SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                   For the fiscal year ended December 31, 1997

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                For the transition period from _______ to _______

                         Commission file number 0-25378

                                    HCIA Inc.
             (Exact name of registrant as specified in its charter)

                Maryland                                 52-1407998
     (State or other jurisdiction of
     incorporation or organization)         (I.R.S. employer identification no.)

 300 East Lombard Street, Baltimore, MD                     21202
(Address of Principal executive offices)                 (Zip Code)

        Registrant's telephone number, including area code (410) 895-7470

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          Common Stock, $.01 par value
                                (Title of class)

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 the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  X    No 
                                          ---      ---

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 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. [X]

The aggregate market value of the Common Stock, $.01 par value, held by
non-affiliates of the registrant based on the closing sales price of the Common
Stock as quoted on the National Association of Securities Dealers, Inc. National
Market System as of February 27, 1998, was $158,622,210.

The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 27, 1998 was 11,850,094.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III.


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                                     PART I

ITEM 1.               BUSINESS.

BACKGROUND

HCIA Inc. ("HCIA" or the "Company") was incorporated in Maryland in 1985. In
1988, all of the then outstanding capital stock of the Company was acquired by
Citicorp Financial Guaranty Holdings, Inc. which subsequently transferred the
stock to AMBAC Inc. ("AMBAC"). AMBAC is a publicly held holding company that
through its affiliates provides financial guarantee insurance and financial
services to both public and private clients. From 1988 until HCIA's initial
public offering, AMBAC provided additional capital and financing for the growth
of the Company. In March 1992, HCIA acquired substantially all of the assets of
the Information Strategies division of McGraw-Hill, Inc. and certain assets of
the commercial products division of the SysteMetrics subsidiary of McGraw-Hill,
Inc. (collectively, "MHI"). The business of MHI acquired by the Company had
revenue for the fiscal year ended December 31, 1991 of approximately $4.8
million. In April 1992, the Company acquired all of the outstanding capital
stock of Healthcare Knowledge Resources, Inc. ("HKR"), a health care information
company with revenue for the fiscal year ended June 30, 1991 of approximately
$12.2 million. The acquisition of HKR provided the Company with a perpetual and
exclusive license (subject to certain conditions) to the International
Classification of Clinical Services System (the "ICCS System(TM)"), a
proprietary classification system for tracking and measuring the use of medical
resources, and the database developed by the Commission on Professional and
Hospital Activities ("CPHA"). During the first quarter of 1995, HCIA completed
an initial public offering of approximately 2.0 million newly issued shares of
Common Stock. Subsequent to the offering, in April 1995, the Company acquired
all of the outstanding capital stock of Datis Corporation, a health care
information company with revenue for the twelve months ended December 31, 1994
of approximately $6.9 million. In August 1995, HCIA sold 1.5 million newly
issued shares and AMBAC sold approximately 1.1 million shares of Common Stock at
$28.50 per share in a combined public offering.

In December 1995, the Company acquired the assets constituting the CHAMP unit of
William M. Mercer, Incorporated ("CHAMP"), which provides a database service for
the analysis of health care costs to employers, for $17.5 million in cash. In
May 1996, the Company acquired Response Healthcare Information Management, Inc.
("Response"), a patient-centered data collection company, for approximately $6.3
million in cash. In August 1996, the Company acquired LBA Health Care
Management, Inc. ("LBA"), a health care information company combining data
collection, benchmarking and decision support tools with a clinical
implementation management team, for approximately $128.8 million, $100.1 million
of which was paid in cash and $28.7 million of which was paid by the delivery of
Common Stock. In December 1996, the Company acquired all of the capital stock of
HealthChex, Inc. ("HealthChex"), which provides physician profiling and medical
claims review systems to health care providers and payors, for $11.5 million in
cash. In addition to the acquisitions described above, the Company has also
acquired a number of smaller companies and business lines, including several
acquisitions in Europe. During 1996, the Company completed two additional public
offerings. In May 1996, AMBAC sold the remaining shares of Common Stock it held,
and the Company sold an additional 261,591 shares of Common Stock, at a per
share price of $51.00. In August 1996, the Company sold approximately 2.0
million shares of Common Stock, at a per share price of $54.125, to repay bank
indebtedness incurred in connection with the acquisition of LBA.

GENERAL

HCIA is a leading health care information content company that develops and
markets integrated clinical information systems and products. The Company's
systems and products range from standardized databases to highly focused
decision support systems that assist its customers in evaluating the efficacy
and economics of health care delivery. HCIA currently sells its decision support
systems to approximately 400 customers, including hospitals, integrated delivery
systems, self-insured employers, pharmaceutical companies and managed care
organizations. The Company's less complex database products (formerly referred
to as syndicated products) are sold to over 7,000 customers.

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By utilizing its core collection of proprietary data standardization
methodologies and value-added clinical measurement tools, HCIA creates clinical
databases and information systems and products from many large and disparate
incoming data streams. For example, the Company's proprietary ICCS System(TM)
allows for the standardization and comparison of detailed clinical data across a
broad range of data sources. The Company's other proprietary data-handling and
management methodologies link the costs, quality, utilization and outcomes of
medical services delivered to patients in various clinical settings. These
methodologies and technical resources permit the Company to provide a level of
clinical information which is substantially more detailed and useful in
understanding and modifying medical practice patterns than information derived
from traditional health care data sources.

SYSTEMS AND PRODUCTS

HCIA offers a range of database systems and products, which are utilized by each
of the three major health care market constituencies. Providers, such as
hospitals, physician groups and integrated delivery systems, use the Company's
systems and products to measure and analyze the cost and quality of medical
interventions. Buyers, such as managed care organizations, indemnity insurers
and self-insured employers, utilize the Company's information and analyses on
medical resource usage and outcomes to fortify their overall management of
medical costs and to manage the overall health status of a covered population.
Suppliers, such as pharmaceutical, biotechnology and medical supply and device
companies, utilize the Company's databases and products to analyze the size and
composition of addressable markets for their products and to evaluate the costs
and benefits associated with the distribution of their products into the health
care economy.

The Company's delivers its systems and products to the U.S. market through three
business units: Content Products, which focuses on distributing standard data
content products; Integrated Solutions, which aligns multiple HCIA competencies
to create an integrated solution for a client; and Implementation, which
provides data-focused implementation services to providers. The company's
European operations, HCIA-Europe, offers services similar to the Company's
domestic units to hospitals and insurance organizations predominately located in
the United Kingdom and Spain.

         CONTENT PRODUCTS

The Content Products unit markets the Company's database products to hospitals,
integrated delivery systems and professional services firms that service the
provider market. Content Products are distributed to more than 1,600 hospitals
through HCIA's partnerships with 20 state and specialty hospital associations.
Each association acts as a marketing agent for HCIA, while HCIA collects data
from the association's member-hospitals, builds a membership-specific data
mart and provides access to the data mart to the members and the association
through a variety of methods including hard-copy reports, electronic databases
provided through HCIA's proprietary software applications and, beginning in
1998, Internet-based analytical systems.

Other Content Products range from database directories (e.g., health care
industry professionals, nursing homes and managed care organizations) to more
complex analyses (e.g., cost and outcome summaries for each U.S. hospital), and
include databases and publications that allow customers to analyze different
sub-sectors of the health care industry (e.g., The 100 Top Hospitals study).
HCIA also markets to managed care clients a number of more sophisticated Content
Products containing national and regional normative data on length of stay,
costs and medical necessity. The Company markets these Content Products directly
to managed care organizations, and through alliances with information systems
vendors, third-party administrators and other entities that process data streams
for managed care organizations and payors. These Content Products generally are
used for utilization management, claims adjudication and actuarial forecasting.

Most of the Company's Content Products customer contracts provide that as the
Company extracts data from the customer (as part of the process of delivering a
system or product to the customer), the data become part of the Company's
database. The Company supplements its databases with data it purchases or
licenses from federal and state governments, trade groups and other industry
sources. The Company maintains several terabytes of live

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health care data, including data from medical records, laboratory, pharmacy,
imaging, outpatient clinics, physician's offices, insurance claims, managed care
encounters and point-of-care member patient surveys.

The Company's database resides in a relational database structure that utilizes
a network of large Sun Microsystems servers. The Company believes that its
current software and hardware platforms are scaleable and provide it with a cost
and flexibility advantage. The Company has made a significant investment in an
open-network architecture which links its several geographical locations and
provides customers with leased-line and dial-up access. The Company supports
most of the major relational database platforms. The Company has personnel drawn
from several key health care disciplines (e.g., pharmacists, clinical nurses and
medical technologists) who are responsible for the auditing, editing and
standardizing of its database, as well as the upgrading and maintaining of its
core methodologies. The Company believes that its database provides more
clinical detail and better outcomes measurement capabilities than competitive
systems. Furthermore, the detailed medical content of the data and HCIA's
experience in collecting and standardizing this information provide additional
competitive advantages.

In addition to creating and distributing many of the Company's databases, the
Content Products unit also supports Databridge(TM), HCIA's collection of
proprietary data-handling technologies. A typical HCIA customer submits data in
an electronic, computer-readable format. In creating the interface for the
customer's data stream, HCIA enables the transfer of customer data and the
subsequent application of the Company's proprietary software algorithms and
data-standardization technologies to the incoming data, transforming the data
into HCIA's proprietary standardized formats. A significant component of
Databridge(TM) is HCIA's International Clinical Classification System, or ICCS
System(TM). The Company holds a perpetual and exclusive license to the ICCS
System(TM), subject only to the Company's obligation to use all commercially
reasonable efforts to maintain and upgrade the system. The ICCS System(TM)
assigns a discrete and clinically detailed 12-digit code to every product and
service consumed in the treatment of patients. The ICCS System(TM) allows for
the standardization and comparison of detailed clinical data, regardless of the
original source of the data (e.g., medical records, insurance claims, laboratory
or pharmacy systems), and is used by the Company to create the most clinically
detailed portion of its database.

         INTEGRATED SOLUTIONS

While the Content Products unit brings narrowly focused databases and products
to a large number of customers, the Integrated Solutions unit combines many of
the Company's databases and methodologies into complex database systems for
customers, including managed care organizations, self-insured employers and
pharmaceutical and medical device manufacturers. Database systems typically
include large amounts of customer-specific data that are standardized into
HCIA's formats and delivered back to the customer together with comparative data
and supplemental analyses from HCIA.

Deliverables from the Integrated Solutions unit may also include data collected
through patient-centric surveys that are merged with transactional data from a
customer's core systems. In combining key information such as health risk
assessments, actual medical utilization experience, and post-utilization
resource consumption and behavior, the Company is able to create a detailed and
valuable portrait of the full continuum of care for the customer.

         IMPLEMENTATION

In addition to providing databases and application software, the Company,
utilizing proprietary methodologies, assists providers with the implementation
of product-line specific re-engineering solutions. The Company's knowledge-based
clinical implementation programs allow HCIA to leverage its databases and enable
clients to realize improved clinical outcomes and lower costs through the
modification of medical and behavioral practice patterns. The Company's
methodologies link the costs, quality, utilization and outcomes of medical
services delivered to patients in various clinical settings and focus on
episodes of illness that offer the greatest opportunity for improving outcomes
and reducing costs. The Company utilizes database analyses and an implementation

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management team to assist customers in reducing clinical resource consumption
and improving outcomes in major specialties, including invasive cardiovascular,
vascular, orthopaedics, oncology and medical cardiology.

CUSTOMERS

The Company's customers include numerous health care industry participants
located throughout the United States, United Kingdom and Spain, including major
provider and provider groups, managed care organizations, and pharmaceutical,
biotechnology and medical device companies. In 1996 and 1997, no single customer
accounted for 10% or more of the Company's revenue. HCIA's ten largest customers
accounted for approximately 28% and 31% of its revenue during 1996 and 1997,
respectively.

SALES AND MARKETING

HCIA markets its information systems and products through a variety of means
that are designed to enhance its name recognition and facilitate the marketing
of additional systems and products to its customer base. The Company's marketing
personnel are located in the three primary business units and HCIA-Europe. The
Company utilizes a direct sales approach with the existing customer base to
market its decision support systems and seeks to present proposals to both
existing and potential clients in face-to-face meetings at the executive level.
The Company's field sales force is specialized and is able to draw on
the Company's clinical implementation management team. In addition, HCIA has
entered into agreements with other health care information systems vendors
whereby the Company's products are marketed through their respective sales
forces. The Company also approaches each of the major market constituencies
through the sale of lower-priced Content products, such as directory
publications, and also uses efforts such as the 100 Top Hospitals study to
increase the visibility of the Company as an industry-leading source of health
care information. The Company uses both telemarketing and direct-mail efforts in
the sales of its less complex database products.

COMPETITION

The market for health care information products and services is intensely
competitive. The Company believes that the principal competitive factors in the
health care information market are the breadth and quality of system and product
offerings, access to proprietary data, proprietary methodologies and technical
resources, price and the effectiveness of marketing and sales efforts. In
addition, the Company believes that the speed with which information companies
can anticipate and respond to the evolving health care industry structure and
identify information needs is an important competitive factor. Competitors vary
in size and in the scope and breadth of products and services offered, and the
Company competes for the sale of systems and products and the resulting access
to data with different companies in each of its target markets. Many of the
Company's competitors have significantly greater financial, technical, product
development, marketing and other resources than the Company, and offer a broader
range of systems and products. Furthermore, other major information companies
not presently offering clinical health care information services may enter the
markets in which the Company competes. The Company's potential competitors
include specialty health care information companies, health care information
system and software vendors, large data processing and information companies and
systems consultants and integrators. Many of these competitors have substantial
installed customer bases in the health care industry and the ability to fund
significant product development and acquisition efforts.

INTELLECTUAL PROPERTY

HCIA considers its methodologies, computer software and databases to be
proprietary. The Company seeks to protect its proprietary information through
confidentiality agreements with its employees. The Company's policy is to have
employees enter into confidentiality agreements containing provisions
prohibiting the disclosure of confidential information to anyone outside the
Company, requiring employees to acknowledge, and, if requested, assist in
confirming the Company's ownership of any new ideas, developments, discoveries
or inventions conceived during employment, and requiring assignment to the
Company of proprietary rights to such matters that are related to the Company's
business. The Company also relies on a combination of trade secret, copyright
and

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trademark laws, contractual provisions in agreements with customers and
technical measures to protect its rights in various methodologies, systems and
products and databases. The Company has only one patent, and no copyright
registration applications, covering its software technology. Due to the nature
of its software applications, the Company believes that patent, trade secret and
copyright protection are generally less significant than the Company's ability
to further develop, enhance and modify its current systems and products.

GOVERNMENT REGULATION

The confidentiality of patient records and the circumstances under which records
may be released for inclusion in the Company's databases is subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and use of confidential patient medical record
information. Although compliance with these laws and regulations is principally
the responsibility of the hospital, physician or other health care provider
supplying the data to the Company, the Company's databases have been designed to
enable health care providers to comply with the confidentiality requirements of
state law. The Company believes that its procedures comply with the laws and
regulations regarding the collection of patient data in substantially all
jurisdictions. However, additional legislation governing the dissemination of
medical record information has been proposed at both the state and federal
level. This legislation may require holders of such information to implement
security procedures that may result in substantial costs to the Company, and
could, in certain circumstances, limit the Company's access to certain types of
information. There can be no assurance that changes to state or federal laws
will not materially restrict the ability of health care providers to submit
information from patient records to the Company.

The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy
for the regulation of certain computer products as medical devices. Although it
is not possible to anticipate the final form of the FDA's policy with regard to
computer software, the Company expects that, whether or not the draft policy is
finalized, the FDA is likely to become increasingly active in regulating
computer software that is intended for use in health care settings. The
Company's products and product development activities, therefore, could become
subject to extensive regulation by the FDA. The FDA regulates the introduction
of new medical devices as well as activities such as manufacturing, labeling and
recordkeeping for such products. To the extent that computer software is a
medical device under FDA regulations or policy, the Company would be required,
depending on the product, to comply with regulations, to (i) register and list
the product with the FDA, (ii) notify the FDA and demonstrate substantial
equivalence to other products on the market before marketing such products or
(iii) obtain FDA approval by demonstrating safety and effectiveness before
marketing a product. In addition, such products would be subject to the FDA's
general controls, including those relating to good manufacturing practices and
adverse experience reporting.

The process of obtaining clearance from the FDA can be costly and time
consuming, and there can be no assurance that, if required, such clearance would
be granted for the Company's existing and future systems and products on a
timely basis, if at all, or that FDA review will not include delays that would
adversely affect the Company's ability to market new systems and products or to
expand permitted uses of existing systems and products. The FDA could also limit
or prevent the manufacture or distribution of the Company's systems and products
and has the power to require the recall of such systems and products. FDA
regulations depend heavily on administrative and scientific interpretation, and
there can be no assurance that future interpretations made by the FDA or other
regulatory bodies, with possible prospective and retroactive effects, will not
adversely affect the Company.

EMPLOYEES

As of December 31, 1997, the Company had 684 employees, including 79 in sales
and marketing, 318 in health care data, 176 in technology and 111 in finance and
administration. None of the Company's employees are represented by a union or
other collective bargaining group. The Company believes its relationships with
its employees to be satisfactory.

RISK FACTORS; FORWARD-LOOKING STATEMENTS

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CERTAIN STATEMENTS CONTAINED HEREIN REGARDING MATTERS THAT ARE NOT HISTORICAL
FACTS ARE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")), AND BECAUSE SUCH STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW.

ACQUISITIONS. The Company has, in large part, expanded its systems and products
through the acquisition of health care information companies, product lines and
data resources. The Company may continue the acquisition of methodological,
analytical and technical resources that will further enhance and expand the
Company's systems and products.

Acquisitions involve numerous risks, including difficulties in the assimilation
of operations and products, the ability to manage geographically remote units,
the diversion of management's attention from other business concerns, the risks
of entering markets in which the Company has limited or no direct expertise and
the potential loss of key employees of the acquired companies. In addition,
acquisitions may involve the expenditure of significant funds and the incurrence
of significant charges associated with the amortization of goodwill or other
intangible assets, write-offs of acquired in-process research and development
costs and/or future write-downs of the recorded values of assets acquired. There
can be no assurance that any acquisition will result in long-term benefits to
the Company or that management will be able to manage effectively the resulting
business.

MANAGEMENT OF GROWTH. The Company's growth has resulted in an increase in the
level of responsibility for both existing and new management personnel. Many of
the Company's management personnel have had limited experience in managing
companies as large as the Company. The Company has sought to manage its current
and anticipated growth through the recruitment of additional management and
technical personnel and the implementation of internal systems and controls.
However, the failure to manage growth effectively could materially and adversely
affect the Company's operating results.

DEPENDENCE ON KEY PERSONNEL. The Company depends to a significant extent on key
management, technical and marketing personnel. The Company's growth and future
success will depend in large part on its ability to attract, motivate and retain
highly qualified personnel, including management personnel of acquired
companies. Except for an agreement with George D. Pillari, its Chairman of the
Board, President and Chief Executive Officer, the Company does not have
employment agreements with any of its executive officers. The loss of key
personnel or the inability to hire or retain qualified personnel could have a
material adverse effect on the Company.

VARIATIONS IN QUARTERLY RESULTS. The Company has experienced and expects to
continue to experience variations in quarterly results. Recent quarterly
variations are primarily due to the effect of one-time charges related to
acquired in-process research and development costs and the timing of contract
executions. The Company's operating results for any particular quarterly or
annual period may not be indicative of results for future periods.

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DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS. The Company has made significant
investments in the development and maintenance of its core collection of
proprietary data standardization methodologies, value-added clinical measurement
tools and technical resources that are used to transform disparate data streams
into clinically relevant information products. The Company relies largely on its
license agreements with customers and its own security systems, confidentiality
procedures and employee nondisclosure agreements to maintain the trade secrecy
of its proprietary information. There can be no assurance that the legal
protections and precautions taken by the Company will be adequate to prevent
misappropriation of the Company's proprietary information. In addition, these
protections do not prevent independent third-party development of functionally
equivalent or superior systems, products or methodologies.

COMPETITION. The health care information market is intensely competitive and
rapidly changing. The Company competes for the sale of systems and products and
the resulting access to data with different companies in each of its target
markets. Competitors vary in size and in the scope and breadth of the products
and services offered. Many of the Company's competitors have significantly
greater financial, technical, product development and marketing resources than
the Company, and broader product offerings. There can be no assurance that
future competition, or any significant loss of access to data resulting
therefrom, will not have a material adverse effect on the Company.

MAJOR CUSTOMERS. During 1996 and 1997, the Company's ten largest customers
accounted for approximately 28% and 31%, respectively, of the Company's revenue.
Many of the Company's contractual arrangements with its customers are subject to
annual renewal. The loss of one or more of the Company's largest customers could
have a material adverse effect on the Company.

INTEGRITY AND RELIABILITY OF DATA. The Company's success depends significantly
on the integrity of its data. Although the Company tests data for completeness
and consistency, it does not conduct independent audits of the information
provided by its customers. Moreover, while the Company believes that the
benchmarking and other clinical, cost and performance information contained in
its database is representative of the operational aspects of various types of
health care industry participants, there can be no assurance that such
information is appropriate for comparative analysis in all cases or that the
databases accurately reflect general or specific trends in the health care
market. If the information contained in the data were found, or were perceived,
to be inaccurate, or if such information were generally perceived to be
unreliable, the Company's business and operating results could be materially and
adversely affected.

POTENTIAL COST OF PERFORMANCE GUARANTEES. As part of certain of its
implementation products, the Company guarantees that a customer will achieve or
identify a certain level of cost savings at least equal to the fees the customer
pays for the system. To the extent such cost savings are not achieved, the
Company may be subject to claims related to such guarantees. Although the
Company has never incurred a claim under these guarantees, there can be no
assurance that this will continue to be the case. Liabilities related to such
claims could have a material adverse effect on the Company's business and
operating results.

VOLATILITY OF STOCK PRICE. The stock market historically has experienced
volatility which has affected the market price of securities of many companies
and which has sometimes been unrelated to the operating performance of such
companies. The trading price of the Common Stock has been, and may continue to
be, subject to significant fluctuations in response to general market conditions
and to factors specific to the Company, such as variations in quarterly results
of operations, announcements of acquisitions, new systems or products by the
Company or its competitors, governmental regulatory action, other developments
or disputes with respect to proprietary rights, general trends in the industry
and overall market conditions, and other factors.

CHANGES IN THE HEALTH CARE INDUSTRY. The health care industry is subject to
changing political, economic and regulatory influences that may affect the
procurement practices and operation of health care industry participants
generally. During the past several years, the U.S. health care industry has been
subject to an increase in governmental regulation of, among other things,
reimbursement rates and certain capital expenditures. Various programs have been
proposed to reform the U.S. health care system. Many of these programs contain
proposals to

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increase governmental involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's customers. Health
care industry participants may react to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments, including
those for the Company's systems and products. The Company cannot predict what
impact, if any, such factors might have on its business, financial condition and
results of operations. In addition, many health care providers are consolidating
to create larger health care delivery enterprises with greater regional market
power. As a result, the remaining enterprises could have greater bargaining
power, which may lead to price erosion of the Company's systems and products.

GOVERNMENT REGULATION. The confidentiality of patient records and the
circumstances under which records may be released for inclusion in the Company's
databases is subject to substantial regulation by state governments. Additional
legislation governing the dissemination of medical record information has been
proposed at both the state and federal level. This legislation may require
holders of such information to implement security procedures that may result in
substantial costs to the Company, and could, in certain circumstances, limit the
Company's access to certain types of information. There can be no assurance that
changes to state or federal laws will not materially restrict the ability of
health care providers to submit information from patient records to the Company.

The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy
addressing the regulation of certain computer products as medical devices under
the Federal Food, Drug, and Cosmetic Act. The FDA could determine in the future
that certain applications of the Company's systems and products are clinical
decision tools subject to FDA regulation as medical devices. In addition, the
Company could become subject to future regulation of the manufacture and
marketing of medical devices and health care software systems, or to legislation
or regulation regarding the use of patient records or of access to health care
data. Compliance with such legislation and regulation could be burdensome, time
consuming and expensive. The Company cannot predict the effect of possible
future legislation and regulation.

YEAR 2000 ISSUES. The Company's primary exposure to the Year 2000 is the ability
of its systems to recognize four digit versus two digit references (i.e., 1998
versus 98) and to accept such information from its customers in the process of
building its databases. The Company currently believes the incremental costs
that the Company has and expects to incur, to make its systems and products Year
2000 compliant, will not be material to the Company's results of operations,
liquidity or capital resources. However, there can be no assurances that the
Company will not experience difficulties in utilizing data provided by its
customers who have not taken the necessary steps to make their internal systems
Year 2000 compliant. It is not currently possible to estimate the effect on the
Company's results of operations from any such difficulties.

WHEN USED IN THIS FORM 10-K, IN ANY FUTURE FILINGS BY HCIA WITH THE SECURITIES
AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES AND IN ORAL STATEMENTS
MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES
"WILL LIKELY RESULT," "ARE EXPECTED TO," "WILL CONTINUE," "IS ANTICIPATED,"
"ESTIMATE," "PROJECTED" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY
ANTICIPATED OR PROJECTED. HCIA WISHES TO CAUTION READERS NOT TO PLACE UNDUE
RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
MADE. HCIA UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

ITEM 2.               PROPERTIES.

The Company's executive offices are located in Baltimore, Maryland, in
approximately 66,000 square feet of leased office space, under a lease that
expires on December 31, 2002, and which includes an option for an additional
term of up to five years. The Company also leases approximately 47,000 square
feet of office space in

                                       9

<PAGE>

Ann Arbor, Michigan, under leases that expire on March 31, 2000, and 42,000
square feet of office space in Denver, Colorado, under a lease that expires on
August 31, 2001. The Company also maintains offices in Fairport, New York,
Waltham, Massachusetts, Louisville, Kentucky, Concord, California, Olympia,
Washington, Windsor, Connecticut, Deerfield, Illinois, Alcester, England and
Barcelona, Spain. The Company believes that its facilities are adequate for its
current operations.

ITEM 3.               LEGAL PROCEEDINGS.

The Company is a defendant from time to time in lawsuits incidental to its
business. The Company is not currently a party to, and none of its properties is
subject to, any material legal proceedings.

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

                      Not applicable.

ITEM 4A.              EXECUTIVE OFFICERS OF THE COMPANY.

Executive officers are elected annually by the Board of Directors and serve at
the discretion of the Board of Directors. Information regarding the executive
officers of the Company who are not directors is as follows:

Name                     Age               Position
----                     ---               --------

Barry C. Offutt          36         Senior Vice President and Chief Financial
                                    Officer

Jean Chenoweth           51         Senior Vice President-Industry Relations

Charles A. Berardesco    39         Senior Vice President, General Counsel and
                                    Secretary

Donald S. Good, Jr.      35         Senior Vice President-Operations

Mr. Offutt served as a Vice President from April 1992 until September 1995, when
he was appointed a Senior Vice President, and has served as Chief Financial
Officer since October 1992. He is a certified public accountant and was employed
by Arthur Andersen & Co. in various capacities from 1984 to March 1992.

Ms. Chenoweth served as Vice President - Industry Relations from April 1992
until her appointment as Senior Vice President in September 1995. She served in
various senior management positions, including President, with HKR and its
predecessor from 1989 through April 1992.

Mr. Berardesco served as Vice President, General Counsel and Secretary from May
1996 until September 1996, when he was appointed a Senior Vice President. Prior
to May 1996, he was a partner with the law firm of Whiteford, Taylor & Preston
L.L.P., counsel to the Company.

Mr. Good served as a Vice President from May 1996 until September 1996, when he
was appointed Senior Vice President-Commercial Markets. He was appointed Senior
Vice President-Operations, in August 1997. Prior to May 1996, he was a
healthcare consultant with Arthur Andersen & Co.

                                       10

<PAGE>



                                     PART II

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

The following table sets forth, for the quarterly period indicated, the high and
low closing sale price per share of Common Stock as reported by NASDAQ:

                            1996                          1997
                     High          Low             High          Low
                     ----          ---             ----          ---

First Quarter      $55-3/4       $41-7/8         $42            $16-3/4
Second Quarter      67-7/8        45-5/8          34-1/2         15-1/8
Third Quarter       67-3/8        50-1/16         33-3/8         13
Fourth Quarter      36-1/8        23-1/4          16-3/16        11-3/8


As of February 28, 1998, there were 122 holders of record of the Company's
Common Stock. The number of record holders is not representative of the number
of beneficial holders since many shares are held by depositories, brokers or
other nominees.

Dividends

The Company has never paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends on the Common Stock for the foreseeable
future. The Company currently intends to retain future earnings, if any, to fund
the development and growth of its business.

Sales of Unregistered Securities

In connection with the acquisition of LBA in August 1996, the Company issued a
total of 492,961 shares of Common Stock to the then stockholders of LBA's parent
company. The foregoing issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act as they did not involve a public offering. In
issuing the shares, the Company relied upon the status of the stockholders (or
their representatives) as officers or directors of LBA and that each had such
knowledge and experience in financial and business matters that such stockholder
was capable of evaluating the merits and risks of an investment in the Company's
Common Stock.

ITEM 6.           SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                     1993         1994       1995(1)       1996(1)      1997(2)
                                                                     ----         ----       ----          ----         ----
                                                                               (in thousands, except per share data)
<S> <C>
STATEMENTS OF OPERATIONS DATA:
  Revenue                                                          $ 28,111     $ 30,711     $ 48,015     $ 73,520     $ 82,905
  Salaries, wages and benefits                                       14,168       15,457       21,932       32,688       40,811
  Other operating expenses                                            8,611        8,625       12,055       17,058       24,463
  Depreciation and amortization                                       4,595        4,826        6,864       12,670       19,558
  Write-off of acquired in-process research and development costs        --           --       12,152       48,065           --
  Impairment loss on intangible assets and restructuring charges         --           --           --           --       41,129
                                                                   --------     --------     --------     --------     --------
      Operating income (loss)                                           737        1,803       (4,988)     (36,961)     (43,056)
  Interest income                                                        --          111        1,290        1,110          447
  Interest expense                                                      111          131          187          530          401
                                                                   --------     --------     --------     --------     --------
      Income (loss) before income taxes, minority interest
      in loss (income) of consolidated subsidiaries and cumulative
      effect of change in accounting for income taxes                   626        1,783       (3,885)     (36,381)     (43,010)
  Provision (benefit) for income taxes                                  362          759       (1,554)       5,886       (6,051)
  Minority interest in loss (income) of consolidated subsidiaries        90           (3)         (74)          --           --
                                                                   --------     --------     --------     --------     --------
      Income (loss) before cumulative effect of change in
      accounting for income taxes                                       354        1,021       (2,405)     (42,267)     (36,959)
  Cumulative effect of change in accounting for income taxes           (142)          --           --           --           --
                                                                   --------     --------     --------     --------     --------
      Net income (loss)                                            $    212     $  1,021     $ (2,405)    $(42,267)    $(36,959)
                                                                   ========     ========     ========     ========     ========
  Net income (loss) per share                                                   $   0.19     $  (0.31)    $  (4.19)    $  (3.12)
                                                                                ========     ========     ========     ========
  Shares used in per share calculation                                             5,518        7,733       10,096       11,834
                                                                                ========     ========     ========     ========
BALANCE SHEET DATA:
  Working capital                                                  $  3,852     $  5,620     $ 35,671     $ 36,996     $ 31,660
  Total assets                                                       41,122       40,865      108,401      223,196      182,240
  Long-term liabilities, excluding current installments               2,136        1,835          699        2,305           --
  Stockholders' equity                                               32,762       34,371       98,044      202,407      166,714
</TABLE>

(1) In connection with various acquisitions, the Company has recorded charges
    related to acquired in-process research and development costs. Exclusive of
    such charges and related income tax effects, net income per share would have
    been $0.60 and $0.68 for 1995 and 1996, respectively.

(2) During 1997, the Company recorded charges related to the write-down of
    certain intangible assets as well as reserves for the costs of restructuring
    its Implementation unit. Exclusive of such charges and related income tax
    effects, net loss per share would have been $(0.18) for 1997.


<PAGE>


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

OVERVIEW

HCIA Inc. ("HCIA" or the "Company") is a health care information content company
that develops and markets integrated clinical information systems and products.
The Company's systems and products range from standardized databases to highly
focused decision support systems that assist its customers in evaluating the
efficacy and economics of health care delivery. The Company's customers include
hospitals, integrated delivery systems, self-insured employers, pharmaceutical
companies and managed care organizations.

The Company has made a substantial investment in the acquisition and development
of its core collection of methodologies, clinical measurement tools and
technical resources. In addition to internal development efforts, the Company
has made a series of acquisitions of other health care information companies,
product lines and data resources. The Company's strategy is to integrate and
leverage these developed and acquired resources across substantially all of its
systems and products, thereby giving it the ability to increase revenue
generated from these resources without a commensurate increase in expenses. The
Company does not track profitability by product line since many of the Company's
resources are utilized throughout its systems and products.

In connection with certain acquisitions, the Company has recorded one-time
charges related to acquired in-process research and development costs. Such
charges totaled approximately $12.2 million and $48.1 million during 1995 and
1996, respectively. During 1997, the Company recorded a charge totaling $41.1
million related to an impairment loss on intangible assets and a restructuring
charge related primarily to the Company's 1996 acquisition of LBA Health Care
Management, Inc. ("LBA"). The Company has accounted for all of its acquisitions
using the purchase method of accounting and, accordingly, has included the
results of the acquired entities since the dates of acquisition. See Note 1 of
the Notes to Consolidated Financial Statements.

The Company's internal product development efforts are generally in connection
with customer contracts, and the related costs are included as a component of
operating expenses in the year incurred. The Company capitalizes costs related
to internal product development which is not in connection with a specific
customer contract from the point of technological feasibility to the point of
general availability.

As a result of its acquisitions of health care information companies, product
lines and data resources, the Company has acquired intangible assets, the cost
of which it amortizes over various useful lives. In addition, the Company has
capitalized internal development costs and acquired assets relating to the
development of methodologies, clinical measurement tools and technical
resources, including its database, of $6.9 million, $14.4 million and $14.9
million during 1995, 1996 and 1997, respectively. Consequently, the Company has
recorded amortization expense of $5.2 million, $10.1 million and $15.4 million
during 1995, 1996 and 1997, respectively. See Notes 1, 2, and 4 of the Notes to
Consolidated Financial Statements.

As a result of its unique ability to integrate health care data collected from
numerous sources and across varied treatment settings, the Company believes that
it is well positioned to offer the information systems and products necessary to
continue to increase average revenue per customer through the sale of more
sophisticated and comprehensive systems and products. With respect to
entry-level systems and products, pricing is relatively fixed and is influenced
by competitive systems and products. With respect to high-end systems and
products, pricing is often negotiated with the customer and is based on a number
of factors, including the value attributed by the customer to the system.

During 1997, the Company reorganized its internal sales and marketing structure
into four business units: Content, which focuses on distributing standard data
content products; Integrated Solutions, which aligns multiple HCIA competencies
to create an integrated solution for a client; Implementation, which provides
data-focused implementation services to providers; and HCIA-Europe. Effective in
1997, the Company began tracking its revenue through the four units, in lieu of
its historical tracking of revenue by sales of decision support systems and
syndicated products.

8


<PAGE>


RESULTS OF OPERATIONS

The following table sets forth, for the fiscal periods indicated, certain items
from the consolidated statements of operations of the Company expressed as a
percentage of revenue:

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                               1995          1996        1997
                                                               ----          ----        ----
<S> <C>
Revenue                                                        100%          100%        100%
Salaries, wages and benefits                                    46            45          49
Other operating expenses                                        25            23          30
Depreciation and amortization                                   14            17          24
Write-off of acquired in-process research and development costs 25            65          --
Impairment loss on intangible assets and restructuring charges  --            --          49
  Operating loss                                               (10)          (50)        (52)
Interest income, net                                             2             1          --
  Loss before income taxes                                      (8)          (49)        (52)
Provision (benefit) for income taxes                            (3)            8          (7)
Net loss                                                        (5)%         (57)%       (45)%
</TABLE>


                                                                             9


<PAGE>


1997 COMPARED TO 1996

Revenue

Revenue for 1997 was $82.9 million, an increase of $9.4 million or 13% over
1996. The increase was primarily the result of increased sales in 1997 by the
Company's Integrated Solutions and Implementation units.

The increase in Integrated Solutions sales was the result of the inclusion of a
full year's revenue from HealthChex, Inc. ("HealthChex") and Response Healthcare
Information Management, Inc. ("Response"), both of which were acquired in 1996,
and increased penetration of the pharmaceutical market. Sales by the
Implementation unit increased as a result of the inclusion of a full year's
revenue of LBA, which was acquired in 1996.

During 1997, revenue historically classified as from sales of decision support
systems represented approximately 85% of revenue and syndicated products
represented the remaining 15% of revenue. All of the Company's revenue growth in
1997 was the result of increased sales of decision support systems.

Salaries, Wages and Benefits

Salaries, wages and benefits increased to 49% of revenue for 1997 from 45% for
1996. The increase was primarily the result of the Company establishing staffing
levels in anticipation of a higher revenue level than actually achieved during
the second and third quarters of 1997 and the Company's decision to maintain
staffing levels in the fourth quarter of 1997 at a level which would be
necessary to support higher levels of revenue for 1998.

Other Operating Expenses

Other operating expenses, which include occupancy, travel and consulting
expenses, increased to 30% of revenue for 1997 from 23% for 1996. This increase
was a result of the Company establishing levels for certain of these expenses,
primarily consulting and occupancy, in anticipation of a higher revenue level
than actually achieved in 1997.

Depreciation and Amortization

Depreciation and amortization increased to 24% of revenue for 1997 from 17% for
1996. This increase was primarily a result of the additional amortization and
depreciation associated with the acquisitions of HealthChex, Response and LBA.

Write-off of Acquired In-process Research and Development Costs

In connection with the acquisitions of Response, HealthChex and LBA during 1996,
the Company acquired ongoing research and development activities. The Company
recorded one-time charges totaling $48.1 million during 1996, resulting from the
write-off of the acquired in-process research and development costs. The amount
of the one-time charges was equal to the estimated current fair value, based on
the discounted risk-adjusted cash flows, of specifically identified technologies
for which technological feasibility had not yet been established pursuant to
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," and for which
future alternative uses did not exist.

Impairment Loss on Intangible Assets and Restructuring Charges

During 1997, the Company recorded an impairment loss on intangible assets and
restructuring charges of approximately $41.1 million. Approximately $37.6
million of the charges represented the write-down of certain intangibles, which
arose from the Company's acquisition of LBA, to their estimated realizable
value. The charge resulted from the assessment that the Company's Implementation
unit, formed upon the acquisition of LBA, would not generate the cash flows
anticipated at the time of the LBA acquisition. The remainder of the charges,
totaling $3.5 million, represented reserves for the cost of employee severance,
facilities reduction, and customer allowances related to product
discontinuances, which were incurred primarily in connection with restructuring
the ongoing operations of the Implementation unit.

Interest Income and Expense

Net interest income was $46,000 for 1997 compared with $580,000 for 1996. This
change was the result of a lower invested balance in 1997 due to the use of cash
for acquisitions and to fund internal development costs and equipment
acquisitions.

Income Taxes

The Company's effective income tax rate was (14)% for 1997 compared with 16% for
1996. The change in the rate results from the effect of the non-deductible
write-off of the in-process research and development costs resulting from
certain acquisitions during 1996, which was partially offset by the increased
amortization of non-deductible goodwill during 1997 (see Note 8 of the Notes to
Consolidated Financial Statements).

10


<PAGE>


1996 COMPARED TO 1995

Revenue

Revenue for 1996 was $73.5 million, an increase of $25.5 million or 53% over
1995. The increase was the result of increased sales of the Company's decision
support systems. Revenue from the sales of decision support systems represented
82% of revenue for 1996 and syndicated products represented the remaining 18% of
revenue.

The decision support systems revenue increase was primarily the result of
increased sales to providers and managed care customers, particularly as a
result of acquisitions, as well as increased penetration of the supplier market.

Salaries, Wages and Benefits

Salaries, wages and benefits decreased to 45% of revenue for 1996 from 46% for
1995. This decrease was a result of the continued leveraging of the Company's
historical investments in technology and basic infrastructure as revenue
increased.

Other Operating Expenses

Other operating expenses, which include occupancy, travel and marketing
expenses, decreased to 23% of revenue for 1996 from 25% for 1995. This decrease
was a result of certain of these expenses growing at a slower rate than revenue.

Depreciation and Amortization

Depreciation and amortization increased to 17% of revenue for 1996 from 14% for
1995. This increase was a result of the additional amortization associated with
certain acquisitions and capitalized internal development costs as well as
depreciation of other acquired assets.

Write-off of Acquired In-process Research and Development Costs

In connection with four acquisitions completed during 1995 and 1996, the Company
acquired ongoing research and development activities. The Company recorded
one-time charges totaling $12.2 million and $48.1 million during 1995 and 1996,
respectively, resulting from the write-off of the acquired in-process research
and development costs. The amount of the one-time charges was equal to the
estimated current fair value, based on the discounted risk-adjusted cash flows,
of specifically identified technologies for which technological feasibility had
not yet been established pursuant to Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," and for which future alternative uses did not exist.

Interest Income and Expense

Net interest income was $580,000 for 1996 compared with $1.1 million for 1995.
The decrease was the result of higher interest expense in 1996 related to debt
incurred in connection with certain acquisitions.

Income Taxes

The Company's effective income tax rate was 16% for 1996 compared with (39)% for
1995. The change was primarily the result of non-deductible goodwill and the
non-deductible write-off of the in-process research and development costs
resulting from certain acquisitions during 1996.


                                                                             11


<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

During 1995 and 1996, the Company completed several public offerings of its
common stock. The net proceeds to the Company from the offerings were
approximately $182.3 million.

In August 1996, the Company obtained from First Union National Bank of North
Carolina ("First Union") a credit facility totaling $100 million, consisting of
a $50 million term loan and a $50 million revolving line of credit. The Company
incurred a one-time facility fee of $520,000. The Company borrowed the entire
$50 million term loan and approximately $36 million of the revolving line of
credit in connection with the acquisition of LBA and repaid such borrowings with
a portion of the net proceeds to the Company from a public offering of the
Company's common stock.

During 1997, the Company reduced the amount available under the revolving line
of credit and currently maintains a $25 million (subject to certain borrowing
limitations) revolving line of credit for general corporate purposes, including
future acquisitions and working capital requirements. Borrowings are
collateralized by substantially all of the Company's assets. The Company is
required to pay a commitment fee on the average daily unused portion of the
facility at a rate ranging from 0.25% to 0.375% per annum, depending on the
Company's debt/cash flow ratio. Borrowings bear interest at varying rates based
on an index tied to First Union's prime rate or LIBOR. The credit facility also
contains financial covenants applicable to HCIA, including a debt/cash flow
ratio and ratios of debt to capital. As of December 31, 1997, the Company was in
compliance with all such financial covenants and had a maximum borrowing
capacity of $11.7 million, and there were no borrowings outstanding under the
facility. The credit facility reduces to $18.8 million in July 1999, $12.5
million in July 2000 and expires on July 31, 2001.

During 1995, 1996 and 1997, the Company generated net cash from operations of
approximately $3.1 million, $10.3 million and $12.8 million, respectively.
During 1996 and 1997, approximately $12.1 million and $4.8 million of cash
generated from operations was used to fund the increase in accounts receivable.
The increases in accounts receivable were primarily the result of revenue
growth, as well as the timing of receipt of payments from certain major
customers. Net cash provided (used) by financing activities during 1995, 1996
and 1997 was approximately $66.2 million, $116.0 million and ($.4) million,
respectively. The cash generated by financing activities in 1995 and 1996 was
primarily a result of the Company's public offerings of its common stock. The
net cash provided by operations and financing activities has been utilized
primarily for acquisitions, software development costs and capital expenditures.

The Company made capital expenditures (including capitalized leases) totaling
$3.1 million, $6.4 million and $5.6 million during 1995, 1996 and 1997,
respectively. As of December 31, 1997, the Company had net working capital of
$31.7 million, including cash and cash equivalents in the amount of $5.6
million, and did not have any material commitments for capital expenditures.

In April 1995, the Company completed the acquisition of all of the outstanding
capital stock of Datis Corporation ("Datis") for $14.6 million in cash, which
included approximately $14.25 million funded by the Company and $386,000 funded
with the proceeds received from the exercise of certain options to purchase
Datis stock and repaid approximately $900,000 of outstanding debt of Datis. In
December 1995, the Company acquired the CHAMP unit of William M. Mercer,
Incorporated ("CHAMP") for $17.5 million in cash and, in May 1996, the Company
completed the acquisition of Response for approximately $6.3 million in cash. In
August 1996, the Company acquired LBA for a total purchase price of
approximately $128.8 million, $100.1 million of which was paid in cash and $28.7
million of which was paid by the delivery of HCIA common stock. The Company
utilized $86 million in borrowings under the First Union credit facility
discussed above to fund the cash portion of the purchase price, which was
subsequently repaid from the proceeds of a public offering of common stock. In
December 1996, the Company acquired HealthChex from Equifax Inc. for $11.5
million in cash. Each of these acquisitions has been accounted for using the
purchase method of accounting and, accordingly, the assets have been valued at
their estimated fair market value.


12


<PAGE>


YEAR 2000 COMPUTER SOFTWARE

The Company has performed a review of its computer systems and software and has
begun to implement the required revisions in anticipation of the Year 2000. The
Company believes that its primary exposure to the issue is in the ability of its
systems to recognize four digit references versus two digit references (i.e.,
1998 versus 98) and to accept such information from its customers in the process
of building its databases. At this time, the Company has completed the required
revisions to certain of its main processing systems to make them Year 2000
compliant and has scheduled the remainder of its efforts such that they should
be completed by June 1999. The Company believes that to a significant extent,
the necessary revisions to its systems and products will be made during the
planned updates and edits to its product offerings. As a result, the cost of the
efforts performed to date and the incremental future costs the Company expects
to incur to make all of its systems and processes Year 2000 compliant are not
anticipated to be material to the Company's results of operations, liquidity or
capital resources.

While the Company, in the process of making its systems Year 2000 compliant,
intends to design algorithms to test data received from its customers and
convert it to a usable format, there can be no assurances that the Company will
not experience difficulties in utilizing data provided by its customers who have
not taken the necessary steps to make their internal systems Year 2000
compliant. It is not currently possible to estimate the effect on the Company's
results of operations from any such difficulties.

NEW ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In
addition, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2, "Software Revenue Recognition" during 1997. The
Company will adopt the provisions of these pronouncements in 1998 and has
determined that they will not have a material effect on its financial position
or results of operation and is assessing their effect on its financial statement
presentation and disclosure.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-K contain forward-looking
statements, including statements regarding the intent, belief or current
expectations of the Company and its management. These statements are not
guarantees of future performance and involve a number of risks and uncertainties
which are difficult to predict. Therefore, actual outcomes and results could
differ materially from those indicated by such forward-looking statements. HCIA
undertakes no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are (i) variations in
quarterly results, (ii) the assimilation of acquisitions, (iii) the management
of the Company's growth and expansion, (iv) dependence on key personnel, (v)
development by competitors of new or superior products or entry into the market
of new competitors, (vi) dependence on major customers, (vii) dependence on
intellectual property rights, (viii) integrity, availability and reliability of
the Company's data, (ix) volatility of the Company's stock price, (x) changes in
the health care industry from both a regulatory and financial perspective, (xi)
implementation of required changes to computer systems and software for the year
2000, and (xii) other risks identified from time to time in the Company's
reports and registration statements filed with the Securities and Exchange
Commission.


                                                                             13


<PAGE>

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS
HCIA INC.:

We have audited the accompanying consolidated balance sheets of HCIA Inc. and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated 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.

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 HCIA Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

                                                           KPMG Peat Marwick LLP

Baltimore, Maryland
January 22, 1998


14


<PAGE>


CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands, except per share data)

HCIA INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                 1995          1996           1997
                                                                                 ----          ----           ----
<S> <C>
Revenue                                                                       $ 48,015      $ 73,520       $ 82,905
Salaries, wages and benefits                                                    21,932        32,688         40,811
Other operating expenses                                                        12,055        17,058         24,463
Depreciation                                                                     1,619         2,567          4,199
Amortization                                                                     5,245        10,103         15,359
Write-off of acquired in-process research and development costs                 12,152        48,065             --
Impairment loss on intangible assets and restructuring charges                      --            --         41,129
                                                                              --------      --------       --------
  Operating loss                                                                (4,988)      (36,961)       (43,056)
Interest income                                                                  1,290         1,110            447
Interest expense                                                                   187           530            401
                                                                              --------      --------       --------
  Loss before income taxes                                                      (3,885)      (36,381)       (43,010)
Provision (benefit) for income taxes                                            (1,554)        5,886         (6,051)
Minority interest in income of consolidated subsidiaries                           (74)           --             --
                                                                              --------      --------       --------
  Net loss                                                                    $ (2,405)     $(42,267)      $(36,959)
                                                                              ========      ========       ========
Net loss per share                                                            $  (0.31)     $  (4.19)      $  (3.12)
                                                                              ========      ========       ========
Shares used in per share calculation                                             7,733        10,096         11,834
                                                                              ========      ========       ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                                                              15


<PAGE>


CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(in thousands)

HCIA INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                                    1996                  1997
                                                                                                    ----                  ----
<S> <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                                      $  13,302            $    5,580
  Short-term investments                                                                               510                    --
  Trade accounts receivable, net of allowance for doubtful accounts
     of $1,042 in 1996 and $2,100 in 1997                                                           32,122                34,354
  Prepaid expenses and other current assets                                                          4,225                 3,669
  Deferred compensation funds held in trust                                                          5,321                 3,583
                                                                                                 ---------            ----------
            Total current assets                                                                    55,480                47,186
Furniture and equipment, net                                                                        12,188                13,671
Computer software costs, net                                                                        20,425                26,727
Other intangible assets, net                                                                       115,601                71,298
Net deferred tax asset                                                                              17,074                23,238
Other                                                                                                  123                   120
Deferred compensation funds held in trust                                                            2,305                    --
                                                                                                 ---------            ----------
            Total assets                                                                         $ 223,196            $  182,240
                                                                                                 =========            ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                               $   1,315            $    2,227
  Accrued salaries, benefits and other liabilities                                                   8,078                 7,430
  Notes payable                                                                                      1,718                    31
  Deferred revenue                                                                                   2,052                 2,255
  Acquired deferred compensation liability                                                           5,321                 3,583
                                                                                                 ---------            ----------
            Total current liabilities                                                               18,484                15,526
Acquired deferred compensation liability                                                             2,305                    --
                                                                                                 ---------            ----------
            Total liabilities                                                                       20,789                15,526
                                                                                                 ---------            ----------
Stockholders' equity:
  Preferred stock -- $0.01 par value; 500,000 shares authorized;
    no shares issued and outstanding                                                                    --                    --
  Common stock -- $0.01 par value; 50,000,000 shares authorized; issued and
    outstanding 11,781,458 as of December 31, 1996 and 11,850,094 as of December 31, 1997              118                   118
  Additional paid-in capital                                                                       249,591               250,892
  Accumulated deficit                                                                              (47,220)              (84,179)
  Cumulative unrealized appreciation of short-term investments                                           4                    --
  Cumulative effect of currency translation adjustment                                                 (86)                 (117)
                                                                                                 ---------            ----------
            Total stockholders' equity                                                             202,407               166,714
                                                                                                 ---------            ----------
 Total liabilities and stockholders' equity                                                      $ 223,196            $  182,240
                                                                                                 =========            ==========
</TABLE>

See accompanying notes to consolidated financial statements.


16


<PAGE>


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands)

HCIA INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                                                           Cumulative    Cumulative
                                                                                           Unrealized     Effect of
                                                               Additional                 Appreciation    Currency       Total
                                         Preferred   Common      Paid-In    Accumulated  of Short-Term   Translation  Stockholders'
                                           Stock      Stock      Capital      Deficit     Investments    Adjustment      Equity
                                           -----      ----      --------     ---------       -----         ------       ---------
<S> <C>
BALANCE AT
  DECEMBER 31, 1994                        $  --      $ 54      $ 36,876     $ (2,548)       $ --          $ (11)       $ 34,371

Sale of common stock to
  the public                                  --        36        66,006           --          --             --          66,042

Net loss                                      --        --            --       (2,405)         --             --          (2,405)

Effect of currency
  translation adjustment                      --        --            --           --          --             (8)             (8)

Unrealized appreciation of
  short-term investments                      --        --            --           --          44             --              44
                                           -----      ----      --------     ---------       -----         ------       ---------
BALANCE AT
  DECEMBER 31, 1995                        $  --      $ 90      $102,882     $ (4,953)       $ 44          $ (19)       $ 98,044

Exercise of stock options                     --        --           638           --          --             --             638

Income tax benefits related to exercise
  of stock options                            --        --         1,128           --          --             --           1,128

Sale of common stock to
  the public                                  --        23       116,233           --          --             --         116,256

Issuance of stock in connection
with an acquisition                           --         5        28,710           --          --             --          28,715

Net loss                                      --        --            --      (42,267)         --             --         (42,267)

Effect of currency
  translation adjustment                      --        --            --           --          --            (67)            (67)

Unrealized depreciation of
  short-term investments                      --        --            --           --         (40)            --             (40)
                                           -----      ----      --------     ---------       -----         ------       ---------
BALANCE AT
  DECEMBER 31, 1996                        $  --      $118      $249,591     $(47,220)       $  4          $ (86)       $202,407

Exercise of stock options                     --        --           613           --          --             --             613

Income tax benefits related to exercise
  of stock options                            --        --           688           --          --             --             688

Net loss                                      --        --            --      (36,959)         --             --         (36,959)

Effect of currency
  translation adjustment                      --        --            --           --          --            (31)            (31)

Unrealized depreciation of
  short-term investments                      --        --            --           --          (4)            --              (4)
                                           -----      ----      --------     ---------       -----         ------       ---------
BALANCE AT
  DECEMBER 31, 1997                        $  --      $118      $250,892     $(84,179)       $ --          $(117)       $166,714
                                           =====      ====      ========     =========       =====         ======       =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                              17

<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands)

HCIA INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                              1995           1996            1997
                                                                          ----------     -----------      ----------
<S> <C>
Cash flows from operating activities:
  Net loss                                                                $  (2,405)      $ (42,267)      $ (36,959)
  Adjustments to reconcile net loss to net cash
    provided by operating activities:
      Depreciation and amortization                                           6,864          12,670          19,558
      Write-off of acquired in-process research and development costs        12,152          48,065              --
      Impairment loss on intangible assets and restructuring charges             --              --          41,129
      Deferred tax provision (benefit)                                       (3,625)          5,606          (6,164)
      Changes in operating assets and liabilities:
         Trade accounts receivable                                           (7,078)        (12,057)         (4,846)
         Prepaid expenses and other current assets                             (532)         (1,965)            697
         Accounts payable                                                       215          (1,247)            912
         Accrued salaries, benefits and other liabilities                      (816)            812          (1,587)
         Deferred revenue                                                    (1,714)            674              88
         Minority interest                                                       75              --              --
                                                                          ----------     -----------      ----------
            Net cash provided by operating activities                         3,136          10,291          12,828
                                                                          ----------     -----------      ----------
Cash flows from investing activities:
  Purchases of furniture and equipment                                       (3,145)         (6,357)         (5,643)
  Cost of acquisitions, net of cash acquired                                (35,271)       (118,050)           (104)
  Computer software costs purchased or capitalized                           (6,151)        (12,671)        (13,389)
  Other intangible assets purchased or capitalized                             (716)         (1,742)         (1,506)
  Purchases of short-term investments                                       (69,312)        (59,640)             --
  Proceeds from disposals of short-term investments                          46,077          82,370             506
  Payments on notes receivable                                                1,551              --              --
  Other                                                                         104             (67)              3
                                                                          ----------     -----------      ----------
            Net cash used in investing activities                           (66,863)       (116,157)        (20,133)
                                                                          ----------     -----------      ----------
Cash flows from financing activities:
  Proceeds from exercise of stock options                                        --             638             613
  Income tax benefits related to stock options                                   --           1,128             688
  Proceeds from public offerings                                             66,042         116,256              --
  Acquisition related borrowings                                                 --          86,000              --
  Repayment of acquisition related borrowings                                    --         (86,000)             --
  Fees paid to establish credit facilities                                       --            (520)             --
  Borrowing from related party                                                2,915              --              --
  Repayments of related party borrowing                                      (1,900)             --              --
  Repayments of notes payable                                                  (513)         (1,246)         (1,687)
  Principal payments on capital leases                                         (315)           (211)             --
                                                                          ----------     -----------      ----------
            Net cash provided by (used in) financing activities              66,229         116,045            (386)
                                                                          ----------     -----------      ----------
Impact of currency fluctuations on cash and cash equivalents                     (8)            (67)            (31)
                                                                          ----------     -----------      ----------
(Decrease) increase in cash and cash equivalents                              2,494          10,112          (7,722)
Cash and cash equivalents--beginning of year                                    696           3,190          13,302
                                                                          ==========      ==========      ==========
Cash and cash equivalents--end of year                                    $   3,190       $  13,302       $   5,580
                                                                          ==========      ==========      ==========
Supplemental cash flow information
           -- cash paid during the year for interest                      $      89       $     461       $     367
                                                                          ==========      ==========      ==========
           -- cash paid during the year for income taxes                  $   1,088       $     790       $     415
                                                                          ==========      ==========      ==========
</TABLE>

See accompanying notes to consolidated financial statements.



18


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 and 1997


HCIA INC. AND SUBSIDIARIES

(1)  BACKGROUND

(a) Description of Business
HCIA Inc. ("HCIA" or the "Company") is a health care information content company
that develops and markets integrated clinical information systems and products.
The Company's systems and products range from standardized databases to highly
focused decision support systems that assist its customers in evaluating the
efficacy and economics of health care delivery. The Company's customers include
hospitals, integrated delivery systems, self-insured employers, pharmaceutical
companies and managed care organizations.

(b) Public Offerings
In February 1995, the Company completed an initial public offering of
approximately 2.0 million shares of common stock at $14.00 per share.

In August 1995, the Company completed a public offering of approximately 2.6
million shares at $28.50 per share, consisting of 1.5 million shares issued by
the Company and approximately 1.1 million shares sold by the Company's then
largest stockholder, AMBAC Inc. ("AMBAC").

In May 1996, approximately 4.2 million shares of the Company's common stock were
sold by AMBAC in a public offering. In connection with the offering the Company
sold 261,591 shares of common stock at $51.00 per share.

In August 1996, approximately 2.2 million shares of the Company's common stock
were sold at $54.125 in a public offering. Of these shares 216,696 were sold by
certain stockholders. The Company did not receive any of the proceeds from the
sale of shares by the selling stockholders.

Net proceeds to the Company from the offerings discussed above were
approximately $182.3 million.

(c) Acquisitions
Certain information regarding the Company's major acquisitions in the periods
covered by these financial statements is summarized below:

<TABLE>
<CAPTION>
                                  Datis                  CHAMP                Response                    LBA
                           -------------------    -------------------   ----------------------   ----------------------
                                       Life of                Life of               Life of                   Life of
                                        Asset                  Asset                 Asset                     Asset
                                        -----                  -----                 -----                     -----
<S> <C>
Purchase price             $14,250,000            $17,500,000           $6,261,000               $128,829,000
Assets acquired
  Current assets           $ 1,338,000            $   175,000           $1,274,000               $  4,681,000
  Furniture & equipment    $ 1,092,000 3-5 years           --           $  293,000 3-5 years     $  1,533,000 3-5 years
  Other assets             $    25,000                     --                   --                         --
  Deferred tax asset                --                     --           $  221,000               $ 18,534,000
  Software                 $   233,000   5 years  $   859,000  5 years  $  255,000   5 years               --
  Trade name                        --            $ 1,266,000 12 years          --                         --
  Customer base                     --            $   595,000 12 years  $  393,000  12 years     $  5,135,000  10 years
  Methodologies                     --                     --                   --               $ 12,843,000   6 years
  Assembled workforce               --            $ 1,102,000 12 years  $  133,000  12 years     $  4,080,000  10 years
  Goodwill                 $16,503,000  20 years  $ 1,351,000 12 years  $  304,000  15 years     $ 43,859,000  20 years
  In-process research
    & development                   --            $12,152,000           $4,309,000               $ 41,507,000
Liabilities assumed        $ 4,941,000                     --           $  921,000               $  3,343,000
</TABLE>


<TABLE>
<CAPTION>
                                   HealthChex
                            -----------------------
                                            Life of
                                             Asset
                                             -----
<S> <C>
Purchase price              $11,503,000
Assets acquired
  Current assets            $   508,000
  Furniture & equipment     $   590,000 3-5 years
  Other assets                       --
  Deferred tax asset        $   835,000
  Software                           --
  Trade name                         --
  Customer base             $   599,000  10 years
  Methodologies             $ 1,628,000   5 years
  Assembled workforce       $   715,000  10 years
  Goodwill                  $ 5,107,000  20 years
  In-process research
    & development           $ 2,249,000
Liabilities assumed         $   728,000
</TABLE>

                                                                              19

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On April 28, 1995, the Company acquired all of the capital stock of Datis
Corporation ("Datis") for $14,250,000 in cash. Datis provided databases and
related analyses to hospitals and hospital systems. The goodwill amortization
period is based on the nature of Datis' products and markets and the historical
rates of change in the products and markets.

On December 15, 1995, the Company acquired the assets constituting the CHAMP
unit of William M. Mercer, Incorporated ("CHAMP") for $17,500,000 in cash. CHAMP
provides database and analytical reporting services to large employers to assist
them in the management of their healthcare costs.

On May 15, 1996, the Company acquired all of the outstanding stock of Response
Healthcare Information Management, Inc. ("Response") for $6,261,000 in cash.
Response develops and markets information products which capture and analyze
patient-centered data relating to disease-specific outcomes measurement and
member/ patient satisfaction.

On August 9, 1996, the Company acquired all of the capital stock of LBA
Holdings, Inc. (formerly HealthVision, Inc.) and its operating subsidiary LBA
Health Care Management, Inc. ("LBA"). The purchase price including acquisition
expenses was $128,829,000, of which $100,114,000 was paid in cash and
$28,715,000 was paid through the delivery of 492,961 shares of the Company's
common stock. LBA develops and markets information products that analyze and
benchmark detailed clinical and productivity outcomes. The cash portion of the
purchase price was funded primarily through a credit facility obtained from
First Union National Bank of North Carolina ("First Union") consisting of a
$50,000,000 term loan and a $36,000,000 draw on a $50,000,000 revolving line of
credit (see note 9). These loans were repaid with a portion of the proceeds from
the Company's August 1996 public offering.

On December 2, 1996, the Company purchased all of the capital stock of
HealthChex, Inc. ("HealthChex") for $11,503,000 in cash. The parties have made
an election under Internal Revenue Code Sec. 338(h)(10) to treat this
acquisition as an asset purchase for tax purposes. HealthChex provides physician
profiling and medical claims review systems to health care providers and payors.

The values and lives of the intangible assets and in-process research and
development costs obtained in the CHAMP, Response, LBA and HealthChex
acquisitions were determined by an independent appraiser. The lives and values
of the intangible assets were based on, among other things, employee retention
rates, customer retention rates and the historical rates of change in the
products and markets. The current fair value of in-process research and
development costs was determined based on the risk-adjusted cash flows (at
discount rates of 19% to 22%) of specifically identified technologies for which
technological feasibility had not yet been established pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86") and for which
future alternative uses did not exist. Consideration of technological
feasibility for purposes of these calculations was given on a basis consistent
with that normally utilized by the Company (see note 2d). Non-recurring charges
to write off these costs were recorded on the date of each acquisition. These
charges are recorded as operating expenses on the accompanying consolidated
statements of operations.

During 1997, the Company recorded a $37,649,000 impairment loss on intangible
assets related to the LBA acquisition and reduced the economic lives of certain
of the remaining intangible assets (see note 4).

During November 1995, the Company acquired an additional 36% interest in CHKS
Limited ("CHKS"). As a result of this acquisition, CHKS became a wholly owned
subsidiary of the Company. The Company issued notes payable to the former
shareholders in the principal amount of $2,795,000. This acquisition was
accounted for using the purchase method of accounting and resulted in additional
goodwill of $2,709,000.


20

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The goodwill is being amortized over its estimated useful life of 15 years. The
estimate of the amortization period is based on the nature of the products and
markets of CHKS and the historical rate of change in the products and markets.

Also during 1995, the Company acquired certain assets and assumed certain
liabilities of John Froehlich Associates, MetriCor Inc. and MetaGenerics. The
aggregate purchase price for these acquisitions was $1,677,000, consisting of
cash of $1,166,000 and notes payable of $511,000. These acquisitions resulted in
increases in furniture and equipment of $75,000, increases in other intangible
assets of $1,938,000 and increases in current liabilities of $336,000. The other
intangible assets consist of goodwill which is being amortized on a
straight-line basis over estimated useful lives of 10 to 15 years. The estimate
of each amortization period is based on the nature of the products and markets
of the acquired entities and the historical rate of change in the products and
markets.

During 1996, the Company also acquired all of the stock of IASIST S.A. and all
of the interests in Managed Marketing LLC. The aggregate purchase price for
these acquisitions was $2,713,000 and was paid in cash. These acquisitions
resulted in increases in current assets of $496,000, furniture and equipment of
$85,000, software of $303,000 and goodwill of $2,159,000, offset by increased
current liabilities of $330,000. The goodwill is being amortized on a
straight-line basis over its estimated useful life of 15 years. The estimate of
each amortization period is based on the nature of the products and markets of
the acquired entities and the historical rates of change in the products and
markets.

Unless otherwise noted, funding for the acquisitions discussed above was
provided from the proceeds of the Company's public offerings. All of these
acquisitions were accounted for using the purchase method of accounting.

Unaudited pro forma combined results of the operations of the Company for the
year ended December 31, 1996 are presented below and have been prepared assuming
that the acquisitions discussed above had been made as of January 1, 1996.

                                   1996
                                -----------
                                (unaudited)

Revenue                          $93,568
Net income                       $ 7,192
Net income per share             $  0.59

The pro forma results include the historical accounts of the Company and the
acquired entities adjusted to reflect the effects of the depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the assets acquired, additional interest expense
related to notes payable issued in connection with certain acquisitions, the
reversal of the non-recurring write-off of acquired in-process research and
development costs recorded in connection with certain acquisitions and related
income tax effects. The pro forma results are not necessarily indicative of
actual results which might have occurred had the operations and management of
the Company and the acquired entities been combined in 1996.


                                                                              21

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its subsidiaries. The minority interest of CHKS for the periods before it became
wholly owned is stated separately on the financial statements. All significant
intercompany transactions have been eliminated in consolidation.

(b) Cash Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid securities with original maturities of
three months or less at the date acquired by the Company. At December 31, 1996,
the Company's short-term investments, which are classified as an available for
sale securities portfolio, consisted of municipal bonds, which had a fair value
and a cost of $510,000 and $506,000 respectively.

The portfolio is carried at fair value in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." All securities mature within one year. Realized gains and
losses are recorded using the specific identification basis to determine costs.
During 1996 and 1997, proceeds from sales of the securities totaled $82,370,000
and $506,000, respectively. Gross realized gains and losses on sales of the
securities were immaterial in 1996 and 1997.

(c) Furniture and Equipment
Furniture and equipment are stated at cost. Included in furniture and equipment
are computer hardware, furniture and fixtures and leasehold improvements. These
costs are being depreciated on the straight-line method over their estimated
useful lives of three to five years.

(d) Computer Software Costs
Computer software costs include the cost of internally developed software and
the fair market value assigned to computer software obtained in purchase
transactions. Costs for internally developed software are capitalized in
accordance with SFAS No. 86. These costs relate primarily to the building of
production systems and extending existing applications to new markets or
platforms using existing technologies and programming methods. The Company
capitalizes only those costs incurred after a detailed program design or, in the
absence of such, a working prototype has been developed. The Company generally
develops its applications in connection with customer contracts and includes the
related costs as a component of operating expenses in the period incurred. The
Company capitalized or purchased a total of $7,260,000, $13,229,000 and
$13,389,000 of computer software costs in 1995, 1996 and 1997, respectively,
including $1,092,000 in 1995 and $558,000 in 1996 related to business
acquisitions.

Capitalized costs are amortized, beginning with market availability, over the
economic useful life of the product. Typically, this life is five years. The
annual amortization expense is the greater of the amount computed using (a) the
ratio that current gross revenues for a product bears 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 including the
period being reported. Amortization expense for computer software was
$2,048,000, $3,816,000 and $6,204,000 during 1995, 1996 and 1997, respectively.
Accumulated amortization for computer software was $10,326,000 and $16,530,000
at December 31, 1996 and 1997, respectively.

The Company evaluates, on a quarterly basis, the recoverability of capitalized
software costs on the basis of whether such costs are fully recoverable from
projected undiscounted cash flows of individual system and product lines.


22

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(e) Revenue Recognition
Revenue from license fees for access to the Company's databases is recognized
when access to the database is made available to the customer. Revenue from
custom system or database development and implementation contracts is recognized
on a percentage of completion basis using the cost-to-cost method. This method
of accounting has resulted in unbilled accounts receivable of $3,686,000 and
$3,424,000 at December 31, 1996 and 1997, respectively. On a quarterly basis,
the Company assesses whether the current estimate of total contract costs for
each of these contracts indicates a loss is expected and accrues any such losses
on the entire contract in that quarter. Where the Company has contracted to
provide both access to a Company database and development of a custom database,
the contract value is segmented into its discrete elements according to their
relative values, and revenue is recognized separately on each element in
accordance with the above.

Revenue from group data contracts, which obligate the Company to process data,
produce reports and update databases on periodic intervals, is recognized as the
contracted obligations are fulfilled.

Revenue from licensing of software products is recognized upon shipment,
provided that no vendor obligations remain outstanding. While the Company has no
significant post-contract support ("PCS") obligations, any revenue related to
insignificant PCS obligations on software licenses is deferred and recognized
over the contract term. The Company determines the component of revenue
applicable to PCS obligations based upon its experience in fulfilling such
obligations.

Revenue on all other products is recognized when the product is shipped.

(f) Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are translated at
year-end exchange rates, while revenue and expenses are translated at rates
prevailing during the period. Accordingly, translation adjustments that arise
due to fluctuations in exchange rates are excluded from operations and are
reported as a separate component of stockholders' equity. The Company's foreign
operations account for less than 10% of assets and revenue of the Company for
1997.

(g) Income Taxes
Prior to the completion of the Company's initial public offering in February
1995, the Company was party to a federal tax-sharing agreement with AMBAC and
was included in AMBAC's consolidated federal income tax return. The tax-sharing
agreement provided for the determination of tax expense or benefit based on the
contribution of the Company to AMBAC's tax liability, computed substantially as
if the Company filed a separate income tax return. The tax liability due AMBAC
was settled quarterly, with a final settlement taking place after the filing of
the consolidated federal tax return. Commencing February 22, 1995, the Company
was no longer included on a consolidated basis for tax purposes with AMBAC and
became responsible for filing its own federal income tax return.

The Company uses the asset and liability method required by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," to
account for deferred income taxes. Under this method, deferred income taxes are
recognized for temporary differences between the financial reporting bases of
assets and liabilities and their respective tax bases and for operating loss and
tax credit carryforwards based on enacted rates expected to be in effect when
such amounts are realized or settled. The effects of changes in tax laws or
rates on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.


                                                                              23


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(h) Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (SFAS
No. 128"), which was effective for financial statements issued for periods
ending after December 15, 1997. This Statement replaces the presentation of
primary earnings per share ("EPS") with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. The Company adopted
SFAS No. 128 in 1997. While SFAS No. 128 requires restatement of all prior
period EPS data presented, there was no effect on the Company's prior period EPS
data for the years ended December 31, 1995 and 1996 because the Company
experienced losses in those years. The number of shares used in these
calculations has been adjusted to reflect a one-for-three reverse stock split
and the conversion of Class A and Class B common stock into a single class of
common stock (see note 10).

(i) Accounting for Stock Options
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") in accounting for its stock options.
Additional information required by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") is
discussed in Note 10.

(j) Use Of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

(k) Reclassifications
Certain amounts for 1995 and 1996 have been reclassified to conform to the
presentation for 1997.

(3)  FURNITURE AND EQUIPMENT

Furniture and equipment consist of the following at December 31:


                                         1996              1997
                                     ------------     ------------
Computer equipment                   $ 15,274,000     $ 17,896,000
Office furniture and equipment          1,881,000        4,329,000
Other                                     516,000          919,000
                                     ------------     ------------
                                     $ 17,671,000     $ 23,144,000
Less accumulated depreciation          (5,483,000)      (9,473,000)
                                     ------------     ------------
                                     $ 12,188,000     $ 13,671,000
                                     ============     ============


24

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) OTHER INTANGIBLE ASSETS

Other intangible assets at December 31, 1997 consist of the following:

<TABLE>
<CAPTION>
                                     Capitalized    Accumulated     Carrying      Weighted
                                        Cost       Amortization      Value      Average Life
                                    -------------  -------------  ------------- ------------
<S> <C>
Databases                           $   8,340.000   $ 5,457,000   $  2,883,000         5
CPHA license and prepaid royalties     14,031,000     4,711,000      9,320,000        17
Goodwill                               53,289,000     6,230,000     47,059,000        19
Customer bases                          3,395,000       287,000      3,108,000         7
Methodologies                           4,138,000       437,000      3,701,000         5
Assembled workforce                     3,682,000       316,000      3,366,000         9
Other                                   2,289,000       428,000      1,861,000        13
                                    -------------   -----------   ------------
                                    $  89,164,000   $17,866,000   $ 71,298,000
                                    =============   ===========   ============
</TABLE>

Other intangible assets at December 31, 1996 consist of the following:

<TABLE>
<CAPTION>
                                     Capitalized    Accumulated      Carrying      Weighted
                                         Cost       Amortization      Value      Average Life
                                    -------------   -----------   ------------   ------------
<S> <C>
Databases                           $   7,788,000   $ 4,778,000   $  3,010,000         5
CPHA license and prepaid royalties     14,031,000     3,886,000     10,145,000        17
Goodwill                               79,467,000     4,777,000     74,690,000        19
Customer bases                          6,722,000       290,000      6,432,000        10
Methodologies                          14,471,000       919,000     13,552,000         6
Assembled workforce                     6,030,000       276,000      5,754,000        10
Other                                   2,274,000       256,000      2,018,000        13
                                    -------------   -----------   ------------
                                    $ 130,783,000   $15,182,000   $115,601,000
                                    =============   ===========   ============
</TABLE>

Databases consist of the fair market value of various acquired databases, the
cost of acquiring data and internal development costs (direct labor and related
overhead) incurred in standardizing data for use in internally developed
databases. These assets are being amortized on a straight-line basis over their
estimated useful lives of five years. Amortization expense for databases was
approximately $962,000, $1,067,000, and $679,000 during 1995, 1996 and 1997,
respectively.

During 1992, the Company acquired an exclusive license to access and sell the
databases and certain other assets of the Commission on Professional and
Hospital Activities ("CPHA"). This license was recorded at its estimated fair
value of $8,073,000 at the date of acquisition and is being amortized on a
straight-line basis over 17 years. Under the terms of the license, the Company
paid royalties to CPHA based on revenues earned utilizing the licensed assets.
Subsequent to the acquisition, the Company and CPHA entered into a new license
agreement. Under the terms of the new agreement, the Company paid $5,958,000 to
CPHA in lieu of future royalty obligations. The payment is recorded as prepaid
CPHA royalties and is being amortized on a straight-line basis over 17 years,
consistent with the estimated economic life of the licensed properties.

Goodwill represents the excess of the purchase price over the fair value of net
assets acquired. Goodwill is being amortized on a straight-line basis over 10 to
20 years. Such amortization periods are estimated based on the nature of the
products and markets of the acquired companies and the historical rates of
changes in these products and market areas.

Customer bases, methodologies and assembled workforces were obtained through the
CHAMP, Response, LBA and HealthChex acquisitions. The values and lives of these
assets were determined by an independent appraiser based on factors such as
going concern value, employee turnover and historical customer retention rates.

Other intangibles consist of a trade name obtained in the CHAMP acquisition and
certain non-competition agreements. The value and life of the trade name were
determined by an independent appraiser. The non-competition agreements are
amortized over their 1 to 2 year terms commencing with the date the employees
are no longer employed by the Company.

                                                                              25

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Periodically the Company evaluates the carrying values and economic lives of its
intangible assets relative to the expected future cash flows of the underlying
businesses with which they are associated. At September 30, 1997, this
evaluation indicated that the carrying value of the intangible assets arising
from the acquisition of LBA in August 1996 were not fully realizable (see note
1). Accordingly the Company recorded an impairment loss on intangible assets of
approximately $37.6 million in the quarter ended September 30, 1997.
Commensurate with the write-down of the intangible assets, the Company
reevaluated the remaining economic lives of these assets and made appropriate
prospective adjustments. The following table summarizes the impairment loss on
intangible assets and changes to the asset lives:

<TABLE>
<CAPTION>
                                     Pre-Charge                     Post-Charge     Pre-Charge     Post-Charge
        Asset                      Net Book Value   Write Down    Net Book Value  Remaining Life  Remaining Life
---------------------              ---------------  -----------  ---------------  --------------- --------------
<S> <C>
Customer bases                     $  4,536,000    $  2,728,000    $  1,808,000         9                  4
Assembled workforce                   3,604,000       1,872,000       1,732,000         9                  6
Methodologies                        10,345,000       7,835,000       2,510,000         5                  4
Software                              1,236,000         828,000         408,000         4                  4
Goodwill                             41,804,000      24,386,000      17,418,000        19                 19
                                   ------------    ------------    ------------
                                   $ 61,525,000    $ 37,649,000    $ 23,876,000
                                   ============    ============    ============
</TABLE>


The Company also implemented a restructuring of certain of its operations,
primarily related to its Implementation unit, which was formed after the
acquisition of LBA. A $3.5 million restructuring charge was recorded during the
quarter ended September 30, 1997, representing the cost of employee severance,
facilities reduction and customer allowances.

(5)  ACCRUED SALARIES, BENEFITS AND OTHER LIABILITIES

Accrued salaries, benefits and other liabilities consist of the following at
December 31:

                                          1996                 1997
                                      -----------         -----------
Accrued salaries                      $ 2,220,000         $ 2,244,000
Accrued benefits                          477,000             515,000
Accrued vacation                          681,000             774,000
Other                                   4,700,000           3,897,000
                                      -----------         -----------
                                      $ 8,078,000         $ 7,430,000
                                      ===========         ===========



(6)  LEASES

The Company leases office space and certain equipment under operating leases.
Rent expense for these leases was $2,286,000, $3,563,000 and $4,907,000 net of
rental income of $0, $412,000 and $609,000 during 1995, 1996 and 1997,
respectively. The minimum rental commitments under noncancelable operating
leases as of December 31, 1997, are as follows:

Year Ending December 31:

  1998                                      $ 5,381,000
  1999                                        4,857,000
  2000                                        3,775,000
  2001                                        3,001,000
  2002                                        2,239,000
  Thereafter                                     --
                                            -----------
     Gross minimum payments required        $19,253,000
  Sublease Income                              (317,000)
                                            -----------
     Net minimum payments required          $18,936,000
                                            ===========


26

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7)  SAVINGS INCENTIVE PLAN

The Company maintains the HCIA Inc. Savings Incentive Plan, a profit sharing
plan qualified under Section 401(a) of the Internal Revenue Code. All employees
of the Company who have completed one year of service are eligible to
participate in the Plan. Subject to certain limitations on individual
contributions and allocations and Company deductions, the Plan allows
participants to defer up to 15% of their pay on a pre-tax basis and up to 10% of
their pay on an after-tax basis. The Company also makes matching contributions
equal to 50% of the amount a participant defers up to 6% of the participant's
pay. The Plan also provides for discretionary contributions by the Company. All
participants are fully vested in all of their accounts in the Plan. The
Company's contributions to the Plan during 1995, 1996 and 1997 were
approximately $194,000, $397,000 and $624,000, respectively.

(8)  INCOME TAXES

The income tax expense (benefit) relating to the operations of the Company
consists of the following:

<TABLE>
<CAPTION>
                                                   1995              1996                1997
                                              -------------     -------------       -------------
<S> <C>
Federal and state:
  Current                                     $   2,071,000      $    280,000       $     113,000
  Deferred                                       (3,625,000)        5,606,000          (6,164,000)
                                              -------------      ------------       -------------
     Total income tax expense (benefit)       $  (1,554,000)     $  5,886,000       $  (6,051,000)
                                              =============      ============       =============
</TABLE>


The tax provisions in the accompanying financial statements differ from
prevailing federal corporate rates. A reconciliation of this difference is as
follows:

<TABLE>
<CAPTION>
                                                               1995                   1996                       1997
                                                         Amount       %          Amount         %           Amount         %
                                                    -----------------------  ------------------------  -------------------------
<S> <C>
Computed expected tax expense
  (benefit) at statutory rate                       $ (1,346,000)  (34.0)%    $(12,370,000)  (34.0)%    $ (14,623,000)   (34.0)%
Goodwill amortization                                    220,000     5.6           637,000     1.8            922,000      2.1
Impairment loss on intangible assets                          --      --                --      --          9,754,000     22.7
Tax-exempt interest                                     (234,000)   (5.9)         (216,000)   (0.6)                --       --
State tax, net of federal benefit                       (224,000)   (5.7)       (1,609,000)   (4.4)        (2,350,000)    (5.5)
Acquired in-process research and development costs                              19,226,000    52.8                 --       --
Other, net                                                30,000     0.7           218,000     0.6            246,000      0.6
                                                    ----------------------    ---------------------     ------------------------
Provision (benefit) for income taxes                $ (1,554,000)  (39.3)%    $  5,886,000    16.2%     $  (6,051,000)   (14.1)%
                                                    ======================    =====================     ========================
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities and deferred tax assets at December 31, 1996 and
1997, are presented below:

<TABLE>
<CAPTION>
                                                       1996                1997
                                                  ------------        -------------
<S> <C>
Deferred tax assets:
  Operating accruals                               $   881,000         $ 2,205,000
  Basis differences in software and intangibles      3,865,000           4,439,000
  Bonus accrual                                      2,005,000                  --
  Net operating loss carryforwards                  11,457,000          17,752,000
                                                   -----------         -----------
  Gross deferred tax assets                         18,208,000          24,396,000
  Valuation allowance                                       --                  --
                                                   -----------         -----------
  Net deferred tax assets                          $18,208,000         $24,396,000
                                                   -----------         -----------
Deferred tax liabilities:
  Bonus accrual                                             --             209,000
  Basis differences in fixed assets                  1,134,000             949,000
                                                   -----------         -----------
  Total deferred tax liabilities                     1,134,000           1,158,000
                                                   -----------         -----------
Net deferred tax asset                             $17,074,000         $23,238,000
                                                   ===========         ===========
</TABLE>


                                                                              27

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The valuation allowance for deferred tax assets as of December 31, 1996 and 1997
was $0. Therefore, there was no net change in the valuation allowance for 1996
and 1997.

The Company has net operating loss carryforwards of $55,400,000 at December 31,
1997, which expire between 2002 and 2011. The utilization of certain of these
carryforwards is subject to limitations under U.S. federal income tax laws.
Realization of these carryforwards is dependent on the Company generating
sufficient taxable income prior to their expiration. Although realization is not
assumed, management believes it is more likely than not that they will be
realized through future taxable income. However, the net deferred tax assets
could be reduced by a valuation allowance if management's estimates of future
taxable income are significantly reduced.

(9)  CREDIT AGREEMENT

In August 1996, the Company obtained a credit facility from First Union totaling
$100,000,000, consisting of a $50,000,000 term loan and a $50,000,000 revolving
line of credit. The Company incurred a one-time facility fee and related
expenses of $520,000 which is being amortized over the five year term of the
line of credit. The Company borrowed the entire $50,000,000 term loan and
approximately $36,000,000 of the line of credit in connection with the LBA
acquisition (see note 1(c)). These borrowings were repaid in August 1996 with a
portion of the proceeds from the Company's August 1996 public offering of its
common stock (see note 1(b)). During 1997, the Company reduced the amount
available under the revolving line of credit and currently maintains a
$25,000,000 line of credit (subject to borrowing limitations) and made no
additional borrowings against it during 1997.

The line of credit bears interest at rates ranging from First Union's prime rate
to prime plus 0.5% or LIBOR plus 0.75% to LIBOR plus 1.75%, depending on the
Company's debt to cash flow ratio. The Company pays a commitment fee on the
unused portion of the line of credit at rates ranging from 0.25% to 0.375%,
depending on the Company's debt to cash flow ratio. The line of credit is
subject to financial covenants including debt to cash flow and debt to capital
ratios. As of December 31, 1997 the Company was in compliance with all such
covenants and had a maximum borrowing capacity of $11.7 million, and there were
no borrowings outstanding under the facility. The credit facility reduces to
$18.8 million in July 1999, $12.5 million in July 2000 and expires on July 31,
2001.

(10)  STOCKHOLDERS' EQUITY

(a) Capital Amendment
Effective February 14, 1995, the Company filed an amendment to its articles of
incorporation which effected: (i) a one-for-three reverse stock split; (ii) the
conversion of the Class A and Class B common stock into a single class of common
stock; and (iii) the authorization of a total of 15,000,000 shares of common
stock and 500,000 shares of preferred stock, each having a par value of $.01 per
share. All references to common stock and stock options in these financial
statements have been adjusted to reflect the one-for-three reverse stock split
as if it had occurred prior to January 1, 1995. Effective August 12, 1996, the
Company filed an amendment to its articles of incorporation increasing the
authorized number of shares of common stock to 50,000,000.

(b) Common and Preferred Stock
The preferred stock may be issued from time to time by the board of directors as
shares of one or more series. The description of the shares of each series of
preferred stock is established by the board of directors prior to the issuance
of the series of shares.

During 1995, the Company issued 3,512,500 shares of common stock in connection
with its public offerings.

During 1996, the Company issued 2,261,591 shares of common stock in connection
with its public offerings and 492,961 shares in connection with its acquisition
of LBA.

28

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(C) OPTIONS
At December 31, 1995, 1996 and 1997, the Company had outstanding stock options
as follows:



<TABLE>
<CAPTION>

                                           1995            1996               1997
                                         --------       ----------        ----------

<S><C>

Stock options outstanding pursuant to:
HCIA Stock Option Plan                    169,933          956,266         1,399,952
Directors' Option Plan                     22,500           57,000            87,000
Other options                             507,800          451,111           388,425
                                          -------        ---------         ---------
Total stock options outstanding           700,233        1,464,377         1,875,377
                                          =======        =========         =========
</TABLE>

The HCIA Stock Option Plan provides that up to 2,350,000 options may be issued
to employees of the Company. Options granted to date under this plan vest over a
period of three or four years and expire ten years from the date of grant. The
Directors' Option Plan provides that up to 200,000 options may be issued to
outside directors of the Company. Options granted to date under this plan vest
over periods of one to two years. The Company has also issued non-plan options
which generally vest over periods of two or three years and expire six to ten
years from the date of grant. In February 1995, the Company issued a non-plan
option to its chief executive officer which was fully vested on the date of
grant and expires five years from the date of grant. All stock options issued by
the Company have been granted with exercise prices equal to or greater than the
estimated fair market value of the common stock on the date of grant. Stock
option transactions are summarized as follows:


<TABLE>
<CAPTION>

                                           1995                1996                  1997
                                     -----------------    -----------------     ----------------
                                              Weighted             Weighted             Weighted
                                               Average              Average              Average
                                              Exercise             Exercise             Exercise
                                      Shares    Price      Shares    Price    Shares      Price
                                     -------  -------   ---------   ------   ---------   -------
<S><C>
Outstanding at beginning of year     374,226   $ 8.62     700,233   $13.80   1,464,377   $25.89
Granted                              357,433   $18.99   1,524,000   $45.61     891,500   $23.87
Exercised                             (6,427)  $10.50     (62,605)  $ 9.27     (65,907)  $ 8.50
Canceled                             (24,999)  $11.20    (697,251)  $58.35    (414,593)  $30.10
                                     -------            ---------            ---------
Outstanding at end of year           700,233   $13.80   1,464,377   $25.89   1,875,377   $24.61
                                     =======            =========            =========
Options exercisable at end of year   186,867   $13.50     345,215   $13.13     640,905   $20.00
                                     =======            =========            =========

</TABLE>


The following summarizes information about stock options outstanding as of
December 31, 1997:


<TABLE>
<CAPTIONS>
                                              Options Outstanding                        Options Exercisable
                                    ---------------------------------------------   ----------------------------
                                      Number       Weighted Avg.     Weighted          Number        Weighted
              Range of              Outstanding      Remaining        Average        Exercisable      Average
           Exercise Prices          at 12/31/97  Contractual Life  Exercise Price    at 12/31/97  Exercise Price
           ---------------          -----------  ----------------  ---------------  ------------  --------------
<S><C>
                 $6                    85,498           2.5        $      6.00         85,498     $     6.00
             $10 to $24               936,928           7.5              15.04        336,929          12.52
             $25 to $40               638,576           8.4              30.71        152,978          27.73
             $48 to $51                80,750           5.1              48.72          7,250          49.07
               $59.88                 133,625           8.5              59.88         58,250          59.88
                                    ---------     --------------   ---------------    -------     ----------
                                    1,875,377           7.5        $     24.61        640,905     $    20.00
                                    =========     ==============   ===============    =======     ==========
</TABLE>


                                       29

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company applies APB No. 25 and related interpretations in accounting for its
stock options. Accordingly, no compensation expense has been recognized in
connection with its stock options. Had compensation expense for the Company's
stock options been determined consistent with FASB No. 123, the Company's net
loss and loss per share would have been increased to the pro forma amounts
indicated below:


<TABLE>
<CAPTION>

                                           1995              1996            1997
                                       -----------      -----------       ------------
<S><C>
Net loss                As reported    $   (2,405)     $   (42,267)     $   (36,959)
                          Pro forma    $   (2,996)     $   (43,795)     $   (40,781)
Loss per share          As reported         (0.31)           (4.19)           (3.12)
                          Pro forma         (0.39)           (4.34)           (3.45)

</TABLE>


The fair value of the options for purposes of the above pro forma disclosure was
calculated using the Black-Scholes option pricing model and the following
assumptions: a risk-free interest rate of 6.58% in 1995 and 1996 and 5.80% in
1997; a weighted average expected life of four to seven years; no dividend
payments; and a volatility of 31.29% in 1995 and 1996, based on the annualized
10 year industry average, and 67.22% in 1997 based on the Company's historical
volatility. The effects of applying SFAS No. 123 in the pro forma net loss and
loss per share for 1995, 1996 and 1997 may not be representative of the effects
on such pro forma information for future years.

(11)  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, trade accounts receivable,
other current assets, accounts payable, accrued expenses and capital lease
obligations approximates fair value because of the short-term maturity of these
instruments. The fair value of short-term investments is estimated based on
quoted market prices for these or similar investments.

(12)  NEW ACCOUNTING PRONOUNCEMENTS

SFAS NO. 130

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," (SFAS No. 130). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. This statement is
effective for both interim and annual periods beginning after December 15, 1997.
It is not anticipated that SFAS No. 130 will have any material effect on current
or prior period financial statement displays presented by the Company.


30

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SFAS NO. 131

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS No. 131). SFAS No. 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.

SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated, unless it is impracticable to do so. The
Company is currently assessing the effect of the pronouncement on its current
disclosure.

SOP 97-2

In November 1997, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2). SOP 97-2 provides revised and new
guidance on when and in what amounts revenue should be recognized for licensing,
selling, leasing or otherwise marketing computer software. The Statement is
generally effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company does not anticipate that SOP 97-2 will have
any material impact on its revenue recognition policies.

                                                                             31

<PAGE>

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE.
                  None.

                                       11

<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.

The information required by this Item is contained in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the headings
"Election of Directors" and in Item 4A of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is contained in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the heading
"Executive Compensation and Other Information."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item is contained in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the heading
"Security Ownership of Management and Certain Beneficial Owners."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is contained in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the heading "Certain
Transactions."

                                       12

<PAGE>

                                     PART IV

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

         (a)      The following documents are filed as a part of this Report:

1. The following report and financial statements are included in Item 8 of this
Report:

                      Independent Auditors' Report
                      Consolidated Balance Sheets
                      Consolidated Statements of Operations
                      Consolidated Statements of Changes in Stockholders' Equity
                      Consolidated Statements of Cash Flows
                      Notes to Consolidated Financial Statements

         (b)      Form 8-Ks:

         None

         (c)      Exhibits:

         (d)      Schedules to Financial Statement
         
                  Independent Auditors' Report
                  Financial Statement Schedule II

<TABLE>
<CAPTION>
         Exhibit
         Number                                        Description
         ------                                        -----------
<S><C>
           3.1        ***        Articles of Incorporation of the Registrant, as amended to date.
           3.2                   Bylaws of the Registrant, as amended to date.
          10.1         *         Employment Agreement dated as of January 1, 1995 by and between the Registrant
                                 and George D. Pillari.
          10.1.1      ****       First Amendment to Employment Agreement.
          10.2                   HCIA Inc. 1994 Stock and Incentive Plan, as amended to date.
          10.3        **         Agreement dated December 4, 1992 by and among Healthcare Knowledge
                                 Resources, Inc., the Registrant and the Commission on Professional and Hospital
                                 Activities.
          10.4        ****       HCIA Inc. 1995 Non-Employee Directors Stock Option Plan, as amended to date.
          10.5        **         Tax Sharing Agreement by and among AMBAC Inc., AMBAC Indemnity Corporation, American
                                 Municipal Bond Holding Company and the Registrant dated July 18, 1991.
          10.6        ***        Form of Management Retention Agreement.
          10.7         *         Registration Rights Agreement, dated August 10, 1995, by and among the
                                 Registrant, George D. Pillari, AMBAC Inc. and AMBAC Indemnity
                                 Corporation.
          10.8        ***        Registration Rights Agreement, dated August 9, 1996, by and among the Registrant and
                                 certain stockholders.
          10.9        ***        Credit Agreement between First Union National Bank of North Carolina
                                 and the Registrant.
          10.9.1                 First Amendment to Credit Agreement.
          10.9.2                 Second Amendment to Credit Agreement.
          10.9.3                 Third Amendment to Credit Agreement.
          11.1                   Statement regarding Computation of Per Share Earnings.
          21.1         ****      Subsidiaries of the Registrant.
</TABLE>

                                       13

<PAGE>

          23.1                   Consent of KPMG Peat Marwick LLP.
          27.1                   Financial Data Schedule.

*        Incorporated by reference to the Registrant's Registration Statement on
         Form S-1. (File No. 33-94946).

**       Incorporated by reference to the Registrant's Registration Statement on
         Form S-1. (File No. 33-88226).

***      Incorporated by reference to the Registrant's Registration Statement on
         Form S-3. (File No. 333-08639).

****     Incorporated by reference to the Registrant's Report on Form 10-K for
         the year ended December 31, 1996.

                                       14

<PAGE>



                                   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.

                                       HCIA INC.

                                       By:  /s/ George D. Pillari
                                            ________________________________
                                            George D. Pillari
                                            Chairman of the Board, President
                                            & CEO

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

      Signature                             Title                      Date
      ---------                             -----                      ----

/s/ George D. Pillari             Chairman of the Board,          March 26, 1998
________________________          President and Chief
George D. Pillari                 Executive Officer
                                  (principal executive
                                    officer)

/s/ Barry C. Offutt               Senior Vice President           March 26, 1998
________________________          and Chief Financial Officer
Barry C. Offutt                   (principal financial and
                                    accounting officer)


/s/ Richard A. Berman             Director                        March 26, 1998
________________________
Richard A. Berman

/s/ Richard Dulude                Director                        March 26, 1998
________________________
Richard Dulude

/s/ W. Grant Gregory              Director                        March 26, 1998
________________________
W. Grant Gregory

/s/ Phillip B. Lassiter           Director                        March 26, 1998
________________________
Phillip B. Lassiter

/s/ Mark C. Rogers                Director                        March 26, 1998
________________________
Mark C. Rogers

/s/ Carl J. Schramm               Director                        March 26, 1998
________________________
Carl J. Schramm

                                       15

<PAGE>



                                  Exhibit Index


<TABLE>
<S><C>
3.1  ***        Articles of Incorporation of the Registrant, as amended to date
3.2             Bylaws of the Registrant, as amended to date.
10.1 *          Employment Agreement dated as of January 1, 1995 by and between the Registrant
                and George D. Pillari.
10.1.1 ****     First Amendment to Employment Agreement
10.2            HCIA Inc. 1994 Stock and Incentive Plan, as amended to date
10.3 **         Agreement dated December 4, 1992 by and among Healthcare
                Knowledge Resources, Inc., the Registrant and the Commission on
                Professional and Hospital Activities
10.4 ****       HCIA Inc. 1995 Non-Employee Directors Stock Option Plan, as amended to date
10.5 **         Tax Sharing Agreement by and among AMBAC Inc., AMBAC Indemnity Corporation,
                American Municipal Bond Holding Company and the Registrant dated as of July 18, 1991.
10.6 ***        Form of Management Retention Agreement.
10.7 *          Registration Rights Agreement, dated August 10, 1995, by and among the Registrant,
                George D. Pillari, AMBAC Inc. and AMBAC Indemnity Corporation
10.8 ***        Registration Rights Agreement, dated August 9, 1996, by and among the Registrant
                and certain stockholders
10.9 ***        Credit Agreement, dated August 8, 1996, by and between First
                Union National Bank of North Carolina, as Agent, and the
                Registrant.
10.9.1          First Amendment to Credit Agreement.
10.9.2          Second Amendment to Credit Agreement.
10.9.3          Third Amendment to Credit Agreement.
11.1            Statement regarding Computation of Per Share Earnings
21.1 ****       Subsidiaries of the Registrant.
23.1            Consent of KPMG Peat Marwick LLP.
27.1            Financial Data Schedule
</TABLE>


*        Incorporated by reference to the Registrant's Registration Statement on
         Form S-1 (File No. 33-94946).

**       Incorporated by reference to the Registrant's Registration Statement on
         Form S-1. (File No. 33-88226).

***      Incorporated by reference to the Registrant's Registration Statement on
         Form S-3. (File No. 333-08639).

****     Incorporated by reference to the Registrant's Report on Form 10-K for
         the year ended December 31, 1996.

                                       16

<PAGE>



                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
HCIA Inc.:

Under date of January 22, 1998, we reported on the consolidated balance sheets
of HCIA Inc. and Subsidiaries (the Company) as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997, as contained in the annual report on Form 10-K for the year 1997. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this consolidated financial statement schedule based on our audits.

In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

                                       KPMG PEAT MARWICK LLP

Baltimore, Maryland
January 22, 1998

                                       17

<PAGE>


                SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS

                                 (In thousands)

<TABLE>
<CAPTION>
                                            Balance at        Charged to        Deductions       Balance at
                                            Beginning         Costs and                          End of Period
Description                                 of Period         Expenses
<S><C>
Allowance for Doubtful Accounts
Year ended December 31, 1995..................$  359              $ 214          $(119)(A)           $454
Year ended December 31, 1996..................$  454              $ 560          $  28 (A)         $1,042
Year ended December 31, 1997..................$1,042             $1,361          $(303)(A)         $2,100
</TABLE>


(A)  Accounts receivable write-offs and recoveries

                                       18