associated with the Rothenberg business (which was acquired in a
pooling transaction) and to an increase in the number of software license
installations during 1996. As a percentage of license revenues, cost of licenses
decreased to 41.8% in 1996 from 65.7% in 1995. The decrease in cost of licenses
as a percentage of license revenues reflects the significant increase in license
revenues with higher operating margins during 1996.

Cost of Services. Cost of service revenues increased slightly by 2.4% to
$25.3 million in 1996 from $24.7 million in 1995. As a percentage of service
revenues, cost of services decreased to 63.8% in 1996 from 69.1% in 1995. The
decline in cost of services as a percentage of service revenues was due to the
Company's ability to leverage its service projects.

Operating Expenses

General and Administration. General and administration expenses increased
52.2% to $21.6 million in 1996 from $14.2 million in 1995. The increase in
general and administration expenses is due to expenses associated with
businesses acquired in pooling transactions, the addition of personnel
associated with the Healthcare Design Systems 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 29.0% in 1996 from 30.6% in 1995.

Sales and Marketing. Sales and marketing expenses increased 118.2% to $7.6
million in 1996 from $3.5 million in 1995. The increase in sales and marketing
expenses resulted primarily from the addition of sales personnel and project
managers in connection with acquisitions and increased advertising expenditures
during 1996. As a percentage of total revenues, sales and marketing expenses
increased to 10.2% in 1996 from 7.5% in 1995 primarily due to the hiring of the
Company's sales force during 1996 and new marketing initiatives during 1996.

Research and Development. Research and development expenses increased 254.6%
to $5.0 million in 1996 from $1.4 million 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 6.8% in 1996 from 3.1% in 1995.

<PAGE> 7

Amortization of Intangibles. Amortization of goodwill increased to $1.2
million in 1996 from $102,000 in 1995. The increase in amortization is primarily
the result of amortization of goodwill associated with the acquisition of
Healthcare Design Systems in December 1995 and amortization previously
associated with Rothenberg, which was not included in the Company's results of
operations until November 1995.

Acquired In-Process Research and Development. In 1995, the Company recorded a
$6.2 million write-off related to acquired in-process research and development
that had not achieved technological feasibility and had no alternative future
use. In addition, Rothenberg recorded a write-off of $8.6 million associated
with acquired in-process research and development during 1995.

LIQUIDITY AND CAPITAL RESOURCES

In October 1996, the Company completed its initial public offering of common
stock, which resulted in net proceeds to the Company of approximately $26.1
million. In October 1997, the Company completed a follow-on offering of common
stock, which resulted in net proceeds to the Company of approximately $57.3
million.

At December 31, 1997, the Company had $44.7 million of cash and cash
equivalents, $1.0 million of short-term investments and $16.7 million in net
working capital. Net cash used in operating activities was $5.6 million and $6.1
million in the years ended December 31, 1997 and 1995, respectively. Net cash
provided by operating activities in 1996 was $3.1 million. Net cash used in
operating activities in 1997 and 1995 was principally attributable to the
Company's net loss in 1997 and 1995, a substantial portion of which was
comprised of non-cash charges to write-off acquired in-process research and
development related to the Medicus acquisition in November 1997 and Rothenberg
in 1995. Net cash provided by operating activities in fiscal year 1996 was
principally attributable to an increase in depreciation and amortization expense
and deferred revenue in 1996.

Net cash used in investing activities was $31.1 million, $4.6 million and
$5.6 million in the years ended December 31, 1997, 1996 and 1995, respectively.
Investing activities in fiscal year 1997 primarily included cash paid for the
Medicus and Synergy acquisitions, purchases of equipment and the capitalization
of computer software development costs. Investing activities in fiscal years
1996 and 1995 related to additions to capital equipment, the capitalization
of computer software development costs and the discontinuance of a certain
operation in 1995.

Net cash provided by financing activities was $60.0 million, $10.5 million
and $22.0 million in the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash provided by financing activities in fiscal year 1997
included $57.3 million in proceeds from the Company's follow-on common stock
offering in October 1997, which was partially offset by the repayment of notes
payable in connection with the November 1997 acquisition of Medicus. Net cash
provided by financing activities in fiscal year 1996 included proceeds from the
issuance of convertible preferred stock and proceeds from the Company's initial
public offering, which proceeds were offset by repayment of notes payable. Net
cash provided by financing activities in fiscal year 1995 included borrowings
related to notes payable and contributed capital to Rothenberg.

In April 1997, Medicus entered into an agreement with a bank that provided
for a secured revolving line of credit up to a maximum of $2,500,000. There were
no outstanding balances at December 31, 1997. The line of credit agreement was
terminated by the Company in January 1998.

In July 1997, the Company entered into an unsecured line of credit
arrangement to borrow up to $5,000,000 at the bank's prime rate. The line of
credit expires in July 1998 and contains certain financial and non-financial
restrictions, including among others, maintaining a minimum quick ratio, minimum
tangible net worth and a minimum ratio of total liabilities to tangible net
worth. The Company was not in compliance with certain of these covenants at
December 31, 1997; however, the Company received a waiver from the bank for
noncompliance with such financial covenants. There were no outstanding balances
at December 31, 1997. The line of credit expired in July 1998, at which time it
was extended until September 1998 when it expired.

The Company believes that its current cash and investments will be sufficient
to fund operations at least through December 31, 1999.

YEAR 2000 COMPLIANCE

<PAGE> 8

Many computer systems have experienced or will experience problems processing
dates beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional. The
Company is assessing both the internal readiness of its computer systems and the
compliance of its computer products and software sold to customers for
addressing the year 2000 issue. The Company expects to implement successfully
the systems and programming changes necessary to address the year 2000 issues
and does not believe that the cost of such actions will have a material adverse
effect on the Company's business, results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
its business, financial condition and results of operations.

The Company has designed and tested the most current versions of its products
to be year 2000 compliant. A significant number of the Company's customers are
running product versions that are not year 2000 compliant. While the Company has
been encouraging such customers to migrate to current product versions, it is
possible that the Company may experience increased expenses in addressing
migration issues and may lose customers. In addition, there can be no assurances
that the Company's current products do not contain undetected errors or defects
associated with year 2000 date functions that may result in material costs to
the Company. Some commentators have stated that significant amounts of
litigation will arise out of year 2000 compliance issues. Because of the
unprecedented nature of such litigation it is uncertain whether or to what
extent the Company may be affected by it.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"), which was adopted by the Company in the quarter ended December 31, 1997,
and in accordance with this standard all prior periods presented have been
restated to conform to its provisions. Under the new requirements for
calculating earnings per share, basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed using the weighted
average of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded from the dilutive
computation only if their effect is anti-dilutive. As the Company recorded a net
loss in each of the three years in the period ended December 31, 1997, no common
equivalent shares are included in diluted weighted average common shares
outstanding.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). This statement establishes standards for reporting and displaying
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements and is effective for fiscal
years beginning after December 15, 1997. The adoption of this statement will not
have a material impact on the Company's results of operations or financial
position.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). This statement establishes
standards for reporting selected segment information quarterly and to report
entity-wide disclosures about products and services, geographic areas and major
customers. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of this statement will not have a material impact on the
Company's results of operations or financial position.
<PAGE> 9

ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.

(b) The Company has restated certain of its historical fiscal year end audited
financial statements to reflect the business combinations with Pyramid and IMN
consistent with the accounting treatment for a pooling of interests. Listed
below are the financial statements, related information which are responsive to
Item 7(b) hereof.

Report of Independent Public Accountants
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997
Consolidated Statements of Changes in Stockholder' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements

(c) The following exhibits are being filed herewith as a result of the
restatement of the Company's audited financial statements:

Exhibits:

23.1 Consent of Arthur Andersen LLP

23.2 Consent of Deloitte & Touche LLP

<PAGE> 10

INDEX TO FINANCIAL STATEMENTS

QUADRAMED CORPORATION

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................................. F-1
Independent Auditors' Report.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997.......................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997............ F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997.............................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997............ F-6
Notes to Consolidated Financial Statements............................................................ F-7
</TABLE>

<PAGE> 11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To QuadraMed Corporation:

We have audited the accompanying consolidated balance sheets of QuadraMed
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of operations, statements of
changes in stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997 (as restated -- see Note 12). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the consolidated
balance sheets of FRA Acquisitions, Inc. and subsidiary as of December 31, 1996,
nor did we audit the related statements of operations, statements of changes in
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1996, which statements represent total assets of 4% of the
1996 consolidated total and total revenues of 4% and 12% of the 1995 and 1996
consolidated totals, respectively. Those statements were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for that entity, is based solely on the report
of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QuadraMed
Corporation as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

San Jose, California
January 12, 1999

F-1
<PAGE> 12
INDEPENDENT AUDITORS' REPORT

To the Board of Directors
FRA Acquisitions, Inc.
Rothenberg Health Systems Inc.
Woodland Hills, California:

We have audited the consolidated balance sheet of FRA Acquisitions, Inc. and
subsidiary (the "Company") as of December 31, 1996, and the related consolidated
statements of operations, shareholder's equity, and cash flows for the year
ended December 31, 1996, and the 55 day period ended December 31, 1995 (which
financial statements are not presented herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996,
and the results of its operations and its cash flows for the year ended December
31, 1996, and the 55 day period ended December 31, 1995 in conformity with
generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Los Angeles, California
April 25, 1997

F-2
<PAGE> 13
QUADRAMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997
--------- ---------
(RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 21,283 $ 44,666
Short-term investments .............................................. -- 1,032
Accounts receivable, net of allowance for uncollectible
accounts of $1,954 and $2,176, respectively ..................... 10,135 20,179
Unbilled receivables ................................................ 624 4,018
Notes and other receivables ......................................... 2,921 2,354
Prepaid expenses and other .......................................... 723 2,550
--------- ---------
Total current assets ......................................... 35,686 74,799
--------- ---------
EQUIPMENT, at cost:
Equipment ........................................................... 8,746 12,679
Less-- Accumulated depreciation and amortization .................... (4,133) (5,813)
--------- ---------
Equipment, net .................................................. 4,613 6,866
--------- ---------
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net ............................. 1,446 1,525
ACQUIRED SOFTWARE, net of accumulated amortization
of $323 and $643, respectively ...................................... 2,176 4,178
INTANGIBLES, net of accumulated amortization
of $568 and $2,501, respectively .................................... 2,164 15,836
LONG-TERM INVESTMENTS ................................................... -- 1,200
NET ASSETS OF DISCONTINUED OPERATIONS ................................... 3,591 --
OTHER ................................................................... 693 884
--------- ---------
$ 50,369 $ 105,288
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations ..................... $ 83 $ 168
Notes payable ....................................................... 346 10,640
Accounts payable .................................................... 3,157 3,728
Accrued liabilities ................................................. 10,349 26,639
Accrued interest .................................................... 4,571 4,461
Deferred revenue .................................................... 7,798 11,827
Minority interest ................................................... -- 658
--------- ---------
Total current liabilities .................................... 26,304 58,121
NOTES PAYABLE ........................................................... 25,705 13,153
CAPITAL LEASE OBLIGATIONS, less current portion ......................... 154 285
--------- ---------
Total liabilities ............................................ 52,163 71,559
--------- ---------
CONTINGENCIES (Note 13) ................................................. -- --
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par, 20,000 shares authorized,
12,567 and 16,772 shares issued and outstanding, respectively ....... 57 96
Additional paid-in capital .......................................... 57,121 129,564
Deferred compensation ............................................... (703) --
Accumulated deficit ................................................. (58,269) (95,931)
--------- ---------
Total stockholders' equity ................................... (1,794) 33,729
--------- ---------
$ 50,369 $ 105,288
========= =========
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-3
<PAGE> 14
QUADRAMED CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
------------- ------------ ------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
REVENUES:
Licenses ..................................... $ 10,518 $ 34,657 $ 44,372
Services ..................................... 35,703 39,612 55,253
--------- --------- ---------
Total revenues ........................ 46,221 74,269 99,625
--------- --------- ---------
OPERATING EXPENSES:
Cost of licenses ............................. 6,908 14,485 18,467
Cost of services ............................. 24,680 25,261 35,643
General and administration ................... 14,165 21,565 26,260
Sales and marketing .......................... 3,474 7,582 10,009
Research and development ..................... 1,418 5,028 11,024
Amortization of intangibles .................. 102 1,184 1,719
Non-recurring charges ........................ -- -- 7,816
Write-off of acquired research and
development in process ................... 14,840 -- 21,854
--------- --------- ---------
Total operating expenses .............. 65,587 75,105 132,792
--------- --------- ---------
LOSS FROM OPERATIONS ............................. (19,366) (836) (33,167)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income(expense) ..................... (1,886) (2,724) (473)
Other income (expense) ....................... 53 393 683
--------- --------- ---------
Total other income (expense) .......... (1,833) (2,331) 210
--------- --------- ---------
LOSS BEFORE INCOME TAXES
AND MINORITY INTEREST ........................ (21,199) (3,167) (32,957)
PROVISION FOR INCOME TAXES ....................... 172 147 1,136
--------- --------- ---------
LOSS BEFORE MINORITY INTEREST .................... (21,371) (3,314) (34,093)
--------- --------- ---------
MINORITY INTEREST IN LOSS ........................ -- -- 37
INCOME (LOSS) FROM DISCONTINUED OPERATIONS .. .... (2,206) (1,010) 118
--------- --------- ---------
NET LOSS ......................................... $ (23,577) $ (4,324) $ (33,938)
========= ========= =========
BASIC AND DILUTED NET LOSS FROM CONTINUING
OPERATIONS .................................. $ (2.98) $ (0.39) $ (2.57)
========= ========= =========
BASIC AND DILUTED NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS .................................. $ (0.31) $ (0.12) $ 0.01
========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE ............. $ (3.29) $ (0.51) $ (2.56)
========= ========= =========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC AND DILUTED ............................ 7,181 8,476 13,239
========= ========= =========
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-4
<PAGE> 15
QUADRAMED CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Capital contribution ........... -- -- -- -- -- --
Issuance of warrant to purchase
Common stock ............... -- -- -- -- -- --
Issuance of common stock at
$2.50 per Share ............ -- -- -- -- 5 --
Deferred compensation .......... -- -- -- -- -- --
Amortization of deferred
compensation ............... -- -- -- -- -- --
Conversion of notes payable to
related Parties to Series A
preferred stock at $4.79 per
share ...................... 77 1 -- -- -- --
Conversion of notes payable to
related Parties to Series B
preferred stock at $5.25
at $5.25 per share, net of
issuance costs ............. -- -- 892 9 -- --
Net loss ....................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 ... 912 9 892 9 7,182 6
--------- --------- --------- --------- --------- ---------
Issuance of common stock at
$3.75 per Share ............ -- -- -- -- 56 1
Conversion of notes payable to
related parties to Series B
preferred stock
at $5.25 per share, net of
issuance costs ............. -- -- 740 7 -- --
Contributed capital ............ -- -- -- -- -- --
Issuance of warrant to purchase
common stock ............... -- -- -- -- -- --
Amortization of deferred
compensation ............... -- -- -- -- -- --
Issuance of Series A preferred
stock under exchange
agreement .................. 251 -- -- -- -- --
Repurchase of Series B preferred
stock ...................... -- -- (6) -- -- --
Conversion of Series A and B
preferred stock to common
stock ...................... (1,163) (9) (1,626) (16) 2,789 25
Exercise of common stock options -- -- -- -- 40 --
Issuance of common stock from
initial public offering, net
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL DEFERRED ACCUMULATED STOCKHOLDERS'
PAID IN CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
--------------- ------------ ----------- ---------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ..... $ 17,941 $ -- $ (30,368) $ (12,413)

Capital contribution ........... 1,568 -- -- 1,568
Issuance of warrant to purchase
Common stock ............... 57 -- -- 57
Issuance of common stock at
$2.50 per Share ............ 12 -- -- 12
Deferred compensation .......... 440 (440) -- --
Amortization of deferred
compensation ............... 10 -- 10
Conversion of notes payable to
related Parties to Series A
preferred stock at $4.79 per
share ...................... 367 -- -- 368
Conversion of notes payable to
related Parties to Series B
preferred stock at $5.25
at $5.25 per share, net of
issuance costs ............. 4,630 -- -- 4,639
Net loss ....................... -- -- (23,577) (23,577)
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 ... 25,015 (430) (53,945) (29,336)
--------- --------- --------- ---------
Issuance of common stock at
$3.75 per Share ............ 209 -- -- 210
Conversion of notes payable to
related parties to Series B
preferred stock
at $5.25 per share, net of
issuance costs ............. 3,862 -- -- 3,869
Contributed capital ............ 1,246 -- -- 1,246
Issuance of warrant to purchase
common stock ............... 381 (381) -- --
Amortization of deferred
compensation ............... -- 108 -- 108
Issuance of Series A preferred
stock under exchange
agreement .................. -- -- -- --
Repurchase of Series B preferred
stock ...................... (53) -- -- (53)
Conversion of Series A and B
preferred stock to common
stock ...................... -- -- -- --
Exercise of common stock options 100 -- -- 100
Issuance of common stock from
initial public offering, net
</TABLE>
F-5
<PAGE> 16

<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------- ------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
(RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C> <C> <C> <C>
of issuance costs .......... -- -- -- -- 2,500 25
Net loss ....................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 ... -- -- -- -- 12,567 57
--------- --------- --------- --------- --------- ---------
Issuance of common stock in
connection with the Synergy
acquisition ................ -- -- -- -- 182 2
Issuance of common stock in
connection with Healthcare
Revenue Management, Inc.
acquisition ................ -- -- -- -- 113 1
Amortization of deferred
compensation ............... -- -- -- -- -- --
Capital contributed ............ -- -- -- -- -- --
Spin-off of subsidiary ......... -- -- -- -- -- --
Issuance of common stock
purchase warrants in
connection with
the acquisition of Medicus
Systems Corporation ........ -- -- -- -- -- --
Conversion of notes payable to
contributed capital ........ -- -- -- -- -- --
Issuance of common stock through
Employee Stock
Purchase Plan .............. -- -- -- -- 14 --
Exercise of warrants to purchase
common stock ............... -- -- -- -- 322 --
Exercise of common stock options -- -- -- -- 107 1
Issuance of common stock from
public offering,
net of issuance costs ...... -- -- -- -- 3,467 35
Net loss ....................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ..... -- $ -- -- $ -- 16,772 $ 96
========= ========= ========= ========= ========= =========
</TABLE>

TOTAL
ADDITIONAL DEFERRED ACCUMULATED STOCKHOLDERS'
PAID IN CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
--------------- ------------ ----------- ---------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C> <C>
of issuance costs .......... 26,361 -- -- 26,386
Net loss ....................... -- -- (4,324) (4,324)
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 ... 57,121 (703) (58,269) (1,794)
--------- --------- --------- ---------
Issuance of common stock in
connection with the Synergy
acquisition ................ 1,680 -- -- 1,682
Issuance of common stock in
connection with Healthcare
Revenue Management, Inc.
acquisition ................ 2,330 -- -- 2,331
Amortization of deferred
compensation ............... -- 703 -- 703
Issuance of common stock in
connection with the Microport
acquisition ................ 251 -- -- 251
Distributions .................. -- -- (40) (40)
Spin-off of subsidiary ......... -- -- (3,684) (3,684)
Issuance of common stock
purchase warrants in
connection with
the acquisition of Medicus
Systems Corporation ........ 700 -- -- 700
Conversion of notes payable to
contributed capital ........ 9,578 -- -- 9,578
Issuance of common stock through
Employee Stock
Purchase Plan .............. 135 -- -- 135
Exercise of warrants to purchase
common stock ............... -- -- -- --
Exercise of common stock options 476 -- -- 477
Issuance of common stock from
public offering,
net of issuance costs ...... 57,293 -- -- 57,328
Net loss ....................... -- -- (33,938) (33,938)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ..... $ 129,564 $ -- $ (95,931) $ 33,729
========= ========= ========= =========
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-6
<PAGE> 17
QUADRAMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $(23,577) $ (4,324) $(33,938)
Adjustments to reconcile net loss to net
cash used for operating activities --
Depreciation and amortization .......................... 1,542 2,836 5,563
Amortization of deferred compensation .................. 10 108 703
Income (loss) from discontinued operations ............. 2,206 1,010 (118)
Write-off of in-process research and development ....... 14,840 -- 21,854
Minority interest in net loss .......................... -- -- (37)
Cash acquired in the acquisition of
Healthcare Design Systems ................................ 13 -- --
Changes in assets and liabilities, net of acquisitions--
Accounts receivable and unbilled receivables ............. (1,694) (1,876) (4,492)
Prepaid expenses and other ............................... (162) (95) (1,341)
Other assets ............................................. (17) 15 187
Accounts payable and accrued liabilities ................. 50 1,348 5,623
Deferred revenue ......................................... 719 4,092 444
-------- -------- --------
Cash provided by (used for) operating activities ..... (6,070) 3,114 (5,552)
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for the acquisition of Synergy HMC,
net of cash acquired ..................................... -- -- (2,776)
Cash paid for the acquisition of Queen City
Microsystems ............................................. -- -- (160)
Cash paid for the acquisition of Medicus
Systems Corporation, net of cash acquired ................ -- -- (21,454)
Cash paid for the acquisition of Healthcare
Revenue Management, net of cash acquired ................. -- -- (126)
Purchased technology ....................................... -- -- (460)
Purchase of available for sale securities................... -- -- (1,032)
Purchase of long-term investments .......................... -- -- (1,200)
Increase in assets held for distribution ................... (3,636) -- --
Additions to equipment ..................................... (1,340) (3,824) (3,225)
Capitalization of computer software
development costs ...................................... (671) (745) (673)
-------- -------- --------
Cash used for investing activities .................. (5,647) (4,569) (31,106)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on capital lease obligations ......... (104) (177) (140)
Borrowings (repayments) under notes and loans payable ...... 20,476 (21,144) 2,030
Issuance of convertible notes payable to related parties.... -- 3,869 --
Distributions .............................................. -- -- (40)
Contributed capital ........................................ 1,568 1,246 --
Issuance of common stock, net of issuance costs ............ 12 26,596 57,579
Issuance of common stock through Employee
Stock Purchase Plan ........................................ -- -- 135
Proceeds from exercise of common stock options ............. -- 100 477
-------- -------- --------
Cash provided by financing activities ............... 21,952 10,490 60,041
-------- -------- --------
Net increase in cash and cash equivalents .................. 10,235 9,035 23,383

CASH AND CASH EQUIVALENTS, beginning of period ................. 2,013 12,248 21,283
-------- -------- --------

CASH AND CASH EQUIVALENTS, end of period ....................... $ 12,248 $ 21,283 $ 44,666
======== ======== ========
</TABLE>

F-7
<PAGE> 18
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest ................................. $ 154 $ 1,270 $ 1,197

SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS:
Purchase of equipment subject to capital lease ......... 17 128 --
Repurchase of Series B preferred stock in
exchange for extinguishment of shareholder
receivable.......................................... -- 53 --
Conversion of notes payable to related
parties to convertible preferred stock ............. 5,007 3,869 --
Conversion of notes payable and accrued
interest to related parties to contributed capital.. -- -- 9,578
Conversion of convertible preferred stock to
common stock ....................................... -- 25 --
Issuance of common stock in connection with
the Synergy acquisition ............................ -- -- 2,000
Issuance of common stock in connection with
acquisition of Healthcare Revenue Management, Inc... -- -- 2,300
Issuance of common stock warrants in
connection with acquisition of Medicus
Systems Corporation ................................ -- -- 700
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

F-8
<PAGE> 19
QUADRAMED CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

1. THE COMPANY

QuadraMed Corporation (the Company) was incorporated in California in
September 1993. In August 1996, the Company reincorporated in Delaware. The
Company operates in a single industry segment and offers a suite of decision
support, financial management and electronic data interchange (EDI) software
products that are designed to enable health care providers to increase
operational efficiency and measure the cost of care and to facilitate the
negotiation of managed care contracts and capitation agreements. In addition to
its software products, the Company provides business office outsourcing and cash
flow management services.

The Company is subject to a number of risks, including, but not limited to,
its dependence on the hospital market, uncertainty in the health care industry,
risks associated with acquisitions (successful integration and operation of new
products, technologies or businesses), and its ability to increase market share
for its products from larger competitors. There can be no assurance that the
Company will successfully integrate acquired subsidiaries or be able to increase
market share for its products from larger competitors.

2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.

Cash and Cash Equivalents

For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. These investments have consisted of certificates of
deposit, money market accounts and commercial maturities of three months or
less.

Short and Long-Term Investments

The Company accounts for short term investments in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Instruments." The Company considers its short and
long term securities to be available-for-sale-securities and accordingly are
stated at fair value. The difference between amortized cost (cost adjusted for
amortization of premiums and accretion of discounts which are recognized as
adjustments to interest income) and fair value representing unrealized holdings
gains or losses are recorded as a separate component of stockholders' equity
until realized. The Company's policy is to record debt securities as
available-for-sale because the sale of such securities may be required prior to
maturity. Any gains and losses on the sale of debt securities are determined on
a specific identification basis. Realized gains and losses are included in
interest income (expense) in the accompanying statement of operations. There
were no short or long term investments during 1996. At December 31, 1997, the
fair value of the investments approximated amortized cost and, as such, gross
unrealized holding gains and losses were not material. The amortized cost,
aggregate fair value and gross unrealized holding gains and losses by major
security type were as follows:

<TABLE>
<CAPTION>
AGGREGATE
FAIR VALUE
--------------
(IN THOUSANDS)
<S> <C>
Debt securities issued by
the United States Government $ 408
Corporate debt securities 624
------
$1,032
======
</TABLE>

F-9
<PAGE> 20
Long-Term Investments

In July 1997, the Company acquired an 11 percent equity interest in
VantageMed Corporation ("VantageMed"), a company that develops and sells
software to physician groups. The Company paid $1,200,000 for its equity
interest in VantageMed which is accounted for on the cost method. In addition,
the Company has provided VantageMed a revolving line of credit in the amount of
$500,000. The line of credit bears interest at a rate of 8% per annum and all
outstanding balances, including accrued interest, is due on December 31, 1998.
There were no outstanding borrowings at December 31, 1997. VantageMed borrowed
$500,000 against the line of credit subsequent to December 31, 1997.

Equipment

Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets which
is generally three to seven years. Maintenance and repairs are expensed as
incurred.

Software Development Costs

Under the provisions of SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," software development costs
are capitalized upon the establishment of technological feasibility, which the
Company defines as establishment of a working model which is typically the beta
version of the software. Capitalized software development costs require a
continuing assessment of their recoverability. This assessment requires
considerable judgment by management with respect to various factors, including,
but not limited to, anticipated future gross product revenues, estimated
economic lives and changes in software and hardware technology. The Company
capitalized software development costs of $599,000, including $72,000 which was
acquired from Healthcare Design Systems, $745,000 and $673,000 in 1995, 1996 and
1997, respectively. Amortization of capitalized software development costs was
$47,000, $32,000 and $155,000 for the years ended December 31, 1995, 1996 and
1997, respectively. Amortization is based upon the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product or
(b) the straight-line method over the remaining estimated economic life of the
product, generally five years.

Revenue Recognition

The Company licenses a variety of products and provides a variety of
services. License revenue includes license, installation, consulting and
post-contract customer support fees, third-party hardware sales and other
revenues related to licensing of the Company's software products. Service
revenue is composed of business office and health information management
outsourcing, cash flow management, compliance and consulting services. The
product suite is comprised of three primary elements: financial management,
decision support compliance and EDI software. Each of these elements includes a
variety of products which can be licensed individually or as a suite of
interrelated products. Products are licensed either under term arrangements
(which range from one year to three years and typically include monthly or
annual payments over the term of the arrangement) or on a perpetual basis.

Revenues from term licenses of financial management, decision support,
compliance and EDI products are recognized monthly or annually over the term of
the license arrangement, beginning at the date of installation. Revenues from
perpetual licenses of decision support, financial management, EDI and certain
compliance products are recognized upon shipment of the software if there is
persuasive evidence of an agreement, collection of the resulting receivable is
probable and the fee is fixed and determinable. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. Revenues from certain compliance products
are recognized on a percentage of completion basis of accounting as determined
by the achievement of certain performance milestones during the product
installation process.

The Company provides business office and health information management
outsourcing, cash flow management compliance and consulting services to certain
hospitals under contract service arrangements. Outsourcing revenues typically
consist of fixed monthly fees plus, in the case of business office outsourcing,
incentive-based payments that are based on a percentage of dollars recovered for
the provider for which the service is being performed. The monthly fees are
recognized as revenue on a monthly basis at the end of each month. Incentive
fees are recognized as the conditions upon which such fees are based are
realized based on collection of accounts from payors. Cash flow management
services typically consist of fixed fee services and additional incentive
payments based on a certain percentage of revenue returns realized by the
customer as a result of the services provided by the Company. The fixed fee

F-10
<PAGE> 21
portion is recognized as revenue upon the completion of the project with the
customer. Compliance and consulting revenues are recognized as the services are
provided.

Other services are also provided to certain of the Company's licensees of
software products. These services consist primarily of consulting and
post-contract customer support. Consulting services generally consist of
installation of software at customer sites and revenue is recognized upon
completion of installation. Unbilled receivables consist of work performed or
software delivered which has not been billed under the terms of the contractual
arrangement with the customer. Post-contract customer support is recognized
ratably over the term of the support period. Deferred revenue primarily consists
of revenue deferred under annual maintenance and annual license agreements on
which amounts have been received from customers and for which the earnings
process has not been completed.

Cost of license revenues consists primarily of salaries, benefits, hardware
costs and allocated costs related to the installation process and customer
support and royalties to third parties.

Cost of service revenues consists primarily of salaries, benefits and
allocated costs related to providing such services.

Major Customers

In the years ended December 31, 1995, 1996 and 1997, no customers accounted
for greater than 10% of total revenue.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company does not require collateral on trade accounts receivable as the
Company's customer base consists primarily of hospitals and, to a lesser extent,
hospital associations, physician groups, medical payors and self-administered
employers. The Company provides reserves for credit losses.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, short and long-term investments, accounts receivable and
accounts payable, approximate their fair values.

Intangibles

Intangibles include goodwill, which represents the amount of purchase price
in excess of the fair value of the tangible net assets, and software purchased
in acquisitions completed by the Company and are amortized on a straight-line
basis over a period of five to ten years. Goodwill is evaluated annually for
impairment and written down to net realizable value if necessary. No impairment
has been recorded to date. Intangible assets also include acquired customer
lists, tradenames and assembled work forces which are amortized on a
straight-line basis over a period of five to ten years.

Intangible assets include the following at December 31 (in thousands):

<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Customer lists $ 2,732 $ 16,621
Goodwill -- 241
Work force and trade names -- 1,475
------- --------
2,732 18,337
Less: Accumulated amortization (568) (2,501)
------- --------
$ 2,164 $ 15,836
======= ========
</TABLE>

Net Loss Per Share

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share", which was adopted by the Company in the quarter ended
December 31, 1997, and in accordance with this standard all prior periods
presented have been restated to conform to its provisions. Under the new
requirements for

F-11
<PAGE> 22
calculating earnings per share, basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed using the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of stock options and warrants (using
the treasury stock method). Common equivalent shares are excluded from the
dilutive computation only if their effect is anti-dilutive. As the Company
recorded a net loss in each of three years in the period ended December 31,
1997, no common equivalent shares are included in diluted weighted average
common shares outstanding.

Non-Recurring Charges

During 1997, the Company incurred certain non-recurring charges. In February
1997, the Company entered into an arrangement to provide EDI processing and
management services to EDI USA, Inc. In connection with this claims processing
arrangement, and the termination thereof in December 1997, the Company recorded
a charge of $2,492,000. During the fourth quarter ended December 31, 1997, the
Company completed two acquisitions which were accounted for as a pooling of
interests. In connection with these acquisitions, the Company incurred
$3,111,000 in acquisition and related costs which have been recorded as
non-recurring charges. As a result of completed acquisitions during 1997, the
Company recorded certain charges to write-off assets which were determined to
have no future realizable value.

Use of Estimates in Preparation of Financial Statements

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

Recent Pronouncements

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and displaying comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements and is effective for fiscal years beginning after December 15, 1997.
The adoption of this statement will not have a material impact on the Company's
results of operations or financial position.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for reporting selected segment information
quarterly and to report entity-wide disclosures about products and services,
geographic areas and major customers. This statement is effective for fiscal
years beginning after December 15, 1997. The adoption of this statement will not
have a material impact on the Company's results of operations or financial
position.

3. LINE OF CREDIT

In January 1996, the Company arranged a line of credit agreement with a
bank. Borrowings were limited to the lesser of 80% of eligible borrowing base
(accounts receivable) or $1,200,000. There were no outstanding borrowings under
the line of credit at December 31, 1996. In addition, warrants were issued to
the bank for the purchase of $50,000 worth of Common Stock at $5.25 per share.
The line of credit expired in January 1997.

In July 1997, the Company entered into an unsecured line of credit
arrangement with a bank to borrow up to $5,000,000 at the bank's prime rate. The
line of credit expires in July 1998 and contains certain financial and other
covenants, including, but not limited to, maintaining a minimum quick ratio,
tangible net worth and total liabilities to tangible net worth. The Company was
not in compliance with certain of these financial covenants at December 31,
1997; however, the Company received a waiver from the bank for noncompliance
with such covenants. There were no borrowings against the line of credit at
December 31, 1997. The line of credit expired in July 1998, but was extended
until September 1998, at which time it expired.

In connection with the acquisition of a majority interest in Medicus Systems
Corporation ("Medicus") acquisition in November 1997 (see Note 12), the Company
assumed a line of credit arrangement Medicus had entered into with a bank to
borrow up to a

F-12
<PAGE> 23
maximum of $2,500,000. The line of credit bears interest at the bank's prime
rate and provides the bank with a first security interest in all assets of
Medicus. There were no borrowings against the line of credit at December 31,
1997. In January 1998, the Company terminated the line of credit arrangement
with the bank.

4. NOTES PAYABLE

The Company's notes payable consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
-------- --------
<S> <C> <C>
Notes payable, bearing interest at 10.75
percent, due in 2004, converted to
contributed capital in 1997 ..................................... $ 5,000 $ --
Junior promissory note, bearing interest
at 11.75 percent, due in 2004, converted
to contributed capital in 1997 .................................. 3,700 --
Notes payable to Director and Stockholder of
Medicus Systems Corporation, unsecured, bearing
interest at 5 percent, due January 5, 1998
Repaid in full in January 1998 .................................. -- 1,620
Notes payable to Stockholder of
Integrated Medical Networks, Inc., bearing
interest at 7.875% percent, due January 4, 2000 ................. 6,463 12,671
Convertible subordinated notes, bearing interest at 10
percent, converted to shares of common stock in 1998 ............ 10,000 8,000
Subordinated notes, bearing interest at 15
percent, due and repaid in full in June 1998 .................... -- 750
Miscellaneous notes payable ..................................... 888 752
-------- --------
26,051 23,793
-------- --------
Less: Current portion .................................. (346) (10,640)
-------- --------
$ 25,705 $ 13,153
======== ========
</TABLE>

During 1997, Rothenberg Health Systems, Inc. (see Note 12) converted both
the promissory($5,000,000) and junior promissory($3,700,000) notes aggregating
$8,700,000, along with accrued interest of $878,000 to contributed capital.

During 1998, Pyramid Health Group, Inc. (see Note 12) converted the
subordinated notes ($8,000,000) to common stock in connection with the
acquisition by the Company. Accrued interest in the accompanying consolidated
balance sheet was repaid during 1998.

5. CAPITAL AND OPERATING LEASE OBLIGATIONS

The Company leases its headquarters and certain other facilities under
operating leases and a portion of its equipment under capital lease
arrangements. The minimum future lease payments required under the Company's
capital and operating leases at December 31, 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998 .................................................. $ 202 $ 4,084
1999 .................................................. 158 3,676
2000 .................................................. 137 3,170
2001 .................................................. 44 2,059
2002 .................................................. 3 1,106
Thereafter ............................................ -- 2,301
------- -------
Total minimum payments ........................ 544 $16,396
=======
Interest on capital lease obligations at a
rate of 8.5 percent ................................... (91)
-------
Net minimum principal payments ........................ 453
Current maturities .................................... (168)
-------
$ 285
=======
</TABLE>

F-13
<PAGE> 24
Rental expense was approximately $2,239,000, $2,645,000 and $3,245,000 for
fiscal 1995, 1996 and 1997, respectively.

6. BRIDGE FINANCING

In January 1996, the Company entered into a bridge loan agreement with
certain preferred stockholders of the Company (the "Bridge Investors"), pursuant
to which such Bridge Investors loaned an aggregate of $3,869,160 to the Company.
In addition, the Bridge Investors were issued warrants to purchase an aggregate
of 957,376 shares of Common Stock at a purchase price of $3.75 per share. The
warrants were partially exercised through a cashless exercise into 240,960
shares of Common Stock during 1997. The remaining warrants expire on January 31,
2001. In June 1996, the notes issued in connection with the Bridge Loan
Agreement were converted into an aggregate of 734,000 shares of Series B
Preferred Stock. The 250,653 shares of the Company's Series A Preferred Stock
issuable under the exchange agreement discussed in Note 7 were issued at the
time of the conversion of notes into Series B Preferred Stock. The proceeds from
the Bridge Financing were used to pay down a portion of the amounts payable to
the sellers of Healthcare Design Systems, which was acquired by the Company in
December 1995.

7. CONVERTIBLE PREFERRED STOCK

Upon the Company's initial public offering in 1996, all outstanding shares
of Convertible Preferred Stock were converted into Common Stock.

In 1995, 76,805 shares of Series A Preferred Stock were issued at $4.79 for
conversion of notes payable and accrued interest of $367,703 and 891,519 shares
of Series B Preferred Stock were issued at $5.25 per share for cash of
$3,959,450, net of issuance costs and conversion of notes payable and accrued
interest of $680,475.

In June 1996, 6,400 shares of Series B Preferred Stock were returned to the
Company in exchange for the extinguishment of a shareholder receivable for
approximately $53,000.

Exchange Agreements

As part of its original capitalization, the Company entered into an
agreement with its original three investors, whereby the original investors had
the right to exchange the investors' Common Stock of THCS Holding, Inc. for
250,653 shares of the Company's Series A Preferred Stock. As of December 31,
1996, all such shares have been issued under this right.

Warrants

In connection with a bridge financing in 1994, the Company issued warrants
to purchase 16,000 shares of Series A Preferred Stock at $4.79 per share. These
warrants were partially exercised through a cashless exercise into 5,313 shares
of Common Stock during 1997. The remaining warrants expire on September 29,
1999. The value of the warrants at the date of issuance was nominal; therefore,
no value was assigned to the warrants for accounting purposes.

In connection with the acquisition of a majority interest in Medicus in
November 1997, the Company assumed notes payable to a former officer and current
director of Medicus aggregating $2,000,000. The notes were repaid in full by the
Company in December 1997. In addition, upon the acquisition of the remaining
minority interest in Medicus, a warrant issued to this Medicus director will be
cancelled in exchange for securities of the Company with an aggregate value of
$1,200,000.

In addition, Medicus issued a warrant to purchase 100,000 shares of common
stock to an unaffiliated entity at $7.80 per share. The warrant is exercisable
anytime prior to March 1999. In connection with the acquisition of the remaining
minority interest in Medicus, the Company will assume and convert such warrant
into a warrant based on the conversion rate as set forth in the Merger Agreement
with Medicus.

8. COMMON STOCK

F-14
<PAGE> 25
In September 1994, the Company entered into consulting arrangements with
two individuals pursuant to which each individual was issued warrants to
purchase 17,000 shares of Common Stock at a purchase price of $4.79 per share.
These warrants were exercised through a cashless exercise to purchase an
aggregate of 25,554 shares of Common Stock during 1997.

In October 1995, the Company entered into a joint development arrangement
with another software company pursuant to which the Company issued a warrant to
purchase 28,560 shares of Common Stock at a purchase price of $5.25 per share.
The warrant was partially exercised through a cashless exercise into 18,984
shares of Common Stock during 1997. The remaining warrants expire on June 25,
2001.

In December 1995, the Company issued a warrant to KTU, an affiliate of the
Company's Chief Executive Officer, to purchase up to 134,574 shares of Common
Stock at an exercise price of $3.75 per share. In June 1996, the Company's Chief
Executive Officer transferred the warrant to Trigon Resources Corporation, a
corporation owned by him and his children.

In September 1995 and June 1996, the Company issued warrants to its Chief
Executive Officer to purchase up to 355,600 shares of Common Stock at $3.75 per
share. In connection with the warrant issued in June 1996, the Company recorded
deferred compensation for $381,000, representing the intrinsic value of the
warrant at the date of issuance which would be amortized over the vesting
period. The Company recorded compensation expense of $45,000 and $336,000 for
the years ended December 31, 1996 and 1997, respectively, as a result of the
vesting of the warrants. As of December 31, 1997, these warrants were fully
exercisable.

In connection with the acquisition of Rothenberg Health Systems, Inc. by
Resource Health Partners, L.P. ("RHP") in November 1995 (see Note 12), RHP
granted Class C limited partnership units in RHP to certain officers and
employees of Rothenberg Health Systems, Inc. These units, which were valued at
$440,000, vest over a period of seven years. The related agreements also contain
provisions for accelerated vesting should there be a sale of all or
substantially all of the assets of Rothenberg Health Systems, Inc. With respect
to shares granted to employees who were not shareholders of Rothenberg Health
Systems, Inc. at the date of the acquisition, the Company recorded deferred
compensation expense as a component of stockholders' equity, which was being
amortized ratably over the seven year vesting period. In connection with the
acquisition of Rothenberg Health Systems, Inc., the Company amortized the
remaining deferred compensation during 1997.

In connection with the acquisition of the net assets of Healthcare Design
Systems, the Company issued rights to two former Healthcare Design Systems
employees as part of their employment agreement with the Company whereby these
employees were granted the right to purchase 73,333 shares of common stock at
$3.75 per share. Rights to purchase 55,786 shares were exercised in 1996. The
right to purchase the remaining 17,547 shares has expired.

In June 1996, the Company effected a l-for-25 reverse stock split. In
October 1996, the Company effected a change in the authorized number of Common
and Preferred shares, respectively. The authorized number of Common shares
increased from 1,162,000 to 20,000,000. The authorized number of Preferred
shares increased from 2,795,467 to 5,000,000. The accompanying financial
statements have been restated to reflect this increase in authorized shares and
the reverse stock split.

In October 1996, the Company completed its initial public offering of
2,500,000 shares of its common stock, which raised $26,386,000, net of offering
costs and the underwriters discount of $3,614,000.

In October 1997, the Company completed a follow-on offering of 3,300,000
shares of common stock, of which 2,972,198 shares were offered by the Company
and 327,802 shares were offered by selling stockholders. In addition, the
underwriters exercised an over-allotment option to purchase an additional
495,000 shares. Total proceeds to the Company were $57,328,000 net of offering
costs and the underwriters' discount of $4,083,000.

9. STOCK OPTION AND PURCHASE PLANS

Stock Option Plan

1986 Stock Option Plan

Under the Pyramid Health Group, Inc. ("Pyramid") 1986 Employee Stock Plan
("the 1986 Plan"), options could be granted to key employees, directors and
consultants. The 1986 Plan provided for the issuance of Nonqualified Stock
Options only. A total of 285,419 shares were reserved for issuance pursuant to
the 1986 Plan. The options, option prices, dates of grant and number of shares
granted were determined by the Board of Directors, although options could not
be granted at prices less than 85 percent of the fair market value of the
Company's common stock. Options vested 26 percent at the first year anniversary
of the date of grant and 2% each month thereafter. Options under the 1986 Plan
expire five years from the date of grant. The 1986 Plan was terminated on March
31, 1997.

1997 Stock Option Plan

In 1997, Pyramid adopted the 1997 Stock Option Plan ("the 1997 Plan")
whereby options may be granted to employees, directors and consultants. The
1997 Plan is administered by the Board of Directors or a committee thereof. The
1997 Plan provides for the issuance of incentive stock options to employees and
nonqualified stock options to employees and consultants. A total of 325,228
shares have been reserved for issuance under the 1997 Plan. The 1997 Plan
expires on March 31, 2007, unless terminated earlier by the Board of Directors.
The exercise price of all incentive stock options granted to employees who
would be 10 percent shareholders in the Company must not be less than 110
percent of the fair market value of the shares on the grant date. If granted to
any other employee, the exercise price of the incentive stock options must not
be less than the fair market value of the shares on the grant date. The
exercise price for nonqualified stock options to a person who is a 10 percent
shareholder of the Company must not be less than 110 percent of the fair market
value of the stock on the date of grant. The exercise price for nonqualified
stock options to any other person must not be less than 85 percent of the fair
market value of the shares on the date of grant. The options are generally
granted for a ten-year term. Options vest 20 percent at the first anniversary
of the date of grant and 1.67 percent each month thereafter. No shares were
exercisable under the 1997 Plan at December 31, 1997. There were 308,362 shares
available for grant under the 1997 Plan at December 31, 1997.

Under the Company's 1994 Stock Option Plan and its successor plan, the 1996
Stock Incentive Plan, which became effective in October 1996 (collectively, the
"Option Plan"), the Board of Directors may grant incentive and nonqualified
stock options to employees, directors and consultants. The exercise price per
share for an incentive stock option cannot be less than the fair market value on
the date of grant. The exercise price per share for a nonqualified stock option
cannot be less than 85% of the fair market

F-15
<PAGE> 26

value on the date of grant. Option grants under the Option Plan generally expire
ten years from the date of grant and generally vest over a four-year period.
Options granted under the Option Plan are exercisable subject to the vesting
schedule. As of December 31, 1997, a total of 2,136,759 shares of Common Stock
have been authorized by the Company's stockholders for grant under the Option
plan.

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan. Accordingly, no compensation cost has been
recognized for its Option Plan. Had compensation cost for the Company's Option
Plan been determined based on the fair value at the grant dates for the awards
calculated in accordance with the method prescribed by SFAS No. 123, the
Company's net loss and net loss per share would have been the pro forma amounts
indicated below (in thousands, except per share amounts):

<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(RESTATED -- (RESTATED -- (RESTATED --
NOTE 12) NOTE 12) NOTE 12)
<S> <C> <C> <C> <C>
Net loss ...................... As reported $ (23,577) $ (4,324) $ (33,938)
Pro forma $ (23,640) $ (4,904) $ (35,693)
Basic and diluted net loss
per share ................... As reported $ (3.29) $ (0.51) $ (2.56)
Pro forma $ (3.29) $ (0.58) $ (2.70)
</TABLE>

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions as
of December 31, 1996 and 1997:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Expected dividend yield ................ 0.00% 0.00%
Expected stock price volatility ........ 79.00% 73.00%
Risk-free interest rate ................ 6.0%-6.8% 5.50%-5.54%
Expected life of options ............... 4.5 years 4.5 years
</TABLE>

The weighted average fair value of options granted during 1995, 1996, and
1997 was $3.75, $8.41 and $13.14 per share, respectively. Option activity under
the option plan is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------
WEIGHTED
AVAILABLE AVERAGE
FOR NUMBER OF EXERCISE
GRANT SHARES PRICE
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Balance, December 31, 1994 ........ 34 237 $ 2.13
Authorized .................... 328 -- --
Granted ....................... (353) 532 3.75
Canceled ...................... 106 (115) 3.01
------ ------ ------
Balance, December 31, 1995 ........ 115 654 2.88
Authorized .................... 830 -- --
Granted ....................... (247) 415 8.41
Exercised ..................... -- (63) 2.13
Canceled ...................... 39 (103) 3.80
------ ------ ------
Balance, December 31, 1996 ........ 737 903 9.88
Authorized .................... 767 -- --
Granted ....................... (1,523) 1,577 13.14
Exercised ..................... -- (115) 3.87
Canceled ...................... 251 (365) 11.22
------ ------ ------
Balance, December 31, 1997 ........ 232 2,000 $10.70
====== ====== ======
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF REMAINING EXERCISE AS OF EXERCISE
EXERCISE PRICES 12/31/97 CONTRACTUAL LIFE PRICE 12/31/97 PRICE
--------------- ----------- ---------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.11 - $ 2.50 107,204 6.89 $ 0.51 80,854 $ 0.16
$3.75 218,479 5.54 $ 3.75 98,018 $ 3.75
$3.76 - $ 8.30 175,326 6.99 $ 7.08 54,874 $ 6.47
</TABLE>

F-16
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C>
$9.13 405,773 7.56 $ 9.13 -- --
$9.63 196,615 8.07 $ 9.63 -- --
$11.50 350,000 7.72 $ 11.50 -- --
$12.00 - $17.19 225,622 9.10 $ 15.19 158,020 $ 15.18
$17.54 -.$18.60 204,063 8.22 $ 18.12 180,337 $ 18.14
$19.14 - $26.26 108,008 7.77 $ 20.73 80,726 $ 20.90
$ 33.37 8,910 6.81 $ 33.37 8,910 $ 33.37
--------------- -------- ---- ------- ------- -------
$ 0.11 - $33.37 2,000,000 7.58 $ 10.70 661,739 $ 12.68
=============== ========= ==== ======= ======= =======
</TABLE>

Stock Purchase Plan

The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Company's Board of Directors in June 1996. A total of 200,000 shares of
Common Stock has been reserved for issuance under the Purchase Plan. The
Purchase Plan will enable eligible employees to designate up to 10% of their
compensation for the purchase of stock. The purchase price is 85% of the lower
of the fair market value of the Company's Common Stock on the first day or the
last day of each six-month purchase period. During the year ended December 31,
1997, 13,580 shares of common stock were issued under the plan for an aggregate
purchase price of $135,000.

10. RELATED PARTY TRANSACTIONS

The Company, through the acquisition of Rothenberg Health Systems, Inc.,
assumed a long-term agreement expiring in 2010 to provide management services to
Physical Therapy Provider Network, Inc. ("PTPN"), an affiliated entity. Under
the terms of the agreement, the Company provides PTPN with management services,
employees and facilities and incurs other operating costs on behalf of PTPN. All
employee, facility and other operating costs are directly reimbursed by PTPN.
The Company also receives a 50 percent share of PTPN's net income before taxes,
which is shown in other income (expense) in the statement of operations. Direct
costs incurred by the Company and reimbursed by PTPN were $132,000, $879,000 and
$965,000 in 1995, 1996 and 1997, respectively.

11. EMPLOYEE BENEFIT PLAN

The Company maintains a 401(k) Savings Plan (the "Plan"). All eligible
employees can participate in the Plan. Under the terms of the Plan, employees
may elect to contribute 1% to 15% of their pre-tax compensation to the Plan.
Employee contributions are 100% vested at all times. The Company may make
discretionary contributions to the Plan, which vest annually over a four-year
vesting period. There were no contributions made to the Plan in 1995 and 1996
and $72,000 was contributed by the Company in 1997.

In connection with the acquisition of Rothenberg Health Systems, Inc. in
December 1997, the Company assumed Rothenberg's 401(k) Savings Plan (the
"Rothenberg Plan"). Pursuant to the Rothenberg Plan, employees may elect to
defer up to 10 percent of their pre-tax compensation to the Plan. The Company
may make matching contributions up to 25 percent of the employees' contribution.
For the years ended December 31, 1995, 1996 and 1997, the Company made
contributions of $8,000, $36,000 and $72,000, respectively. Employees vest in
company contributions based on their years of service. Partial vesting begins
after two years of continuous employment. In addition, the Company, at its
discretion, contributes amounts to a profit sharing pool. These amounts are
allocated to the accounts of eligible employees principally based on the
proportion that each eligible employee's compensation bears to the total
compensation of all eligible employees. The contribution is determined yearly by
the Board of Directors of Rothenberg based on its performance and profitability.
The Company accrued contributions to the profit sharing pool of $18,000, $75,000
and $126,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Twenty percent of the amount allocated to an employee for a given year vests
immediately if the employee has two years of service with the Company or, if the
employee does not have two years of service, after two years of service with the
Company. The remaining amount allocated vests at a rate of 20 percent for each
additional year so that the Company's contributions are fully vested four years
after the date of vesting of the first 20 percent. Notwithstanding the
foregoing, the Company's contributions immediately vest when the employee
reaches age 65 or upon the death or permanent disability of the employee while
employed. The Company plans to transition the Rothenberg Plan into the Company's
Plan during 1998.

As a result of the acquisition of 56.7 percent of Medicus Systems
Corporation in November 1997, eligible employees of that Company may participate
in Medicus's 401(k) Savings Plan (the "Medicus Plan"). The Medicus Plan has
substantially the same terms and conditions as the Company's Plan. The Company
plans to transition the Medicus Plan into the Company's Plan during 1998
subsequent to the closing of the planned merger with Medicus.

F-17
<PAGE> 28
12. ACQUISITIONS

In December 1995, the Company acquired the net assets of Healthcare Design
Systems for a purchase price of approximately $8,750,000, which was comprised of
$3,750,000 in cash and a note payable of $5,000,000. The note bore interest at a
prime rate established by Bank of America. The note and accrued interest were
repaid in full in October 1996.

In connection with the Healthcare Design Systems acquisition, which was
accounted for as a purchase, the Company allocated the purchase price based upon
the estimated fair value of the assets acquired and liabilities assumed.
Intangible assets acquired aggregated $10,200,000, of which $1,900,000,
$2,100,000 and $6,200,000 were assigned to acquired software, customer lists and
acquired in-process research and development, respectively. Because there was no
assurance that the Company would be able to successfully complete the
development and integration of the acquired in-process research and development
or that it had alternative future use at the acquisition date, the acquired
in-process research and development was written off as an expense by the Company
in its quarter ended December 31, 1995. Net tangible liabilities assumed in the
acquisition totaled approximately $1,300,000. No fair value adjustments to net
tangible and intangible assets and liabilities were recorded in the purchase
accounting outside of the appraised intangible assets listed above.

The components of the acquired in-process research and development and
acquired software capitalized by product group were as follows (expressed as a
percentage of the amounts recorded in the purchase accounting for such items):

<TABLE>
<CAPTION>
ACQUIRED
IN-PROCESS
ACQUIRED RESEARCH
SOFTWARE AND
CAPITALIZED DEVELOPMENT
----------- -----------
<S> <C> <C>
Financial Management Products ......... 45% 71%
Decision Support Products ............. 49% 23%
Service Products ...................... 6% 6%
----- -----
100% 100%
===== =====
</TABLE>

The unaudited pro forma results of operations for the year ended December
1995 are as follows as adjusted for pooling transactions below (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Revenues.................................... $ 52,604
Net loss.................................... $ (24,939)
Basic and diluted net loss per share........ $ (3.47)
</TABLE>

Prior to the acquisition, Healthcare Design Systems acted as a distributor
of certain of QuadraMed's products. Sales by Healthcare Design Systems were
approximately $60,000 in fiscal year 1995.

In December 1996, the Company acquired all of the outstanding capital stock
of InterMed Healthcare Systems Inc. ("InterMed") for 291,079 shares of Common
Stock and options to purchase 25,208 shares of Common Stock. The acquisition was
accounted for as a pooling of interests. The accompanying consolidated financial
statements have been restated to reflect the acquisition of InterMed on a
pooling of interests basis. Upon the closing of the acquisition, the assets and
liabilities of InterMed were recorded at net book value and consisted primarily
of accounts receivable, fixed assets and capitalized software development costs.
Liabilities assumed consisted of vendor payables and two loans payable. The
outstanding balances on the loans payable of $1,100,000 were repaid by the
Company in December 1996.

In April 1997, the Company acquired Healthcare Recovery, Inc., a successor
in interest to the Synergy Companies doing business as Synergy HMC. The
aggregate purchase price was $3,400,000, consisting of $1,400,000 in cash and
181,855 shares of Common Stock (the aggregate fair market value of which was
$2,000,000). The Company also repaid $1,700,000 in indebtedness of Synergy HMC.
In connection with the acquisition, the Company recorded $4,900,000 of
intangibles, which primarily included customer lists that are being amortized
ratably over a ten year period.

F-18
<PAGE> 29
In July 1997, the Company purchased certain assets, including the customer
list, of Queen City Microsystems, Inc. for an aggregate amount of $500,000,
consisting of $200,000 in cash and $300,000 in notes payable. The notes were
repaid in February 1998 (See Note 4).

In September 1997, the Company completed the acquisition of Healthcare
Revenue Management, Inc. ("HRM") for consideration consisting of 112,706 shares
of Common Stock (the aggregate fair market value of which was $2,300,000) and
$200,000 in cash. The acquisition was accounted for as a purchase. Additionally,
an intangible for customer lists was recorded in the amount of $3,100,000 and
will be amortized ratably over a ten year period.

In November 1997, Pyramid acquired all the outstanding capital stock of
Microport Applications, Inc. ("Microport") in exchange for shares of common
stock. The acquisition was accounted for as a purchase.

In November 1997, the Company acquired 3,111,105 shares of Common Stock of
Medicus Systems Corporation ("Medicus") or 56.7 percent of the then issued and
outstanding shares of Medicus Common Stock from certain selling stockholders.
Pursuant to individual stock purchase agreements (the "Stock Purchase
Agreements"), the Company agreed to pay the selling stockholders $7.50 per
share, in cash and a note payable, together with a warrant ("Warrant") entitling
the selling stockholders to acquire 0.3125 shares of QuadraMed Common Stock for
each share of Medicus Common Stock sold at a price of $24 per share subject to
adjustments and certain limitations. The consideration paid by the Company to
selling stockholders in November 1997 was approximately $21,700,000 in cash and
a note payable for approximately $1,600,000 to a selling stockholder which was
due and repaid by the Company in January 1998 (See Note 4), plus Warrants to
purchase an aggregate of 972,220 shares of QuadraMed Common Stock at $24 per
share.

In conjunction with the Stock Purchase Agreements discussed above, the
Company entered into an Agreement and Plan of Reorganization in November 1997
(the "Merger Agreement"), by and among the Company and Medicus to purchase the
remaining 43.3 percent of outstanding Common Stock held by Medicus stockholders.
The consummation of the merger between both companies will result in the
extinguishment and conversion of all the outstanding shares of Common Stock of
Medicus into the right to receive any of (i) a cash payment of $7.50 per share
of Medicus Common Stock, (ii) .3125 shares of Common Stock of QuadraMed for each
share of Medicus Common Stock, subject to adjustment and certain limitations as
provided in the Merger Agreement, or (iii) a combination of cash and QuadraMed
Common Stock.

The Company previously reported the acquisition of a majority interest in
Medicus and the execution of the Merger Agreement as an acquisition of 100% of
Medicus in November 1997. The Company subsequently revised its accounting for
the transaction to reflect the acquisition of Medicus as a step acquisition,
with purchase accounting applied only to the 56.7 percent majority interest
acquired during 1997. Accordingly, the accompanying financial statements have
been restated to reflect this change. The net loss and loss per share, as
previously reported, were $42.5 million and $4.91, respectively, for the year
ended December 31, 1997, in comparison with a restated net loss of $25.6 million
and $2.96 loss per share, respectively.

The Company's purchase price for the 56.7 percent interest in Medicus which
it acquired was approximately $26.3 million, which was comprised of a cash
payment of $21.7 million, the issuance of a note payable for approximately $1.6
million to one selling stockholder, the value of warrants issued to the selling
stockholders of $700,000, and transaction costs of $2.3 million. In connection
with the acquisition, which was accounted for as a purchase, the Company
allocated the purchase price based upon the estimated fair value of the
Company's proportionate share of the assets acquired and liabilities assumed.
Intangible assets acquired aggregated to $30.2 million, of which $1.7 million,
$6.7 million and $21.8 million were assigned to acquired software, acquired
intangible assets, and acquired research and development in-process,
respectively. Because there was no assurance that the Company would be able to
successfully complete the development and integration of the acquired research
and development in-process or that it had alternative future use at the
acquisition date, the acquired research and development in-process was charged
to expense by the Company in the year ended December 31, 1997. The Company's
proportionate share of net tangible liabilities assumed in the acquisition
totaled approximately $12.8 million.

Minority interest as of December 31, 1997 of $658,000 represents the
remaining 43.3 percent interest in the net assets and liabilities of Medicus
attributable to the minority stockholders. The Company completed the merger with
Medicus in the second quarter of 1998. Accordingly, the minority interest is
classified as a current liability in the accompanying consolidated balance
sheet.

In December 1997, the Company acquired all of the outstanding capital stock
of Fleming SoftLink Systems, Inc. ("SoftLink") in exchange for 110,857 shares of
Common Stock, of which 11,086 shares of Common Stock have been placed into
escrow for a period

F-19
<PAGE> 30
of one year under the terms and conditions of the acquisition agreement. The
acquisition was accounted for as a pooling of interests. Upon closing of
acquisition, the assets and liabilities of SoftLink were recorded at net book
value and consisted primarily of accounts receivable, accrued liabilities and,
to a lesser extent, deferred revenue. The accompanying consolidated financial
statements have been restated to reflect the acquisition of SoftLink on a
pooling of interests basis.

In December 1997, the Company acquired all of assets and assumed all of the
liabilities of RHP, and acquired and merged with its two wholly owned
subsidiaries Resource Holdings, Ltd. ("RHL") and FRA Acquisitions Inc. ("FRA")
(collectively doing business as "Rothenberg Health Systems, Inc."). The mergers
were completed pursuant to an Acquisition Agreement and Plan of Merger (the
"Acquisition Agreement"). The Company issued 1,588,701 shares of its Common
Stock, of which 155,014 have been placed into escrow for a period of one year
under the terms and conditions of the Acquisition Agreement, in exchange for all
of the capital stock of RHL and FRA. The acquisition was accounted for as a
pooling of interests. The accompanying consolidated financial statements have
been restated to reflect the acquisition of RHL and FRA on a pooling of
interests basis. Upon closing of the acquisition, the assets and liabilities of
Rothenberg Health Systems, Inc. were recorded at net book value and consisted
primarily of cash, accounts receivable and accrued liabilities.

Prior to the merger with the Company, in November 1995, FRA and RHP acquired
100 percent of the outstanding shares of Rothenberg Health Systems, Inc.
("Rothenberg") for consideration that consisted of short-term notes payable of
$9,600,000 due, and paid, in January 1996 and partnership interests in RHP. The
estimated fair value of the partnership interests was $2,200,000. Following the
acquisition of Rothenberg, all shares of Rothenberg owned by RHP were
contributed to FRA, resulting in FRA owning 100 percent of the outstanding
shares of Rothenberg. The acquisition was accounted for as a purchase.
Accordingly, the purchase price was allocated based upon the estimated fair
value of the assets acquired and liabilities assumed. The purchase price
allocated to in-process research and development was $8,600,000 and was charged
to expense in the year ended December 31, 1995.

In June 1998, the Company acquired all of the outstanding capital stock of
Pyramid Health Group, Inc. ("Pyramid") in exchange for 2,740,000 shares of
common stock of which 274,000 shares of common stock have been placed in escrow
for a period of one year under the terms and conditions of the acquisition
agreement. The acquisition was accounted for on a pooling of interests basis.
The accompanying consolidated financial statements have been restated to reflect
the acquisition of Pyramid on a pooling of interest basis.

In September 1998, the Company acquired all the outstanding capital stock of
Integrated Medical Networks, Inc. ("IMN") in exchange for 1,550,000 shares of
common stock. The acquisition was accounted for on a pooling of interest basis.
The accompanying consolidated financial statements have been restated to reflect
the acquisition of IMN on a pooling of interest basis.

A reconciliation of the current consolidated financial statements with
previously reported separate Company information for entities with which the
Company has pooled is presented below:

<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:

QuadraMed $ 7,603 $ 19,088 $ 32,443
Rothenberg and Softlink 2,432 10,043 12,483
Pyramid and IMN 36,186 45,138 54,699
-------- -------- --------
Consolidated $ 46,221 $ 74,269 $ 99,625
======== ======== ========
Net income (loss):

QuadraMed $ (9,434) $ 153 $(21,197)
Rothenberg and Softlink (9,397) (1,111) (4,437)
Pyramid and IMN (4,746) (3,366) (8,304)
-------- -------- --------
Consolidated $(23,577) $ (4,324) $(33,938)
======== ======== ========
</TABLE>

The unaudited pro forma results of operations of the Company, Synergy HMC,
HRM and Medicus for the year ended December 31, 1997 are as follows (in
thousands):

<TABLE>
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <C>
Revenues $ 118,941
Net loss $ (20,083)
Basic and diluted net loss per share $ (1.52)
</TABLE>

F-20
<PAGE> 31

13. DISCONTINUED OPERATIONS

In March 1997, Pyramid spun-off a subsidiary to its stockholders by
distributing all of the subsidiary's capital stock in the form of a
one-for-one stock dividend. To reflect this distribution, the $3,684,000
fair value of the net assets of the discontinued operations was charged
against the Company's accumulated deficit and has been reflected as a
discontinued operation in the accompanying consolidated financial
statements.

14. CONTINGENCIES

In 1996 and 1997, Pyramid settled certain litigation related to copying
charges in various states. Pyramid is currently, and may be in the future, a
party to pricing related litigation in other states. Pyramid has estimated its
exposure for such litigation, and has accrued such costs at December 31, 1997.

From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
December 31, 1997, the Company was not a party to any legal proceedings which,
if decided adversely to the Company, would, individually or in the aggregate,
have a material adverse effect on the Company's business, financial condition or
results of operations.

15. INCOME TAXES

The Company has accounted for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," since its
inception. SFAS No. 109 provides for an asset and liability approach to
accounting for income taxes under which deferred income taxes are provided based
upon enacted tax laws and rates applicable to the periods in which taxes become
payable. The Company had incurred net operating losses in each year through
December 31, 1997.

The components of the net deferred tax asset are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
------------- -------------- ------------
(RESTATED) (RESTATED) (RESTATED)
(SEE NOTE 12) (SEE NOTE 12)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ....................... $ 4,724 $ 3,827 $ 8,709
Accruals and reserves .................................. 2,348 3,730 6,083
Writeoff of acquired research and development in
Process ............................................... 3,053 2,764 2,452
-------- -------- --------
10,125 10,321 17,244
Deferred tax liabilities: -------- -------- --------
Cash to accrual adjustment ............................. 1,170 -- --
Depreciation ........................................... 209 301 396

Intangible assets ...................................... 498 -- 582
-------- -------- --------
1,877 301 978
-------- -------- --------
Net deferred tax asset before allowance .................. 8,248 10,020 16,266
Valuation allowance ...................................... (8,215) (10,020) (16,266)
-------- -------- --------

Net deferred tax asset ................................. $ 33 $ -- $ --
======== ======== ========
</TABLE>

The significant components of the provision for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 970
State -- -- 166
------- ------- -------
Total current -- -- 1,136
Deferred:
Federal 1,074 642 (1,312)
State 106 107 (249)
------- ------- -------
Total deferred 1,180 749 (1,561)
Change in valuation
</TABLE>

F-21
<PAGE> 32
<TABLE>
<S> <C> <C> <C>
allowance, net of
the effect of
Medicus (1,008) (602) 1,561
------- ------- -------
$ 172 $ 147 $ 1,136
======= ======= =======
</TABLE>

Reconciliation of the provision for income taxes computed at the statutory
rate to the effective tax rate are as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate (34)% (34)% (34)%
Change in valuation allowance 34 34 6
Write off of acquired research
and development in process -- -- 27
Other 1% 1% 4%
Alternative minimum tax -- -- 1
--- --- ---
1% 1% 4%
=== === ===
</TABLE>

A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties regarding the realization of the asset including the
limited operating history of the Company.

As of December 31, 1997, the Company had net operating loss carryforwards
for Federal and state income tax reporting purposes of approximately $23,000,000
and $12,000,000, respectively. These carryforwards expire in various periods
from 2009 to 2011. The Tax Reform Act of 1986 contains provisions which may
limit the net operating loss and research and development credit carryforwards
to be used in any given year upon the occurrence of certain events, including a
significant change in ownership interest.

16. DISTRIBUTOR AGREEMENT

In 1997, Pyramid entered into a distributor agreement with a software
company whereby the other company granted Pyramid a non-exclusive,
non-transferable right to reproduce, market and license certain of the other
company's software to Pyramid's customers. The initial term of the agreement is
two years. Under the terms of the agreement, Pyramid agreed to a minimum
purchase of software having a value of $2.5 million. Pyramid had not sold any
software to its customers as of December 31, 1997 and does not expect to meet
the $2.5 million minimum purchase commitment. The Company recorded a loss
contingency of $2.5 million as of December 31, 1997.

17. SUBSEQUENT EVENTS

In February 1998, the Company acquired Cabot Marsh Corporation for
approximately $2,800,000 in cash and 382,767 shares of QuadraMed Common Stock
with an aggregate fair market value of approximately $8,400,000. The acquisition
was accounted for as a purchase.

In April 1998, the Company completed an offering of $115 million principal
amount of Convertible Subordinated Debentures, including the underwriters'
over-allotment option. The debentures are due May 1, 2005 and bear interest at
5.25 percent per annum. The Debentures are convertible into common stock at any
time prior to the redemption or final maturity, initially at the conversion
price of $33.25 per share (resulting in an initial conversion ratio of 30.075
shares per $1,000 principal amount). Proceeds to the Company from the offering
were $111,550,000.

In May 1998, the Company completed its acquisition of Medicus by purchasing
the remaining 43.3 percent interest of Medicus. The Company previously purchased
56.7 percent of the outstanding shares of common stock in November 1997. The
acquisition was accounted for as a purchase. The Company allocated the purchase
price of the 43.3 percent interest based on the estimated fair value of the
assets and liabilities assumed. The SEC recently formulated revised methodology
regarding the valuation of acquired research and development in-process. The SEC
has indicated in certain cases that these guidelines should be applied
retroactively while it is the Company's belief that its original treatment of
this transaction was appropriate. The Company has elected to retroactively
adjust its charge for the write-off of acquired research and development
in-process for the remaining 43.3% acquisition of Medicus. The Company has
adjusted the amount of intangibles assigned to acquired in-process research
and development and written-off from the previously reported $17,146,000 to
$4,763,000 in the quarter ended June 30, 1998. The remaining intangible balance
will be amortized over a 7 year average period.

In June 1998, the Company acquired all of the outstanding capital stock of
Pyramid in exchange for 2,740,000 shares of common stock of which 274,000 shares
of common stock have been placed in escrow for a period of one year under the
terms and conditions of the acquisition agreement. The acquisition was accounted
for on a pooling of interests basis. The accompanying consolidated financial
statements have been restated to reflect the acquisition of Pyramid on a pooling
of interests basis.

In September 1998, the Company acquired all the outstanding capital stock of
IMN in exchange for 1,550,000 shares of common stock. The acquisition was
accounted for on a pooling of interests basis. The accompanying consolidated
financial statements have been restated to reflect the acquisition of IMN on a
pooling of interests basis.

F-22
<PAGE> 33

SIGNATURE

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

QUADRAMED CORPORATION

DATE: March 12, 1999 By: /s/ Keith M. Roberts
-------------------------------
Name: Keith M. Roberts
Title: Executive Vice President,
Chief Financial Officer,
General Counsel and
Assistant Secretary

<PAGE> 34

EXHIBIT INDEX

EXHIBIT NO. EXHIBIT

23.1 Consent of Arthur Andersen LLP

23.2 Consent of Deloitte & Touche LLP

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 8-K, into the Company's previously filed
Registration Statements (File No. 333-16385, File No. 333-35937 and File No.
333-56171) on Form S-8.

/s/ ARTHUR ANDERSEN LLP
-------------------------
ARTHUR ANDERSEN LLP

San Jose, California
March 10, 1999

<PAGE> 1
EXHIBIT 23.2

INDEPENDENT AUDITIOR'S CONSENT

We consent to the incorporation by reference in the Registration Statement
No. 333-16385 and No. 333-35937 of QuadraMed Corporation on Form S-8 of our
report dated April 27, 1996 (relating to the consolidated balance sheet of FRA
Acquisitions, Inc. as of December 31, 1996, and the related consolidated
statements of operations, shareholder's equity and cash flows for the year
ended December 31, 1996 and the 55 day period ended December 31, 1995, not
presented or incorporated by reference separately herein) appearing in this
Current report on Form 8-K of QuadraMed Coprporation dated March 12, 1999.

/s/ Deloitte & Touche LLP
---------------------------
DELOITTE & TOUCHE LLP
Los Angeles, California
March 10, 1999