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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K

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

For the fiscal year ended December 31, 1995 Commission File No. 1-9815
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CYCARE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware 91-0842322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

7001 North Scottsdale Road
Suite 1000
Scottsdale, Arizona 85253-3644
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (602) 596-4300

Securities registered pursuant to Section 12(b)of the Act:

Title of Class Name of Exchange on Which Registered
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Common Stock, Par Value $.01 Per Share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of March 22, 1996: Common Stock, $.01 par value:
$125,115,658.

The number of shares outstanding of the Registrant's Common Stock as of
March 22, 1996: Common Stock, $.01 par value: 5,058,170 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Annual Report for the year ended December 31,
1995 (the "Annual Report"), are incorporated by reference into Part II.

Portions of the Company's Proxy Statement for the Annual Shareholders'
Meeting to be held on May 21, 1996 (the "Proxy Statement") are incorporated by
reference into Part III.

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PART 1

ITEM 1. BUSINESS

CyCare Systems, Inc. (the "Company"), founded in 1967 and incorporated
in 1969, is a leading provider of information systems, related support services
and electronic data interchange (EDI) services to the health care industry,
including physicians, medical group practices, academic practice centers and
integrated delivery networks. The Company's services and systems are based
primarily on open-systems architecture using software developed or acquired by
the Company to improve the productivity and profitability of its customers.
Applications include appointment scheduling, patient and member registration
information, business office management, electronic claims processing, patient
care and patient accounting.

INDUSTRY BACKGROUND

The Company estimates that there are over 570,000 physicians in
private practice and approximately 148,000 medical practices in the United
States. The economic pressures and informational demands upon physicians and
medical practices have increased significantly during the past decade. At the
same time, the increased power and decreased cost of computers have made
computers an effective information processing solution for a broader range of
medical practices. Approximately 70% of physician practices now use computers or
computer services for at least some of their information processing
requirements.

The demand for more comprehensive and accurate information processing
solutions is expected to continue. Health care cost containment efforts have
greatly increased the amount and complexity of required information. At the same
time, increased competition has resulted in a greater focus on demonstrating the
quality of care delivered to patients. Practice management systems help
providers reduce the costs and improve the quality of delivering health care
services by automating patient care and administrative processes, ensuring
timely access to relevant information, streamlining the storage and retrieval of
information, and matching patient needs with available resources.

The ongoing pressure to contain health care costs is also changing the
structure of health care providers and their practice management system
requirements. Over the next several years, the majority of practicing physicians
are expected to be channeled into ever enlarging networks, group practices,
HMOs, and integrated delivery systems (IDS). In addition, the number of
third-party payer organizations has increased. At the same time, federal and
state governments, which are estimated to be responsible for approximately 30%
of physician claims for patient charges as a result of Medicare, Medicaid and
other programs, have imposed pricing and reimbursement regulations that
significantly complicate billing procedures and increase the information a
medical practice must maintain with respect to its patients. Furthermore, health
care payers are increasingly transferring the economic risk of health care
delivery to providers by shifting from the traditional fee-for-service
reimbursement model to managed care reimbursement models, such as payment based
on capitation. Under capitation, providers are paid an annual fixed fee per
individual to deliver all health care services required by that individual. This
reimbursement model encourages health care providers to modify their emphasis
from not only treating illness, but also to maintaining wellness. The expansion
in the number of managed care and third-party payer organizations, as well as
additional governmental regulation and the change in reimbursement models, has
greatly increased the complexity of pricing practices, billing procedures and
reimbursement policies impacting medical practices. These trends are prompting
dramatic change in, and ultimately major expenditures for, physician practice
management information systems.

Other factors also are increasing the demand for more comprehensive
and accurate information systems. The growing administrative burdens placed on
medical practices have caused physicians to join together in group practices to
share administrative costs and achieve economies of scale. The Company believes
the movement toward group practices has accelerated the trend toward automation
as group practices require the greater efficiency and productivity of an
automated system. Not only has there been a movement toward group practices,
more recently group practices have been coming together to form larger group
practices. In addition, hospitals and insurance companies are buying and/or
managing physician practices and networking them into one common system. The
general increase in the size and complexity of medical practices has resulted in
a greater need for analysis of data and production of timely management
information reports which allow physicians and other health care providers to
reach informed conclusions regarding the quality and appropriateness of various
procedures and practices.

Technological advances have made more comprehensive, cost-effective
computer solutions available to physician practices. While early systems
concentrated principally on patient billing and collection activities, systems
are now available which record and store clinical information, automate the
processing of insurance and third-party payer claims, and integrate the
operations of physician practices with larger health care organizations such as
hospitals, HMOs and management service organizations (MSO). The Company believes
that these various factors will cause medical practices to seek additional and
more comprehensive computer-based solutions for their information processing
needs.

STRATEGY

The Company's goal is to be the leading provider of physician practice
management systems and services. The Company's strategy includes the following
key elements:

* Provide a Strong and Integrated Product Line. In 1993, the Company
upgraded its large-group product, the CS3000, the first client/server
system in this market segment. In 1994, the Company introduced a new
small-group product, the Windows(TM)-based SpectraMED(TM). In 1995, the
Company began shipping its comprehensive medical records product, CS-CIS,
that has a complete data repository, drug interaction reporting, imaging
and outcomes reporting capabilities. The Company will continue to enhance
these products and to develop new applications that address the rapidly
changing requirements of today's health care environment.

* Provide a Full Range of Transaction Processing Services. The Company
currently offers electronic transactions (EDI) such as claims processing,
remittance advices, eligibility checking and encounter data. Additional
capabilities include statement processing and paper claims for those
insurance carriers without electronic submission capabilities.

* Provide Systems Integration Services. The Company's strategy is to provide
the core practice management system solution using its open-system
architecture, then use its integration expertise to build state-of-the-art
communication networks to tie in ancillary systems such as pharmacies,
labs, radiology departments, etc. and in today's IDS environment,
hospitals.

* Expand National Direct Sales Organization. The Company plans to expand its
direct sales organization to market to a larger number of medical
practices, MSOs, IDSs, and practice management consultants.

* Strategic Acquisitions. The Company continually evaluates the acquisition
of products, services and businesses that are similar or complementary to
those offered by the Company. Many of these potential acquisitions would
allow the Company to expand its customer base or provide new technologies
to existing and future customers. Consistent with this strategy, in
December 1995, the Company acquired Richard D. Jugel and Company. This
acquisition provided the Company with the ability to process UB-92
(hospital-based) claims electronically.

PRODUCTS AND SERVICES

The Company's strategy is implemented through two primary business
units: Group Practice and CyData, Inc.

Group Practice

The Company's Group Practice business unit has served physician groups
and other ambulatory care organizations for over 28 years, and it maintains a 20
percent market share in group practices with 25 or more physicians. This
business unit is uniquely positioned with a comprehensive range of software
applications and services that meet the information processing requirements of
smaller practices that are consolidating into larger groups, and for groups that
are affiliating with each other to form IDSs. Business solutions offered are in
the areas of patient information and registration, business office management,
third-party management, electronic claims clearing, prepaid managed care,
appointment scheduling and clinical information. In addition to systems, support
services such as account management, systems integration and networking,
education and training, installation and documentation are also offered. In
1995, this business unit had revenues of $47.7 million versus $40.5 million and
$36.5 million in 1994 and 1993, respectively. In 1995, 71% of these revenues
were recurring.

The Company developed its Group Practice products, with the exception
of SpectraMED, using client/server based technology to eliminate the dependence
on proprietary technology and enable the Company to add and refine applications
as technology changes. The hardware platform chosen to run the Company's
products is Hewlett Packard's HP 9000, Series 800 business server. This
RISC-based platform provides excellent scalability and has one of the best
price/performance ratios in the industry.

CyCare System 3000(TM) (CS3000) . The CS3000 was introduced in late
1993 and is designed for group practices with 12 or more physicians. The CS3000
is a UNIX-based client/server system that features point and click interface
technology and optimum flexibility through open-systems architecture which
allows integrated access to data from a variety of sources throughout the
organization. The CS3000 is designed to improve physician/provider productivity
and personnel utilization of its customers. Modules included are patient
information and registration, managed care, scheduling and business office
management. The patient information and registration module gives instant access
to patient, guarantor and insurance coverage information that can be used
throughout the product. The system's managed care module is designed to support
capitated contracting from both the provider and the payer perspectives and the
scheduling module is designed to maximize productivity by automating test
schedules, examinations, and procedures. Business office management features are
designed to maximize revenue and minimize staffing requirements.

Clinical Information System (CS-CIS). In August 1995, the Company
signed a relicensing agreement with Wang Laboratories, Inc. to market Wang's
fully functional electronic medical records systems. CS-CIS is a client/server
system that will run on any industry standard 486 or Pentium PC. Its relational
database can share data with every database that is compliant with open-systems
standards. Because CS-CIS was implemented for open-systems, it interfaces
smoothly with multiple UNIX platforms running Novell Netware. CS-CIS fully
integrates the entire practice from the front desk to the examining room,
regardless of medical specialty, and stores all patient data in a clinical
information repository. CS-CIS doesn't replace the CS3000, or any other practice
management system; instead, the systems work in tandem to form a sophisticated
information network for the ambulatory environment. CS-CIS is designed for the
way physicians work intuitively. During an encounter, the physician can check
test results or enter information with a pen on digital forms that look like
familiar paper forms. Referrals, prescriptions and other ancillary services can
be ordered electronically in one easy step. The practice realizes the increased
efficiencies as lower overhead and increased profits in a managed care
environment.

Enterprise-wide Scheduling (CS-ES). The Company is currently developing
an enterprise-wide scheduling product known as CS-ES. CS-ES is a
state-of-the-art achievement based on a sophisticated SQL database for easy
access to information. On-line help and user-friendly graphical interface
employing Microsoft(R) Windows(TM) cut training time and enable the user to move
easily throughout the system. As physician groups combine to form integrated
delivery networks, the ability to schedule patient appointments for numerous
resources becomes extremely critical to both the cost and quality of care. The
CS-ES will allow the physician practice to schedule and coordinate appointments
for multiple resources, specialties or departments. Additional features include:
daily patient lists, resource usage and no-show reports, patient reminder
letters, identification of credit risks, copays, referring physicians, and
preauthorization.

SpectraMED. In February 1994, the Company began shipments of
SpectraMED, the first full spectrum practice management and patient care
solution designed to use the Microsoft(R) Windows(TM) operating system. This
state-of-the-art software solution addresses the practice management needs of
individual providers and groups of up to 12 physicians. This product offers
features such as electronic medical records, live audio and video records that
can be stored in the SpectraMED patient file, patient names/alerts, the ability
to maintain multiple fee schedules and simplified ad-hoc reporting. SpectraMED
is designed to take full advantage of all the EDI and statement processing
capabilities of the Company's CyData subsidiary.

CyData, Inc.

In 1992, the Company formed a wholly-owned subsidiary named CyData,
Inc., that provides solutions to accelerate cash flow, maximize productivity,
reduce administrative costs and improve profitability. More than 25 percent of
the nation's traditional group practices have streamlined operations through
CyData's electronic data interchange (EDI) services, including on-line and
roster eligibility, claims, encounters, remittance advice and statement
processing. CyData's revenues, including intercompany transaction processing
revenues, were $19.0 million, $17.0 million and $13.6 million in 1995, 1994 and
1993, respectively. Intercompany transaction processing revenues were $5.7
million, $5.5 million and $5.1 million in 1995, 1994 and 1993, respectively.
These revenues were 100% recurring in 1995. CyData has also initiated a special
marketing effort called the Participating Payer Program. Insurance payers that
join the Participating Payer Program have agreed to absorb most if not all of
the physician's costs to process claims electronically. In return, the payers
enjoy a cost savings from reduced paper claims processing. Currently, the
clearinghouse formats, edits and processes over four million claims per month.

Electronic Data Interchange. CyData provides a complete financial
processing solution. From the moment a patient walks in the door, health care
providers can confirm if a patient is eligible for treatment (on-line or roster
eligibility). After providing treatment, the physician or hospital can submit
insurance claims or encounter information daily to CyData where it will be
edited, formatted to the payer's unique specifications and transmitted to one of
the over 500 insurance carriers that accept electronic claims from CyData. The
amount the insurer will pay (remittance advice) can be electronically
transmitted back to the provider for updating of accounts receivable, without
rekeying of data. Physicians and hospitals can then collect the final amount
owed by sending a statement to the patient using CyData's statement processing
capabilities, as described below.

Statement Processing. CyData also provides a statement processing
service to medical groups to assist with patient billing. Groups submit, via
electronic transmission or computer tape, billing information to the Corporate
Information Center in Dubuque, Iowa. CyData then prints and mails statements.
Processing five million statements each month, the Company has the facilities to
process statements more inexpensively and efficiently than the groups can do
themselves.

SOFTWARE LICENSING, DEVELOPMENT AND PROTECTION

The Company does not sell its software to customers. The Company
licenses its software to all distributed and in-house/turnkey customers. The
standard license agreement provides that, for a specified fee, a customer is
granted the non-transferable right to use the Company's software products.
Distributed customers are charged lower license fees than non-distributed
customers. The Company's initial software licenses are associated with related
hardware and all sales are accounted for as systems sales.

The Company has implemented an innovative software pricing philosophy,
Living Software, in the Group Practice business unit. The Company licenses
software to customers at a flat rate, including all services and future
upgrades. Because of this structure and because "living software" minimizes
customer's initial cash flow, brand loyalty is enhanced. This pricing philosophy
shifts a portion of the initial software license fee into recurring revenue over
the life of the contract and allows customers to protect their investment in
software. A portion (usually 10%) of the Company's initial license fee is
payable upon execution of a license agreement, with the remainder payable upon
delivery and testing of the software. License agreements contain provisions
designed to prevent disclosure and unauthorized use of the Company's products.
Clients sign license agreements for continuing software use, support and
enhancements, generally for a period of three to five years.

Computer software is subject to rapid changes as a result of internal
and external forces, particularly in the rapidly-changing health care market.
Internally, changing needs of the customer require software to be flexible,
easily modified or completely revised to meet the customer's needs. External
factors, such as technological changes in hardware and changing requirements of
outside parties (like insurance carriers) may necessitate software enhancements
or modifications. To meet these needs, the Company maintains a staff of systems
analysts and programmers in Dubuque, Iowa; Omaha, Nebraska; and Scottsdale,
Arizona to develop and enhance its products. The Company has also contracted
programming from outside sources from time to time. The Company has a number of
significant projects currently in development, including: enterprise-wide
scheduling, new EDI processes, and various upgrades to CS3000 and CS-CIS.

The Company capitalizes certain software development costs, primarily
coding and testing, which meet recoverability tests. The capitalized costs are
then amortized over future periods or written down to their net realizable
value, if recoverability tests are not met. Once a software package is
developed, the expenses associated with its licensing generally are limited to
marketing, installation, support, product updates and administration.

Net research and development expenses were $4.3 million (7% of
revenues) in 1995, $4.1 million (8% of revenues) in 1994, and $4.2 million (9%
of revenues) in 1993. The Company anticipates that these expenditures will
continue to be approximately 8% of revenues.

Application software generally cannot be patented. Instead, the
Company relies upon contract, trade secret and copyright laws to protect its
proprietary knowledge. Customers sign agreements restricting use to their own
operations and prohibiting disclosure to third parties. Furthermore, customers
generally are not provided with the Company's software source code.
Company-prepared manuals are marked as protected under copyright laws. In
addition, employees are notified of the confidential nature of the Company's
proprietary information and trade secrets and are required to sign
non-disclosure agreements. Regardless of these restrictions, it may be possible
for competitors to obtain the Company's trade secrets. The Company will seek to
protect its rights and to enforce the non-disclosure provisions of its
agreements. The names "CyCare" and "CyData" and their associated logos are
trademarks of the Company.

EQUIPMENT SALES AND RENTALS AND SOURCES OF SUPPLY

Through agreements with equipment manufacturers, the Company sells and
leases various minicomputers, personal computers, video display terminals and
peripheral equipment used in the Company's systems. While customers could
purchase or lease identical equipment from other sources, they have not
generally done so.

Most components of CyCare's distributed processing and in-house/turnkey
systems, such as IBM mainframes and personal computers, Hewlett-Packard
minicomputers and personal computers, Bull Worldwide Information Systems, Inc.
minicomputers, Link and Wyse video display terminals and Cincom Systems, Inc.
database management software, are purchased from single sources. While
alternative sources of minicomputers, video display terminals and software are
available to the Company, additional time would be required to adapt the
equipment to the Company's requirements. In addition, the use of alternative
sources might necessitate redesign or recoding of the Company's application
software and could result in some interruption of the delivery of systems. The
Company believes its relationships with its suppliers are good. Periodically,
the Company reevaluates the equipment and software purchased from suppliers. The
Company has entered into a value-added agreement with Hewlett Packard to
purchase equipment for resale to its customers.

INSTALLATION, SUPPORT AND TRAINING

The Company maintains an extensive customer service organization.
Specialists assist customers in installation or conversion and provide ongoing
support. Services performed by such specialists include planning system options
and determining software required, assisting file conversion, implementing
operating procedures, training, planning the equipment environment and
coordinating with other departments. Other personnel handle the day-to-day
contact with the customer concerning such items as requests for supplies,
special processing runs, additional services and problem determination.
Technical support personnel provide continuing enhancements and improvements to
the Company's software and assist customers in communicating with equipment
manufacturers. They also furnish custom programming to customers, usually
charged on a time and material basis.

Installation of a system normally commences upon execution of a
contract, with installation completed in two to three weeks for SpectraMED
clients, and two to six months for CS3000 clients. The equipment supplier
installs the hardware used by distributed and in-house/turnkey customers.
Installation of software may occur in phases, but initial processing usually
begins within two months.

Initial training on the use of the system is generally included in the
cost of the system. In addition, the customer is provided with a user manual
describing the features of the system and how to use it effectively. The Company
also provides continuing classes to update and train the customer personnel at
regional training facilities. The Company periodically schedules state and
national user meetings and executive forums, which allow an exchange of ideas
and techniques among customers and provide the Company with ideas for future
enhancements and products.

CLIENTS, MARKETING AND BACKLOG

The Company markets its Group Practice products for large physician
groups and CyData products and services through sales representatives located in
nine offices throughout the country. The Company currently has 24 direct sales
people, plus 17 sales support personnel with specific product expertise and 5
telemarketing individuals. The Company's sales representatives are experienced
in the computer service field and knowledgeable about the Company's products and
services, and are supported by a marketing and technical staff. The Company's
SpectraMED product is marketed through a nationwide network of over 150
independent dealers that is supported by the Company's marketing and technical
support staffs.

The Company's customers are principally located throughout the United
States. Revenues generated in Canada represent less than 1% of total revenues
and are considered insignificant. In 1995, the Company's Canadian subsidiary was
dissolved and financial transaction reporting and operational activities were
assumed by the Company.

The Company's services and systems are directed at different health
care markets as categorized by its strategic business units. Services and
systems have been designed to meet the specific requirements for each of these
markets.

The Company's backlog for equipment sales and software licenses was
$1,355,000 at March 22, 1996 and $4,890,000 at March 17, 1995. All of the March
22, 1996 backlog is expected to be filled in the current fiscal year.

COMPETITION

Competition is intense in the market served by the Company. The
industry is highly fragmented and includes numerous competitors. The Company
believes that the most important factors in a potential customer's evaluation of
its services and systems are reliability, functional/technical capabilities,
price, future flexibility, data security, support services and cost
effectiveness. The Company continues to focus on increasing customer
satisfaction as a method of improving potential customers' perceptions and
adding value to its products. Improvement has been seen based on the increased
number of customer reference sites and customer retention. The Company believes
it is one of the largest providers of computer information processing services
and systems to physicians and medical group practices. Competitors include other
computer service companies, equipment manufacturers and consulting firms, some
of which are substantially larger and have greater financial, marketing and
personnel resources than the Company. Neither the Company nor any competitor is
believed by the Company to have a 10% or greater share of the current market.

COMMUNICATION NETWORK AND DATA SECURITY

The Company supplies its services through a nationwide data
communications network consisting of leased and WATS telephone lines. Data
stations or video display terminals located on customer premises are connected
through one of these networks to the Company's computer facility.

Computer accessibility is critical to the success of an on-line system,
such as the Company's shared system. In 1995, the Company's computer facility
was operational for over 99% of the Company's customers' normal working hours.

CyCare has a diagnostic system which monitors its leased telephone
lines to detect sources of degradation in data received. The Company maintains a
remote diagnostic system for problem solving and training customer personnel.
This system allows the Company's technical personnel to immediately communicate
with a customer's computer rather than having to visit the customer's location.

The Company maintains confidentiality and security due to the nature of
the information it processes. The Company restricts data access for shared
customers, restricts physical access to its computer facility and requires its
employees to sign agreements acknowledging the confidentiality of information
processed. Customer information is duplicated and transferred to an off-site
location on a daily basis.

EMPLOYEES

As of March 8, 1996, the Company employed approximately 486 persons,
including 46 sales representatives, 144 employees engaged in providing
installation services and continuing support and 106 systems analysts and
programmers involved in research and development and continuing maintenance of
CyCare's systems and programs, the balance being administrative, operations and
clerical employees.

Systems analysts and programmers are in short supply and, consequently,
competition for such personnel is intense. The Company believes that its future
success will be dependent in part upon recruiting and retaining qualified
technical personnel as well as other employees. CyCare considers its employee
relations to be good.

GOVERNMENT REGULATION

The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care facilities. During the past several years, the health care industry
has been subject to an increase in governmental regulation of, among other
things, reimbursement rates and certain capital expenditures. Many lawmakers
have announced that they intend to propose programs to reform the U.S. health
care system. These programs may contain proposals to increase governmental
involvement in health care, lower reimbursement rates or otherwise change the
operating environment for the Company's customers. Health care providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including those for the Company's products
and related services. Cost containment measures instituted by health care
providers as a result of regulatory reform or otherwise could result in greater
selectivity in the allocation of capital funds. Such selectivity could have an
adverse effect on the Company's ability to sell its products and related
services. The Company cannot predict with any certainty what impact, if any,
such proposals or health care reforms might have on its business, financial
condition and results of operations.

ITEM 2. PROPERTIES

The Company's principal processing and development operation is located
in approximately 114,000 square feet of a nine-story commercial office building
in Dubuque, Iowa, purchased by the Company in September 1986. In 1994, the
Company refinanced the building and it is currently subject to a mortgage being
amortized over five years with payments ending in April 1999. The building has
approximately 215,000 leasable square feet. Space not needed by CyCare will
continue to be leased to other tenants. The Company leases approximately 33,000
square feet for its corporate headquarters in Scottsdale, Arizona. The Company
also leases office space in various United States cities for terms generally not
exceeding five years. Offices are located in Atlanta, Chicago, Dallas,
Minneapolis, Omaha, San Diego and Bedminster, New Jersey and are equipped to
service all aspects of the Company's business. The Company considers these
facilities to be adequate for its present and anticipated needs.

ITEM 3. LEGAL PROCEEDINGS

As of the date hereof, there are no legal proceedings pending against
or involving the Company that in the opinion of management could result in a
materially adverse change in the business or financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT

Name Age Position with the Company
- ---- --- -------------------------

Jim H. Houtz 60 Chairman of the Board of Directors, President
and Chief Executive Officer
David H. Koeller 48 President of Group Practice
Mark R. Schonau 39 Chief Financial Officer, Secretary/Treasurer
Bill W. Childs 56 Senior Vice President
Randy L. Skemp 39 Senior Vice President
Carolyn S. Haupert 52 Senior Vice President

Mr. Houtz has been Chief Executive Officer since founding the Company
in 1967, and has served as a director since its incorporation in 1969. In
January 1994, he was also named President of the Company.

Mr. Koeller joined the Company in 1970 and has held various positions
in operations and client services. He was named Vice President - Operations in
1979, Senior Vice President - Operations, Corporate Information Center in 1986,
and Executive Vice President - Group Practice Systems in 1989. In October 1990,
he was named Executive Vice President - Technical Services and Development. In
January 1994, he was named President of Group Practice.

Mr. Schonau joined the Company in May 1988, as Corporate Controller. In
November 1988, he was appointed Secretary/Treasurer. In 1989, he was appointed
Chief Financial Officer. Prior to joining the Company, he was a Senior Manager
with Ernst & Whinney (currently Ernst & Young LLP).

Mr. Childs joined the Company in April 1995 as Senior Vice President.
From 1984 until his employment by the Company in 1995, Mr. Childs was President
and Chief Executive Officer of Health Data Analysis, Inc., a health care
publishing and consulting organization.

Mr. Skemp joined the Company in January 1983, as an Operations
Supervisor. In 1985, Mr. Skemp was named to Manager of Credit Union Sales and
Telemarketing. In 1988, he assumed the position of Director of Commercial and
Distribution Services in Data Clearing and in 1990 was named Director of Account
Management for the central and eastern regions of the United States. In January
1993, Mr. Skemp was named Vice President and then Senior Vice President in May
1994.

Ms. Haupert joined the Company in August 1974 and has held various
management positions. She was named Manager of Clinical Development in 1983;
Director-Application Support in May 1985; Director of Product Development in
January 1988, and Director of Data Clearing Products and Services in June 1991.
Ms. Haupert was named Vice President in January 1993 and subsequently named
Senior Vice President in January 1995.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Certain information in response to this item is incorporated herein by
reference from "Shareholder Information" on page 27 of the Annual Shareholders'
Report.

ITEM 6. SELECTED FINANCIAL DATA

Information in response to this item is incorporated herein by
reference from "Eleven - Year Comparison of Selected Financial Data" on page 26
of the Annual Shareholders' Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Information in response to this item is incorporated herein by
reference from "Management's Discussion and Analysis" on pages 12 and 13 of the
Annual Shareholders' Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information in response to this item is incorporated herein by
reference from the "Consolidated Financial Statements" on pages 14 through 24 of
the Annual Shareholders' Report.

"Quarterly Results" on page 24 of the Annual Shareholders' Report is
incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information in response to this item is incorporated herein by
reference from "Election of Directors" on pages 1 and 2 and "Compliance with
Section 16(a) under the Securities Exchange Act of 1934" on page 15 of the Proxy
Statement and from "Executive Officers of the Registrant" in Part I of this
report.

ITEM 11. EXECUTIVE COMPENSATION

Certain information in response to this item is incorporated herein by
reference from "Board Compensation Committee Report on Executive Compensation,"
"Performance Graph," "Summary Compensation Table," "Director Compensation,"
"Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in
Last Fiscal Year and FY-End Option/SAR Values," and "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" on pages 8 through
14 of the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information in response to this item is incorporated herein by
reference from "Security Ownership of Certain Beneficial Owners and Management"
on page 7 of the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information in response to this item is incorporated herein by
reference from "Certain Relationships and Related Transactions" on pages 14 and
15 of the Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K

(a)(1) Financial Statements

Page in
Annual Shareholders' Report
---------------------------

Incorporated by reference in Part II, Item 8 of this report:

Report of Ernst & Young LLP, Independent Auditors 25

Consolidated Balance Sheets at December 31, 1995 and 1994 14

Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993 15

Page in
Annual Shareholders' Report
---------------------------

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 16

Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993 17

Notes to Consolidated Financial Statements 18 through 24

(2) Financial Statement Schedules
Page in
Form 10-K
---------
Included in Part IV of this report:

Consent of Independent Auditors on Consolidated Financial Statements 18

Schedule II - Valuation and Qualifying Accounts 19

Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is
included in the consolidated financial statements or notes thereto.

(3)Information with respect to this item is contained in Item 14(c) hereof
and is incorporated herein by reference.

(b) Reports on Form 8-K

None

Page in Sequential
Numbering Where
Exhibit Appears
Exhibit Number Description or Manner of Filing
-------------- ----------- -------------------

3-A Restated Certificate of Incorporation i

3-B By-Laws i

4 The Shareholder Rights Agreement dated ii
May 15, 1989

10-A(a) Long-Term Incentive Plan of the Company dated Page __
March 1, 1995, as amended

10-B(a) Employee Stock Purchase Plan of the Company, Page __
dated November 25, 1987, as amended

Page in Sequential
Numbering Where
Exhibit Appears
Exhibit Number Description or Manner of Filing
-------------- ----------- -------------------

10-C(a) Director Stock Plan of the Company, Page ____
dated October 14, 1994

10-D(b) Proprietary Systems, License and Services Agreement iii
dated June 30, 1984 between Cincom Systems, Inc.
and the Company, as amended

10-E(b) Form of OEM Agreement between Honeywell iv
Information Systems, Inc. and the Company

10-F(a) The Company's 401(k) Savings Plan, as amended iii

10-G(a) Retirement Plan of the Company dated May 1, 1974, iii
as amended

10-H(b) Amendment to Value Added Reseller Agreement for v
Equipment, Products and Services dated October
9, 1991, between Bull HN Information Systems and
the Company. (This is an amendment to the Form
of OEM Agreement between Honeywell Information
Systems, Inc. and the Company)

10-I(b) Reseller Start-Up Purchase Agreement for Equipment, v
software and services dated September 27, 1991
between Hewlett-Packard and the Company

10-J Marketing Agreement dated September 30, 1986, i
between Computer Associates International, Inc.
and the Company, as amended

10-K(b) Renewal of Remarketer Agreements for IBM Products vi
dated September 15, 1992, between IBM and the
Company

10-L(b) Addendum to Reseller Start-Up Purchase Agreement for vi
Equipment, Software and Services dated August 25,
1992, between Hewlett-Packard and the Company

10-M(b) Private Label Reseller Agreement for Software and v
Services dated October 22, 1991, between Vision
Software, Inc. and the Company

Page in Sequential
Numbering Where
Exhibit Appears
Exhibit Number Description or Manner of Filing
-------------- ----------- -------------------

10-N(a) Consulting Agreement between Jim H. Houtz, vi
Chairman of the Board and Chief Executive Officer,
and the Company dated January 2, 1993

10-O(a) Employment Agreement between Mark R. Schonau, Page ____
Chief Financial Officer, Secretary and Treasurer,
and the Company dated November 3, 1995

10-P(a) Executive Severance Agreement between Mark R. Schonau, vi
Chief Financial Officer, Secretary and Treasurer,
and the Company dated October 20, 1992

10-Q(a) Supplemental Retirement Agreement between Jim H. vii
Houtz, Chairman of Board, Chief Executive and
President and the Company dated December 28, 1993

10-R(b) Exchange of Business Agreement dated June 22, 1993, vii
between Datamedic Corporation and the Company

10-S(b) Software Purchase Agreement dated June 7, 1993, vii
between Health Software, Inc. and the Company

10-T(b) Software Program License Agreement executed vii
January 4, 1993, between Resource Information
Management Systems, Inc. and the Company

10-U(c) Reseller Agreement between Wang Laboratories, Inc. Page ____
and the Company dated August 31, 1995

13 Annual Report to Security Holders for the fiscal Page ____
year ended December 31, 1995

21 Subsidiaries of the Registrant Page ____

23 Consent of Ernst & Young LLP Page ____

27 Financial Data Schedule Page ____

(a) Management contract or compensatory plan or
arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.

(b) Confidential treatment granted as to portions
thereof.

i Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December
31, 1988.

ii Incorporated by reference to the Company's Report
on Form 8-K dated May 9, 1989.

iii Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December
31, 1989.

iv Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December
31, 1985.

v Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December
31, 1991.

vi Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December
31, 1992.

vii Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December
31, 1993.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

CYCARE SYSTEMS, INC.

DATE: March 26, 1996 /s/ Mark R. Schonau
-------------------
Mark R. Schonau
Chief Financial Officer,
Secretary and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 26, 1996 by the following persons on
behalf of the Registrant and in the capacities indicated.

Signature Capacity

/s/ Jim H. Houtz Director, Chairman of the Board of
------------------------------- Directors, President and Chief
Jim H. Houtz Executive Officer

/s/ Mark R. Schonau Chief Financial Officer,
------------------------------- Secretary and Treasurer
Mark R. Schonau

/s/ Frank H. Bertsch Director
-------------------------------
Frank H. Bertsch

/s/ Richard J. Burgmeier Director
-------------------------------
Richard J. Burgmeier

------------------------------- Director
A. Theodore Engkvist

/s/ James L. Schamadan, M.D. Director
-------------------------------
James L. Schamadan, M.D.

Schedule II
CYCARE SYSTEMS, INC.
AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

Additions
Balance at charged to Balance
Allowance for beginning costs and at end
doubtful accounts of period expenses Deductions of period
----------------- --------- -------- ---------- ---------

Year ended December 31, 1993 $ 884,000 $ 1,353,000 $ (1,189,000) (a)(d) $ 1,048,000
Year ended December 31, 1994 $ 1,048,000 $ 544,000 $ (837,000) (a) $ 755,000
Year ended December 31, 1995 $ 755,000 $ 389,000 $ (324,000) $ 820,000

Additions
Balance at charged to Balance
beginning costs and at end
Reserve for lease loss of period expenses Deductions of period
- ---------------------- --------- -------- ---------- ---------

Year ended December 31, 1993 $ 140,000 $ (140,000) (c) $ 0
Year ended December 31, 1994 $ 0 $ 0 $ 0
Year ended December 31, 1995 $ 0 $ 0 $ 0

Additions
Balance at charged to Balance
Amortization of beginning costs and at end
software products of period expenses Deductions of period
----------------- --------- -------- ---------- ---------

Year ended December 31, 1993 $ 8,350,000 $ 5,953,000 $ (5,387,000) (b)(d) $ 8,916,000
Year ended December 31, 1994 $ 8,916,000 $ 2,168,000 $ (7,170,000) (e) $ 3,914,000
Year ended December 31, 1995 $ 3,914,000 $ 5,801,000 $ (4,600,000) (b)(e) $ 5,115,000

Additions
Balance at charged to Balance
Amortization of beginning costs and at end
goodwill of period expenses Deductions of period
-------- --------- -------- ---------- ---------

Year ended December 31, 1993 $ 2,618,000 $ 4,004,000 $ (6,455,000) (b)(d) $ 167,000
Year ended December 31, 1994 $ 167,000 $ 18,000 $ 185,000
Year ended December 31, 1995 $ 185,000 $ 19,000 $ 204,000

Additions
Balance at charged to Balance
Amortization of beginning costs and at end
other intangibles of period expenses Deductions of period
----------------- --------- -------- ---------- ---------

Year ended December 31, 1993 $ 5,344,000 $ 796,000 $ (4,063,000) (b)(d) $ 2,077,000
Year ended December 31, 1994 $ 2,077,000 $ 65,000 $ 2,142,000
Year ended December 31, 1995 $ 2,142,000 $ 97,000 $ 2,239,000

- ----------
(a) Uncollectible accounts written off, net of recoveries.
(b) Software product capitalization, goodwill, and intangibles written off in
connection with the Company's strategic redirection.
(c) Deductions relating to payments on lease.
(d) Software product capitalization, goodwill, intangibles and accounts
receivable written off in connection with the sale of the Company's
Practice Management business unit.
(e) Remove fully amortized accounts.