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, 1998

                                       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           (I.R.S. employer identification no.)
  incorporation or organization)

 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 26, 1998, was $44,393,073.

The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 26, 1998 was 11,851,125.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the 1999 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"). 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. 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.

In January 1999, the Company announced that it intended to dispose of its
Implementation Unit, which consists of the assets acquired as part of the LBA
acquisition. These assets are now being reported as discontinued operations,
and unless otherwise indicated, the information provided in this Form 10-K does
not included information relating to the Implementation Unit.

GENERAL

HCIA collects, manages, and distributes comparative health care information. Its
customers deliver, purchase and manufacture health care products and services.
By combining industry leading databases, methodologies, and analytic services,
HCIA creates information assets that help customers manage health care costs and
improve patient care.

HCIA's value to its customers is its ability to create clinical databases and
information products from many large and disparate incoming data streams. For
example, the Company's patient-centered outcomes systems allow for the
collection and standardization of patient-reported outcomes and the merging of
such data with a patient's medical-claims and pharmaceutical-usage histories.
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 that is
substantially more detailed and useful in understanding and modifying medical
practice patterns than information derived from traditional health care data
sources.
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PRODUCT LINES

HCIA offers a range of information products that are utilized by each of the
three major health care market constituencies. Providers, such as hospitals and
integrated delivery systems, use the Company's 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 two product lines are Data Management Services and Information
Tools. Data Management Services account for the majority of the company's
revenues and are offered to all three major markets. Data Management Services
generally involve the collection of data from or on behalf of a client, the
merging of proprietary benchmark and comparative data from HCIA, and the
creation of a database and analytical system to analyze the data. The Company
also develops and markets Syndicated Data Products that are created from its
proprietary benchmark and comparative databases. Information Tools primarily
consist of physician and hospital profiling software that is sold to providers
and buyers of health care.

The Company's European operations, HCIA-Europe, offers services similar to the
Company's domestic product lines to hospitals and insurance organizations
predominately located in the United Kingdom and Spain.

     DATA MANAGEMENT SERVICES

Data Management Services account for the majority of the company's revenues and
are marketed to pharmaceutical companies, managed care organizations, and
hospitals. Data Management Services are utilized by more than 400 pharmaceutical
companies, employers and managed care organizations. Additionally, through
marketing partnerships with 19 state and specialty hospital associations, the
Company's Data Management Services reach approximately 1,200 hospitals. 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 Internet-based data-delivery applications.
Syndicated Data Products, or information products created from the Company's
proprietary and benchmark databases, 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 Syndicated Data Products containing national and regional
normative data on length of stay, costs and medical necessity. The Company
markets these Syndicated Data 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 Syndicated Data Products generally are used for
utilization management, claims adjudication and actuarial forecasting. HCIA
reaches more than 5,000 customers with its Syndicated Data Products.

Most of the Company's Data Management Services 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 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 that links its several geographical locations and
provides customers with leased-line, dial-up, and Internet access. The Company
supports most of the major commercially available 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 and
syndicated products, the Data Management Services product line 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

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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.

     INFORMATION TOOLS

Information Tools are used by managed care organizations, hospitals, and
integrated delivery systems to measure and compare the clinical and financial
performance of individual hospitals and physicians. Information Tools are
generally delivered in the form of software that is resident on a client's
internal computer systems and are often integrated into the workflow of an
organization. The software delivered by HCIA is typically updated at least
annually, and in some cases, several time per year. Included in the software are
proprietary algorithms and benchmark data that allow for the standardization of
a client's data and subsequent comparison of those data to national and regional
benchmarks supplied by HCIA. HCIA's Information Tools are used by approximately
300 hospitals and 125 managed care organizations throughout the U.S.

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 1997 and 1998, no single customer
accounted for 10% or more of the Company's revenue. HCIA's ten largest customers
accounted for approximately 31% and 30% of its revenue during 1997 and 1998,
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 utilizes a
direct sales approach with the existing customer base to market its Data
Management Services and Information Tools 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 staff for sales support. In addition, HCIA has entered into
agreements with health care information systems vendors whereby the Company's
products are marketed through their respective sales forces. Approximately 25%
of the Company's revenues in 1998 was derived from third-party relationships.
The Company also approaches each of the major market constituencies through the
sale of Syndicated Data Products and 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 Syndicated Data 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 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 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

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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 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 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 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, 1998, the Company had 507 employees, including 68 in sales
and marketing, 206 in health care data, 168 in technology and 65 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

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 HAVE INVOLVED, AND MAY CONTINUE TO INVOLVE, NUMEROUS RISKS FOR THE
COMPANY. The Company has, in large part,

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expanded its products and services 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.

THE FAILURE TO MANAGE ITS GROWTH COULD ADVERSELY AFFECT THE COMPANY'S RESULTS.
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.

THE COMPANY IS DEPENDENT ON KEY PERSONNEL WHO DO NOT HAVE EMPLOYMENT AGREEMENTS.
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 or other key personnel. The loss of key personnel or the
inability to hire or retain qualified personnel could have a material adverse
effect on the Company.

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.

THE COMPANY IS DEPENDENT ON NON-REGISTERED 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.

THE COMPANY FACES SIGNIFICANT COMPETITION. The health care information market is
intensely competitive and rapidly changing. The Company competes for the sale of
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.

THE COMPANY IS DEPENDENT ON CERTAIN MAJOR CUSTOMERS. During 1997 and 1998, the
Company's ten largest customers accounted for approximately 31% and 30%,
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.

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.

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THE COMPANY'S STOCK PRICE HAS BEEN HIGHLY VOLATILE. 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 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.

CONTINUOUS CHANGES IN THE HEALTH CARE INDUSTRY HAVE A SIGNIFICANT IMPACT ON THE
COMPANY. The health care industry is subject to changing political, economic and
regulatory influences that 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 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 products.

THE COMPANY FACES INCREASING EFFORTS TO REGULATE ACCESS TO HEALTH CARE DATA. 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.

THE COMPANY FACES POTENTIAL EXPOSURE ON 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.
<PAGE>

The Company's executive offices are located in Baltimore, Maryland, in
approximately 48,000 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 38,000 square
feet of office space in Ann Arbor, Michigan, under a lease that expires on March
31, 2000, and 28,000 square feet of office space in Denver, Colorado, under a
lease that expires on August 31, 2001 (for its Implementation Unit). The Company
also maintains offices in Fairport, New York, Waltham, Massachusetts, Concord,
California, Olympia, Washington, 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:


<TABLE>
<CAPTION>
Name                            Age                    Position
----                            ---                    --------
<S>                              <C>          <C>
Donald S. Good, Jr.              36           President and Chief Operating Officer

Barry C. Offutt                  37           Senior Vice President and Chief Financial
                                              Officer

Charles A. Berardesco            40           Senior Vice President, General Counsel and
                                              Secretary
</TABLE>



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, and President and Chief Operating
Officer in September 1998. Prior to May 1996, he was a healthcare consultant
with Arthur Andersen & Co.

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.

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.

                                       8
<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:

<TABLE>
<CAPTION>
                                    1997                          1998
                             High           Low             High         Low
                             ----           ---             ----         ---
<S>                        <C>             <C>              <C>          <C>
First Quarter              $42             $16-3/4         16-5/8     11-1/8
Second Quarter              34-1/2          15-1/8         15          6-13/16
Third Quarter               33-3/8          13             12-11/16    5
Fourth Quarter              16-3/16         11-3/8          5-5/8      3-3/16
</TABLE>


As of February 26, 1999, there were 124 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,
                                                          -----------------------
                                              1994         1995         1996         1997         1998
                                              ----         ----         ----         ----         ----
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Operations Data:
<S>                                        <C>          <C>          <C>          <C>          <C>
Revenue                                    $  30,711    $  48,015    $  61,177    $  66,845    $  62,954
Salaries, wages and benefits                  15,457       21,932       28,040       30,682       32,699
Other operating expenses                       8,625       12,055       15,887       20,300       22,793
Depreciation and amortization                  4,826        6,864       10,347       14,325       11,365
Write-off of acquired in-process
  research and development costs                  --       12,152        6,558           --           --
Impairment loss on intangible assets
  and restructuring charges                       --           --           --          371       27,777
                                           ---------    ---------    ---------    ---------    ---------
    Operating income (loss)                    1,803       (4,988)         345        1,167      (31,680)
Interest income                                  111        1,290        1,110          447          374
Interest expense                                 131          187          530          401          276
                                           ---------    ---------    ---------    ---------    ---------
    Income (loss) from continuing
      operations before income taxes,
      and minority interest in income of
      consolidated subsidiaries                1,783       (3,885)         925        1,213      (31,582)
Provision (benefit) for income taxes             759       (1,554)       3,322          802       (4,237)
Minority interest in income of
  consolidated subsidiaries                       (3)         (74)          --           --           --
                                           ---------    ---------    ---------    ---------    ---------
    Income (loss) from continuing
      operations                               1,021       (2,405)      (2,397)         411      (27,345)
Loss from discontinued operations,
  net of tax                                      --           --      (39,870)     (37,370)     (21,302)
                                           ---------    ---------    ---------    ---------    ---------
    Net income (loss)                      $   1,021    $  (2,405)   $ (42,267)   $ (36,959)   $ (48,647)
                                           ---------    ---------    ---------    ---------    ---------
Net income (loss) per share
 from continuing operations:
  Basic income (loss) per share            $    0.19    $   (0.31)   $   (0.24)   $    0.04    $   (2.31)
  Basic shares used in per share
   calculation                                 5,518        7,733       10,096       11,834       11,851
  Diluted income (loss) per share          $    0.19    $   (0.31)   $   (0.24)   $    0.03    $   (2.31)
  Diluted shares used in per share
   calculation                                 5,518        7,733       10,096       12,127       11,851
Loss per share from discontinued
 operations:
  Basic loss per share                           $--          $--    $   (3.95)   $   (3.16)   $   (1.80)
  Basic shares used in per share
   calculation                                    --           --       10,096       11,834       11,851
  Diluted loss per share                         $--          $--    $   (3.95)   $   (3.08)   $   (1.80)
  Diluted shares used in per
    share calculation                             --           --       10,096       12,127       11,851
Net income (loss) per share:
  Basic net income (loss) per share        $    0.19    $   (0.31)   $   (4.19)   $   (3.12)   $   (4.11)
  Diluted net income (loss) per share      $    0.19    $   (0.31)   $   (4.19)   $   (3.05)   $   (4.11)

Balance Sheet Data:
  Working capital                          $   5,620    $  35,671    $  32,810    $  29,434    $  22,245
  Total assets                                40,865      108,401      214,520      177,835      129,493
  Long-term liabilities, excluding
    current installments                       1,835          699           --           --           --
  Stockholders' equity                        34,371       98,044      202,407      166,714      118,099

</TABLE>


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

OVERVIEW

HCIA collects, manages and distributes comparative health care information. Its
customers deliver, purchase and manufacture health care products and services.
By combining industry leading databases, methodologies and analytic services,
HCIA creates information assets that help customers manage health care costs and
improve patient care.

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. In connection with its acquisitions and
internal development efforts and the Company's difficulties encountered in the
process of integration of certain of these efforts, the Company has recorded a
series of charges.

During 1996, in connection with certain acquisitions, the Company recorded
one-time charges related to acquired in-process research and development costs
totaling $48.1 million. Of these charges, $41.5 million related to the
acquisition of LBA Health Care Solutions, Inc. ("LBA"). During the quarter ended
December 31, 1998, the Company adopted a plan to dispose of the assets and
business activities acquired in connection with the LBA acquisition and,
accordingly, the related assets and results of operations are classified as
discontinued operations in the accompanying financial statements.

During 1997 and 1998, as a result of the Company's evaluation of the carrying
values of its intangible assets relative to the expected future cash flows of
the underlying business with which they were associated, the Company recorded an
impairment loss on intangible assets and related restructuring charges totaling
$41.1 million and $56.2 million, respectively. The charges related to the assets
and operations of LBA, as well as the assets and operations of the Company's
continuing operations, are allocated in the accompanying financial statements
between continuing operations and discontinued operations based on the
classification of the affected assets and operations.

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 that 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 $13.5 million, $13.8 million and $6.5
million during 1996, 1997 and 1998, respectively. Consequently, the Company has
recorded amortization expense of $7.9 million, $10.7 million and $7.6 million
during 1996, 1997 and 1998, respectively. See Notes 1, 2, and 5 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.

<PAGE>

1998 Compared to 1997

REVENUE

Revenue for 1998 was $62.9 million, a decrease of $3.9 million or 6% from 1997.
Revenue from the Content Unit decreased by $5.8 million, which was primarily the
result of revenue from large-scale custom engagements during 1997, which did not
recur during 1998. This decrease was partially offset by $1.5 million increase
in revenue from the Company's Managed Care Unit, and a $400,000 increase in
revenue from HCIA Europe. The increase in Managed Care revenue was primarily the
result of an increased sales effort.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits increased to 52% of revenue for the year ended
December 31, 1998 from 46% for the year ended December 31, 1997. The increase
was primarily the result of the Company establishing staffing levels across all
units in anticipation of a higher revenue level than achieved in 1998. During
the fourth quarter of 1998, the Company commenced a program to reduce its
staffing levels to reflect the lower than expected levels of revenue achieved
during 1998. As a result of this program, the Company had reduced the number of
employees from approximately 580 as of September 30, 1998 to approximately 510
as of December 31, 1998.

OTHER OPERATING EXPENSES

Other operating expenses, which include data acquisitions, occupancy, travel and
consulting expenses, increased to 36% of revenue for the year ended December 31,
1998 from 30% for the year ended December 31, 1997. This increase was a result
of an increase in the cost of data acquisition for a specific project in the
Content Unit partially offset by a reduction in facility costs and travel
related expenses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization decreased to 18% of revenue for the year ended
December 31, 1998 from 21% for the year ended December 31, 1997. This decrease
was the result of the effect of the write-off of certain intangibles during 1997
and 1998.

IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND RESTRUCTURING CHARGES

During 1998, the Company recorded a charge from continuing operations relating
to an impairment loss on intangible assets and restructuring charges of
approximately $27.8 million. Approximately $24.3 million of the charges arose
due to the failure of the Company's Content Unit to execute agreements with
customers for large-scale custom solutions and the Company's determination that
the Unit's revenue, which could be anticipated from future agreements of this
type, was significantly less than had been previously anticipated. As the
products marketed by the Content Unit were intended to integrate the products
and technologies of the Company's other business units, this determination
resulted in a reduced expectation of future cash flows from the Company's
intangible assets across most of its business units and, accordingly, an
impairment in the value of these intangible assets. The remainder of the
charges, totaling approximately $3.5 million, relates primarily to accruals for
the cost of employee severance and facilities reduction.

INTEREST INCOME AND EXPENSE

Net interest income was $98,000 for the year ended December 31, 1998 compared
with net interest income of $46,000 for the year ended December 31, 1997. This
change was the result of lower bank fees in 1998.

INCOME TAXES

The Company's effective tax rate was (13%) for the year ended December 31, 1998
compared with 66% for the year ended December 31, 1997. During 1998, the Company
recorded a valuation allowance of $8.4 million to reduce the carrying value of
its deferred tax asset to an amount management believes is realizable through
future taxable income. Exclusive of this valuation allowance, the Company's
effective tax rate was (40%) compared with 66% for the year ended December 31,
1997. The higher rate in 1997 is the result of the large percentage impact of
certain tax items, primarily goodwill amortization, in 1997 due to the change in
taxable income between years. (See Note 10 of the Notes to Consolidated
Financial Statements.)

DISCONTINUED OPERATIONS

During the quarter ended December 31, 1998, the Company adopted a plan to
dispose of its Implementation Unit. This Unit was formed at the time of the LBA
acquisition to carry on the operations of LBA. The Company is currently seeking
a buyer for the Implementation Unit and has engaged investment bankers to
facilitate the sale process. The Company expects to sell the Unit during the
year ending December 31, 1999. Revenues for the Implementation Unit were $8.8
million and $16.1 million for the years ended 1998 and 1997, respectively. The
Implementation Unit had net losses, net of tax, of $21.3 million and $37.4
million during 1998 and 1997, respectively, including pre-tax impairment losses
on intangible assets and related restructuring charges of $28.4 million and
$40.8 million, respectively. (See Note 3 of the Notes to Consolidated Financial
Statements.)

<PAGE>

1997 Compared to 1996

REVENUE

Revenue for 1997 was $66.8 million, an increase of $5.7 million or 9% over 1996.
Revenue from the Content Unit increased by $5.0 million, which was primarily the
result of significant one-time licenses of existing methodologies. Revenue from
the Managed Care Unit decreased by $600,000. Revenue from HCIA Europe increased
by $1.3 million, which was primarily the result of an acquisition.

SALARIES, WAGES AND BENEFITS

Salaries, wages and benefits were consistent at 46% of revenue for the years
ended December 31, 1997 and 1996.

OTHER OPERATING EXPENSES

Other operating expenses, which include occupancy, travel and consulting
expenses, increased to 30% of revenue for 1997 from 26% for 1996. This increase
was a result of the Company establishing levels for certain of these expenses,
primarily external consulting and occupancy, in anticipation of a higher revenue
level than actually achieved in 1997.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased to 21% 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, Inc. ("HealthChex")
and Response Healthcare Information Management, Inc. ("Response") during 1996.

IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND RESTRUCTURING CHARGES

During 1997, the Company recorded a restructuring charge related to continuing
operations of approximately $400,000. The charge represented the cost of
employee severance and facilities reduction.

WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS

In connection with the acquisitions of Response and HealthChex, during 1996, the
Company acquired ongoing research and development activities. The Company
recorded one-time charges totaling $6.6 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.

INTEREST INCOME AND EXPENSE

Net interest income was $46,000 for 1997 compared with net interest income of
$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 tax rate was 66% for 1997 compared with 359% for 1996.
The higher rate in 1996 is primarily the result of the effect of the
non-deductible write-off of the in-process research and development costs
resulting from certain acquisitions during 1996. (See Note 10 of the Notes to
Consolidated Financial Statements.)

DISCONTINUED OPERATIONS

During the quarter ended December 31, 1998, the Company adopted a plan to
dispose of its Implementation Unit. This Unit was formed at the time of the LBA
acquisition to carry on the operations of LBA. The Company is currently seeking
a buyer for the Implementation Unit and has engaged investment bankers to
facilitate the sale process. The Company expects to sell the Unit during the
year ended December 31, 1999. Revenues for the Implementation Unit were $16.1
million and $12.3 million for the years ended 1997 and 1996, respectively. The
Implementation Unit had a loss of $37.4 million and $39.9 million during 1997
and 1996, respectively, including pre-tax charges for write-off of aquired
in-process research and development, impairment loss on intangible assets and
related restructuring charges of $40.8 million and $41.5 million, respectively.
(See Note 3 of Notes to Consolidated Financial Statements.)

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

During 1996, 1997 and 1998, the Company generated net cash from operations of
approximately $13.2 million, $8.8 million and $11.7 million, respectively.
During 1996 and 1997, approximately $9.3 million and $4.0 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. In 1998, approximately $7.8 million of the cash generated from
operations was generated as a result of a reduction in accounts receivable. Net
cash provided by (used in) financing activities during 1996, 1997 and 1998 was
approximately $116.1 million, ($0.4) million and $0, respectively. The cash
generated by financing activities in 1996 was primarily a result of the
Company's public offerings of its common stock.

The Company made capital expenditures (including capitalized leases) totaling
$5.3 million, $5.6 million and $0.8 million in 1996, 1997 and 1998,
respectively. As of December 31, 1998, the Company had net working capital of
$22.2 million, including cash and cash equivalents in the amount of $7.3
million, and did not have any material commitments for capital expenditures.

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 0.37% 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, 1998, the Company was in compliance with all such financial covenants and
had a maximum borrowing capacity of $6.9 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.

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 had been accounted for using
the purchase method of accounting and, at the time of acquisition, were valued
at their estimated fair market value.

YEAR 2000 COMPUTER SOFTWARE

The Company has created a Year 2000 Program Office to review its exposure to
Year 2000 computer software issues, to coordinate its efforts to identify those
computer software systems which require revisions in anticipation of the Year
2000 and to coordinate such revisions on a corporate-wide basis. This has
entailed the development of a Company-wide assessment, remediation and
certification process, which is monitored by the Program Office and members of
the Company's senior management. In addition, senior management reports to the
Audit Committee of the Board of Directors on a regular basis regarding the
Company's progress in its Year 2000 remediation efforts. While the Company does
not currently intend to engage any outside parties to certify the completion of
its Year 2000 remediation efforts, it does intend to utilize an internal
certification process, whereby remediation efforts will be reviewed and
certified by Company personnel not directly involved in the remediation.

<PAGE>

The Company believes that its primary exposure to the issue is in the ability of
its data processing systems to recognize four digit references versus two digit
references (i.e., 1998 versus 98) and to accept and process such information
from its customers in the process of building databases. In addition, the
Company faces exposure in connection with (i) certain of its software products
which are used to deliver data to clients, (ii) third-party software products,
particularly for its management information systems and (iii) non-information
technology systems used in its business, particularly those operated by third
parties, such as the owners or operators of buildings where the Company's
offices are located.

The Company has substantially completed the evaluation of its own data
processing systems and software products, and has begun remediation of a number
of these systems and products. The Company has also substantially completed its
evaluation of third-party software products used by the Company. The Company
believes that as of December 31, 1998, it has completed the remediation of
approximately 28% of its data processing systems, software products and
third-party software, and that it will complete remediation of approximately 74%
of these systems, products and software by March 31, 1999. It is the Company's
goal, and the Company's Year 2000 work plans have been scheduled, to finish Year
2000 remediation certification of all of its data processing, software products
and third-party software by no later than June 30, 1999.

The Company has not undertaken a substantial effort to certify the Year 2000
compliance on non-information technology systems, but intends to focus on these
systems during 1999.

Through December 31, 1998, the Company has expended approximately $380,000 on
Year 2000 remediation efforts, primarily as the result of allocation of
personnel to evaluation, remediation and certification efforts, that it would
not have otherwise expended but for the Year 2000 remediation process. The
Company believes that it will expend an additional $410,000 on such Year 2000
remediation efforts through 1999.

The Company has not, to any material extent, scheduled the acceleration of the
replacement of any systems or products as a result of the Year 2000 effort, but
has instead been able to schedule such replacement or remediation as part of the
planned updates and revisions to its systems and products.

In the event the Company does not properly remediate its data processing
systems, it might be unable to accept data from its clients and others for
processing. This would materially and adversely affect its ability to deliver
its information products and provide its data management services. The failure
of the Company to remediate its software products would also materially and
adversely affect its ability to deliver its information products and data
management services. In either case, this could place the Company in default of
many of its agreements, and also threaten the Company's right to payment from
many of its clients. The Company believes that the risks from the failure of
third-party software and non-information technology systems to be Year 2000
compliant are less significant for the Company's ability to meet its client
obligations, but could have an adverse impact on its ability to carry out
functions such as financial reporting and accounts receivable and payable
management.

While the Company, in the process of making its data processing 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's customers will not experience difficulties in actually providing data
produced by their systems to the Company as a result of Year 2000-related
difficulties. It is not currently possible to estimate the effect on the
Company's results of operations from any such difficulties.

The Company has not yet developed any contingency plans for systems or products
that will not be Year 2000 compliant. It should be noted that because most of
the Company's data processing and information product releases involve data
which trails the calendar period by one to three months, the full effect of any
failure of the Company's systems or products to be Year 2000 compliant would
most likely not be experienced until the first quarter of 2000. The Company is
currently reviewing the status of its remediation efforts as of December 31,
1998, and intends to develop contingency plans for any material systems or
products which have not been certified as Year 2000 compliant as of that date.

NEW ACCOUNTING PROUNCEMENTS

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 and Recognition" during 1997.
The Company has adopted the provisions of these pronouncements in 1998.

<PAGE>

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 and reliability of the Company's
data, (ix) volatility of the Company's stock price, (x) changes in the
healthcare 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.

                                       9
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS
HCIA INC.:

We have audited the accompanying consolidated balance sheets of HCIA Inc. and
subsidiaries as of December 31, 1998 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, 1998. 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, 1998 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, 1998 in conformity with generally accepted accounting
principles.


                                                             KPMG LLP

Baltimore, Maryland
January 27, 1999

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(in thousands, except per share data)

HCIA INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                    1996        1997        1998
                                                                    ----        ----        ----
<S>                                                                 <C>         <C>         <C>
Revenue                                                           $ 61,177    $ 66,845    $ 62,954
Salaries, wages and benefits                                        28,040      30,682      32,699
Other operating expenses                                            15,887      20,300      22,793
Depreciation                                                         2,413       3,637       3,729
Amortization                                                         7,934      10,688       7,636
Write-off of acquired in-process research and development costs      6,558          --          --
Impairment loss on intangible assets and restructuring charges          --         371      27,777
                                                                  --------    --------    --------
  Operating income (loss)                                              345       1,167     (31,680)
Interest income                                                      1,110         447         374
Interest expense                                                       530         401         276
                                                                  --------    --------    --------
  Income (loss) from continuing operations before income taxes         925       1,213     (31,582)
Provision (benefit) for income taxes                                 3,322         802      (4,237)
                                                                  --------    --------    --------
  Income (loss) from continuing operations                          (2,397)        411     (27,345)
Loss from discontinued operations, net of tax                      (39,870)    (37,370)    (21,302)
                                                                  --------    --------    --------
  Net loss                                                        $(42,267)   $(36,959)   $(48,647)
                                                                  --------    --------    --------
Income (loss) per share from continuing operations:
  Basic income (loss) per share                                   $  (0.24)   $   0.04    $  (2.31)
  Basic shares used in per share calculation                        10,096      11,834      11,851
  Diluted income (loss) per share                                 $  (0.24)   $   0.03    $  (2.31)
  Diluted shares used in per share calculation                      10,096      12,127      11,851
Loss per share from discontinued operations:
  Basic loss per share                                            $  (3.95)   $  (3.16)   $  (1.80)
  Basic shares used in per share calculation                        10,096      11,834      11,851
  Diluted loss per share                                          $  (3.95)   $  (3.08)   $  (1.80)
  Diluted shares used in per share calculation                      10,096      12,127      11,851
Net loss per share:
  Basic net loss per share                                        $  (4.19)   $  (3.12)   $  (4.11)
  Diluted net loss per share                                      $  (4.19)   $  (3.05)   $  (4.11)
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(in thousands)

HCIA INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                                  1997             1998
                                                                  ----             ----
<S>                                                          <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents                                  $     5,580       $     7,343
  Trade accounts receivable, net of allowance for
     doubtful accounts of $1,560 in 1997 and $1,816 in 1998       31,524            23,677
  Prepaid expenses and other current assets                        3,451             2,619
                                                               ---------         ---------
            Total current assets                                  40,555            33,639
Furniture and equipment, net                                      11,706             8,325
Computer software costs, net                                      26,340            10,525
Other intangible assets, net                                      48,326            38,366
Net deferred tax asset                                            23,238            36,719
Net assets of discontinued operations                             27,550             1,363
Other                                                                120               556
                                                               ---------         ---------
            Total assets                                       $ 177,835        $  129,493
                                                               ---------         ---------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                            $    2,147       $     1,219
  Accrued salaries, benefits and other liabilities                 6,719             8,879
  Deferred revenue                                                 2,255             1,296
                                                               ---------         ---------
            Total current liabilities                             11,121            11,394
                                                               ---------         ---------
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 11,850,094 as of
    December 31, 1997 and 11,851,125 as of December 31, 1998         118               118
  Additional paid-in capital                                     250,892           250,904
  Accumulated deficit                                            (84,179)         (132,826)
  Accumulated other comprehensive loss                              (117)              (97)
                                                               ---------         ---------
            Total stockholders' equity                           166,714           118,099
                                                               ---------         ---------
 Total liabilities and stockholders' equity                    $ 177,835         $ 129,493
                                                               ---------         ---------
</TABLE>


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(in thousands)

HCIA INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                       Accumulated
                                                              Additional                Other Comp-      Comp-           Total
                                       Preferred   Common      Paid-in    Accumulated   rehensive     rehensive      Stockholders'
                                         Stock      Stock      Capital       Deficit       Loss          Loss           Equity
                                         -----      -----      -------       -------       ----          ----           ------
<S>                                       <C>      <C>         <C>          <C>            <C>          <C>            <C>
BALANCE AT DECEMBER 31, 1995               $--    $     90    $ 102,882    $  (4,953)     $  25        $     --       $  98,044
Exercise of stock options                  $--          --          638           --         --              --             638
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
Comprehensive loss
  Net loss                                 $--          --           --      (42,267)        --         (42,267)        (42,267)
  Other comprehensive loss:
  Foreign currency translation             $--          --           --           --         --             (67)            (67)
  Unrealized depreciation of
    short-term investments                 $--          --           --           --         --             (40)            (40)
                                                                                                       --------
  Other comprehensive loss                 $--          --           --           --       (107)           (107)             --
                                                                                                       --------
Comprehensive loss                         $--          --           --           --         --        $(42,374)             --
                                                                                                       --------


                                          -----    -------    ---------    ---------      -----                        --------
BALANCE AT DECEMBER 31, 1996               $--     $   118    $ 249,591    $ (47,220)     $ (82)                       $202,407
                                          -----    -------    ---------    ---------      -----                        --------
Exercise of stock options                  $--          --          613           --         --              --             613
Tax benefits related to exercise
  of stock options                         $--          --          688           --         --              --             688
Comprehensive loss:
  Net loss                                 $--          --           --      (36,959)        --         (36,959)        (36,959)
  Other comprehensive loss:
  Foreign currency translation             $--          --           --           --         --             (31)            (31)
  Unrealized depreciation of
    short-term investments                 $--          --           --           --         --              (4)             (4)
                                                                                                       --------
  Other comprehensive loss                 $--          --           --           --        (35)            (35)             --
                                                                                                       --------
Comprehensive loss                         $--          --           --           --         --        $(36,994)             --
                                                                                                       --------


                                          -----    -------    ---------    ---------      -----                        --------
BALANCE AT DECEMBER 31, 1997               $--     $   118    $ 250,892    $ (84,179)     $(117)                       $166,714
                                          -----    -------    ---------    ---------      -----                        --------
Exercise of stock options                  $--          --           12           --         --              --              12
Comprehensive loss:
  Net loss                                 $--          --           --      (48,647)        --         (48,647)        (48,647)
  Other comprehensive loss:
  Foreign currency translation             $--          --           --           --         --              20              20
                                                                                                       --------
  Other comprehensive loss                 $--          --           --           --         20              20              --
                                                                                                       --------
Comprehensive loss                         $--          --           --           --         --        $(48,627)             --
                                                                                                       --------
                                          -----    -------    ---------    ---------      -----                        --------
BALANCE AT DECEMBER 31, 1998               $--     $   118    $ 250,904    $(132,826)     $ (97)                       $118,099
                                          -----    -------    ---------    ---------      -----                        --------
</TABLE>


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(in thousands)

HCIA INC. AND SUBSIDIARIES



<TABLE>
<CAPTION>

                                                                              1996            1997             1998
                                                                              ----            ----             ----
<S>                                                                        <C>             <C>             <C>
Cash flows from operating activities:
  Net loss                                                                 $ (42,267)      $ (36,959)      $ (48,647)
  Adjustments to reconcile net loss to net cash provided by operating
    activities:
      Depreciation and amortization                                           10,347          14,325          11,365
      Write-off of acquired in-process research and development costs          6,558            --              --
      Write-off of acquired in-process research and development costs
          of discontinued operations                                          41,507            --              --
      Impairment loss on intangible assets and restructuring charges            --               371          27,777
      Impairment loss on intangible assets and restructuring charges
         of discontinued operations                                             --            40,758          28,414
      Deferred tax provision (benefit)                                         5,606          (6,164)        (13,481)
      Changes in operating assets and liabilities:
         Trade accounts receivable                                            (9,295)         (3,981)          7,847
         Prepaid expenses and other current assets                            (1,615)            473             832
         Accounts payable                                                        348             658            (928)
         Accrued salaries, benefits, and other liabilities                     1,296            (795)           (554)
         Deferred revenue                                                        674              88            (959)
                                                                           ---------       ---------       ---------
            Net cash provided by operating activities                         13,159           8,774          11,666
                                                                           ---------       ---------       ---------
Cash flows from investing activities:
  Purchases of furniture and equipment                                        (5,252)         (5,600)           (785)
  Cost of acquisitions, net of cash acquired                                (118,050)           (104)           --
  Computer software costs purchased or capitalized                           (11,946)        (12,681)         (5,126)
  Other intangible assets purchased or capitalized                            (1,590)         (1,158)         (1,350)
  Purchases of short-term investments                                        (59,640)           --              --
  Proceeds from disposals of short-term investments                           82,370             506            --
  Investment in net assets of discontinued operations                         (4,864)          2,986          (2,227)
  Other                                                                          (67)              3            (447)
                                                                           ---------       ---------       ---------
            Net cash used in investing activities                           (119,039)        (16,048)         (9,935)
                                                                           ---------       ---------       ---------
Cash flows from financing activities:
  Proceeds from exercise of stock options                                        638             613              12
  Income tax benefits related to stock options                                 1,128             688            --
  Proceeds from public offerings                                             116,256            --              --
  Acquisition related borrowings                                              86,000            --              --
  Repayment of acquisition related borrowings                                (86,000)           --              --
  Fees paid to establish credit facilities                                      (520)           --              --
  Repayments of notes payable                                                 (1,246)         (1,718)           --
  Principal payments on capital leases                                          (197)           --              --
                                                                           ---------       ---------       ---------
            Net cash provided by (used in) financing activities              116,059            (417)             12
                                                                           ---------       ---------       ---------
Impact of currency fluctuations on cash and cash equivalents                     (67)            (31)             20
                                                                           ---------       ---------       ---------
Increase (decrease) in cash and cash equivalents                              10,112          (7,722)          1,763
Cash and cash equivalents-- beginning of year                                  3,190          13,302           5,580
                                                                           ---------       ---------       ---------
Cash and cash equivalents-- end of year                                    $  13,302       $   5,580       $   7,343
                                                                           ---------       ---------       ---------
Supplemental cash flow information
           -- cash paid during the year for interest                       $     461       $     367       $     137
                                                                           ---------       ---------       ---------
           -- cash paid during the year for income taxes                   $     790       $     415       $      96
                                                                           ---------       ---------       ---------
</TABLE>


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998

HCIA INC. AND SUBSIDIARIES

(1)  BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) DESCRIPTION OF BUSINESS
HCIA Inc. ("HCIA" or the "Company") collects, manages and distributes
comparative health care information. Its customers deliver, purchase and
manufacture health care products and services. By combining industry leading
databases, methodologies and analytic services, HCIA creates information assets
that help customers manage health care costs and improve patient care.

(B) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been eliminated
in consolidation.

(C) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid securities with original maturities of
three months or less at the date acquired by the Company.

(D) 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.

(E) 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 Statement of Financial Accountings Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". 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 $11,900,000, $12,700,000 and $5,100,000 of computer
software costs in 1996, 1997 and 1998, respectively, including $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
$3,816,000, $6,041,000 and $3,731,000 during 1996, 1997 and 1998, respectively.
Accumulated amortization for computer software was $16,530,000 and $3,680,000 at
December 31, 1997 and 1998, 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. In
connection with the evaluation performed as of March 31, 1998, the Company
recorded a charge to reduce the carrying value of certain software. (See Note
5.)

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(F) 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 cost-to-cost method. This method of
accounting has resulted in unbilled accounts receivable of $3,424,000 and
$1,752,000 at December 31, 1997 and 1998, respectively. On a quarterly basis,
the Company assesses whether the current estimate of total contract costs for
each of these contacts 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.

(G) 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 the
average rate 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.

(H) INCOME TAXES
The Company uses the asset and liability method required by SFAS 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.

(I) EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of the basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and a reconciliation of the numerators and denominators used
in the basic and diluted EPS claculations. Basic EPS is calculated by dividing
net earnings (loss) by weighted average number of shares for the applicable
period. Diluted EPS is calculated after adjusting the numerator and denominator
of the basic EPS calculation for the effect of all potential dilutive common
shares outstanding during the period.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the calculation of earnings per share of common
stock:

<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                                             (in thousands, except per share data)

                                           1996                               1997                               1998
                               Income       Shares   Per Share    Income       Shares   Per Share    Income       Shares   Per Share
                             (Numerator) (Denominator) Amount   (Numerator) (Denominator) Amount   (Numerator) (Denominator) Amount
                              -------------------------------    -------------------------------     ------------------------------
<S>                           <C>          <C>        <C>        <C>          <C>        <C>         <C>          <C>       <C>
Basic EPS                     $(42,267)    10,096     $(4.19)    $(36,959)    11,834     $(3.12)     $(48,647)    11,851    $(4.11)

Incremental shares from
assumed increase of dilutive
options and warrants                           --                               293                                   --
                              -------------------------------    -------------------------------     ------------------------------
Diluted EPS                   $(42,267)    10,096      $(4.19)   $(36,959)    12,127     $(3.05)     $(48,647)     11,851    $(4.11)
                              -------------------------------    -------------------------------     ------------------------------
</TABLE>


(J) 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 SFAS No. 123, "Accounting for Stock-Based
Compensation," is discussed in Note 12.

(K) 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.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)  ACQUISITIONS

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

<TABLE>
<CAPTION>
                                       RESPONSE                             LBA                     HEALTHCHEX
                                ----------------------          ------------------------    -------------------------
                                               LIFE OF                           LIFE OF                     LIFE OF
                                                ASSET                             ASSET                       ASSET
                                               -------                           -------                     -------
<S>                             <C>            <C>              <C>             <C>          <C>            <C>
Purchase price                  $6,261,000                      $128,829,000                 $11,503,000
Assets acquired
  Current assets                $1,274,000                      $  4,681,000                 $   508,000
  Furniture & equipment         $  293,000     3-5 years        $  1,533,000    3-5 years    $   590,000    3-5 years
  Deferred tax asset            $  221,000                      $ 18,534,000                 $   835,000
  Software                      $  255,000       5 years                  --                          --
  Customer base                 $  393,000      12 years        $  5,135,000     10 years    $   599,000     10 years
  Methodologies                         --                      $ 12,843,000      6 years    $ 1,628,000      5 years
  Assembled workforce           $  133,000      12 years        $  4,080,000     10 years    $   715,000     10 years
  Goodwill                      $  304,000      15 years        $ 43,859,000     20 years    $ 5,107,000     20 years
In-process research
    & development               $4,309,000                      $ 41,507,000                 $ 2,249,000
Liabilities assumed             $  921,000                      $  3,343,000                 $   728,000
</TABLE>


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 developed and marketed information products that 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 developed and marketed 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 11). These loans were repaid with a portion of the proceeds
from the Company's August 1996 public offering. During 1997 and 1998, as a
result of the Company's evaluation of the carrying values of the intangible
assets acquired in connection with the acquisition of LBA relative to the
expected future cash flows of the underlying business, the Company recorded
impairment loss on intangible assets and related restructuring charges totaling
$37.6 and $28.4 million, respectively. During the quarter ended December 31,
1998, the Company adopted a plan to dispose of the assets and business
activities acquired in connection with the LBA acquisition (see Note 3) and,
accordingly, the net assets and results of operations of the business, including
the charges discussed above, are classified as discontinued operations in the
accompanying financial statements.

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

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The values and lives of the intangible assets and in-process research and
development costs obtained in the acquisitions were determined by an independent
appraiser. The lives and values of the intangible assets were based on, among
other things, employee retention rate, 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 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 1e). Non-recurring charges to write off these costs were
recorded on the date of each acquisition.

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.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3)  DISCONTINUED OPERATIONS

During the fourth quarter of 1998, the Company adopted a plan to dispose of its
Implementation Unit. This Unit was formed at the time of the LBA acquisition to
carry on the operations of LBA. The Company is currently seeking a buyer for its
Implementation Unit and has engaged investment bankers to facilitate the sale
process. The Company expects the Unit to be sold during the year ending December
31, 1999.

Based on the adoption of the plan for the sale of the Implementation Unit, the
assets and results of operations of the Unit are included as discontinued
operations in the accompanying financial statements.

Summary operating results of the discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED
                                             PERIOD FROM AUGUST 15, 1996          DECEMBER 31,
                                                THROUGH DECEMBER 31,        ------------------------
                                                       1996                 1997                1998
                                                       ----                 ----                ----
<S>                                                <C>                 <C>                  <C>
Revenue                                            $ 12,343,000        $ 16,060,000         $  8,827,000
Expenses                                              8,142,000          19,525,000           10,829,000
Impairment loss on intangible assets                         --          37,650,000           25,474,000
Restructuring charges                                        --           3,108,000            2,940,000
Write-off of acquired in-process research
   and development                                   41,507,000                  --                   --
                                                   ------------        ------------         ------------
Loss before taxes                                   (37,306,000)        (44,223,000)         (30,416,000)
Income tax expense (benefit)                          2,564,000          (6,853,000)          (9,114,000)
                                                   ------------        ------------         ------------
Net loss                                           $(39,870,000)       $(37,370,000)        $(21,302,000)
                                                   ------------        ------------         ------------
</TABLE>

The write-off of acquired in-process research and development costs included in
the results for 1996 represents the estimated fair value of in-process research
and development costs at the acquisition date of LBA and was determined by an
independent appraiser based on the risk-adjusted cash flows of specially
identified technologies for which technological feasibility had not yet been
established pursuant to SFAS No. 86 and for which future alternatives did not
exist. Consideration of technological feasibility for the purpose of this
calculation was done on a basis consistent with that normally utilized by the
Company (see Note 1e).

The impairment loss on intangible assets and restructuring charges related to
the Implementation Unit included in the above results for 1997 and 1998 were the
result of the Company's evaluation of the carrying value and economic lives of
its intangible assets relative to the net present value of expected future cash
flows of the underlying business and the determination that the carrying values
were not realizable. In connection with this determination, the Company also
recorded restructuring charges relating primarily to the cost of employee
severance and facility reductions.

At December 31, 1998, net assets of the discontinued operations of approximately
$1.4 million consisted of $3.0 million of assets, including accounts receivable,
fixed assets and other assets, and $1.6 million of current liabilities including
restructuring accruals and accrued salaries and benefits. At December 31, 1997,
net assets of discontinued operations of approximately $27.5 million consisted
of $28.3 million of assets including accounts receivable, fixed assets, other
assets and intangibles, and $0.8 million of current liabilities including
accrued salaries and benefits.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)  FURNITURE AND EQUIPMENT

Furniture and equipment consist of the following at December 31:


<TABLE>
<CAPTION>
                                             1997          1998
                                             ----          ----
<S>                                     <C>           <C>
Computer equipment                      $ 16,386,000  $ 16,639,000
Office furniture and equipment             3,289,000     2,570,000
Other                                        836,000       908,000
                                        ------------  ------------
                                        $ 20,511,000  $ 20,117,000
Less accumulated depreciation             (8,805,000)  (11,792,000)
                                        ------------  ------------
                                        $ 11,706,000  $  8,325,000
                                        ============  ============
</TABLE>

(5)  OTHER INTANGIBLE ASSETS

Other intangible assets at December 31, 1998 consist of the following:

<TABLE>
<CAPTION>
                                              CAPITALIZED     ACCUMULATED         CARRYING      WEIGHTED
                                                 COST         AMORTIZATION          VALUE     AVERAGE LIFE
                                                 ----         ------------          -----     ------------
<S>                                          <C>              <C>                <C>             <C>
Databases                                    $ 1,802,000      $   128,000        $1,674,000          5
CPHA license and prepaid royalties            14,030,000        5,537,000         8,493,000         17
Goodwill                                      32,170,000        7,175,000        24,995,000         17
Customer bases                                 1,017,000          156,000           861,000         10
Methodologies                                  1,628,000          678,000           950,000          5
Assembled workforce                            1,817,000          424,000         1,393,000         11
                                               ---------          -------         ---------
                                             $52,464,000      $14,098,000       $38,366,000
                                             ===========      ===========       ===========
</TABLE>


Other intangible assets at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
                                              CAPITALIZED     ACCUMULATED         CARRYING      WEIGHTED
                                                 COST         AMORTIZATION          VALUE     AVERAGE LIFE
                                                 ----         ------------          -----     ------------
<S>                                          <C>              <C>                <C>             <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                                       35,871,000        6,012,000         29,859,000        17
Customer bases                                  1,587,000          197,000          1,390,000        11
Methodologies                                   1,628,000          311,000          1,317,000         5
Assembled workforce                             1,950,000          254,000          1,696,000        11
Other                                           2,289,000          428,000          1,861,000        13
                                                ---------          -------          ---------
                                             $ 65,696,000     $ 17,370,000        $48,326,000
                                             ============     ============        ===========
</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 $1,067,000, $679,000 and $255,000 during 1996, 1997 and 1998,
respectively.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company holds 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. The amortization period was determined to be the estimated economic life
cycle of the licensed properties, as corroborated by an independent appraisal,
and reflected the remainder of the existing term of the license at the date of
acquisition plus one renewal term provided under the terms of the agreement.
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 CHPA 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
various 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.

Periodically the Company evaluates the carrying values of its intangible assets
relative to the net present value of expected future cash flows of the
underlying business with which they are associated. At March 31, 1998, this
evaluation indicated that the carrying value of certain of the Company's
intangible assets were not fully realizable. Accordingly the Company recorded an
impairment loss on intangible assets of approximately $50.0 million in the
quarter ended March 31, 1998, of which approximately $25.5 million related to
discontinued operations and $24.5 million related to continuing operations.

The following table summarizes the impairment loss on intangible assets:


<TABLE>
<CAPTION>
                              PRE-CHARGE                        POST-CHARGE
   ASSET                    NET BOOK VALUE     WRITE DOWN      NET BOOK VALUE
   -----                    --------------     ----------      --------------
<S>                          <C>               <C>              <C>
Databases                    $ 2,871,000       $ 1,649,000      $ 1,222,000
CPHA License                   9,113,000                --        9,113,000
Goodwill                      46,326,000        20,644,000       25,682,000
Customer Bases                 2,987,000         2,028,000          959,000
Methodologies                  3,549,000         2,355,000        1,194,000
Assembled Workforce            3,266,000         1,751,000        1,515,000
Tradename                      1,029,000         1,029,000               --
Software                      28,106,000        20,567,000        7,539,000
                              ----------        ----------        ---------
                             $97,247,000       $50,023,000      $47,224,000
                             ===========       ===========      ===========
</TABLE>

The Company also recorded a restructuring charge of approximately $800,000
during the quarter ended March 31, 1998, representing the cost of employee
severence and facilities reductions. As of December 31, 1998, approximately
$775,000 of the accruals had been used.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6)  SEGMENT INFORMATION

Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which requires that
the Company report information about its operating segments. The Company's three
operating segments, Content, Managed Care and HCIA Europe, each have separate
management teams and offer different products and services.

The Content Unit builds, manages and maintains comparative databases. The
Managed Care Unit helps pharmaceutical companies, employers, managed care
organizations and indemnity insurers better manage the overall health status and
costs of a covered population by providing medical resource usage and outcomes
information. HCIA Europe provides clinical, financial, and operational
efficiency analyses to hospitals and health care purchasers outside of the
United States.

The accounting policies of the operating segments are the same as those
described in Note 1. The Company evaluates the performance of its operating
segments based on contribution margin. Contribution margin includes direct
payroll costs and other direct costs, but does not include any corporate
allocations of overhead costs, nonrecurring items, interest income, interest
expense, amortization or depreciation. The Company tracks accounts receivable by
business segment but does not track any other assets or liabilities by segment
other than HCIA Europe, which had total net assets, including accounts
receivable, of $4,765,000 and $4,883,000 as of December 31,1998 and 1997,
respectively.

Summarized financial information regarding the Company's operating segments is
shown in the following table. The "Corporate Costs" column includes corporate
related items, results of insignificant operations and income and expense not
allocated to operating segments.


<TABLE>
<CAPTION>
                                     CONTENT       MANAGED CARE     HCIA EUROPE   CORPORATE COSTS     CONSOLIDATED
                                     -------       ------------     -----------   ---------------     ------------
<S>                                 <C>               <C>             <C>           <C>                 <C>
1998 Revenues                      $39,855,000      $16,838,000      $6,261,000              --        $62,954,000
Contribution margin (loss)          18,391,000        5,470,000       1,769,000     (29,533,000)        (3,903,000)
Accounts receivable                 16,875,000        5,300,000       1,502,000              --         23,677,000

1997 Revenues                       45,634,000       15,355,000       5,856,000              --         66,845,000
Contribution margin (loss)          25,727,000        6,624,000         872,000     (31,685,000)         1,538,000
Accounts receivable                 23,425,000        6,148,000       1,951,000              --         31,524,000

1996 Revenues                       40,642,000       15,921,000       4,614,000              --         61,177,000
Contribution margin (loss)          23,144,000        9,620,000         397,000     (26,258,000)         6,903,000
Accounts receivable                 19,492,000        6,040,000       1,795,000              --         27,327,000
</TABLE>


(7)  ACCRUED SALARIES, BENEFITS AND OTHER LIABILITIES

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


<TABLE>
<CAPTION>
                                  1997           1998
                                  ----           ----
<S>                          <C>             <C>
Accrued salaries             $ 1,883,000     $ 1,887,000
Accrued benefits                 340,000         580,000
Accrued vacation                 707,000         646,000
Restructuring accruals                --       2,197,000
Other                          3,789,000       3,569,000
                               ---------       ---------
                             $ 6,719,000     $ 8,879,000
                             ===========     ===========
</TABLE>

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8)  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 7% 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 1996, 1997 and 1998 were
approximately $397,000, $505,000 and $519,000, respectively.

(9)  LEASES

The Company leases office space and certain equipment under operating leases.
Rent expense for these leases was $3,563,000, $4,907,000 and $4,947,000 net of
rental income of $412,000, $609,000 and $254,000 during 1996, 1997 and 1998,
respectively. The minimum rental commitments under noncancelable operating
leases as of December 31, 1998, are as follows:

Year Ending December 31:
  1999                                              $  5,080,000
  2000                                                 3,636,000
  2001                                                 2,893,000
  2002                                                 2,028,000
  2003                                                   119,000
  Thereafter                                                  --
     Gross minimum payments required                 $13,756,000
                                                     -----------
  Sublease Income                                        (71,000)
     Net minimum payments required                   $13,685,000
                                                     ===========
(10)  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                               1996          1997             1998
                                                               ----          ----             ----
<S>                                                       <C>              <C>            <C>
Federal and state:
  Current                                                 $   332,000      $ 262,000      $    158,000
  Deferred                                                  2,990,000        540,000        (4,395,000)
                                                            ---------        -------        ----------
     Total income tax expense (benefit)                   $ 3,322,000      $ 802,000      $ (4,237,000)
                                                          ===========      =========      ============
</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>
                                                      1996                  1997                    1998
                                               AMOUNT         %       AMOUNT       %          AMOUNT       %
                                               ------------------    -----------------     -------------------
<S>                                            <C>          <C>       <C>         <C>          <C>        <C>
Computed expected tax expense
  (benefit) at statutory rate$                 315,000      34.0%    $412,000     34.0%   $(10,738,000) (34.0)%
Goodwill amortization                          333,000      36.0      337,000     27.8         331,000    1.0
Tax-exempt interest                           (216,000)    (23.4)          --       --              --     --
State tax, net of federal benefit               56,000       6.1       73,000      6.0      (1,774,000)  (5.6)

Acquired in-process research and development 2,623,000     283.6           --       --              --     --
Impairment loss on intangible assets                --        --           --       --         104,000    0.3
Valuation allowance                                 --        --           --       --       8,400,000   26.6
Other, net                                     211,000      22.8      (20,000)    (1.7)       (560,000)  (1.7)
                                               -------      ----      -------     ----        --------   ----
Provision (benefit) for income taxes        $3,322,000     359.1%   $ 802,000     66.1%    $(4,237,000) (13.4)%
                                            ==========     =====    =========     ====     ===========  =====
</TABLE>


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities and deferred tax assets at December 31, 1997 and
1998, are presented below:

<TABLE>
<CAPTION>
                                                               1997            1998
                                                               ----            ----
<S>                                                        <C>             <C>
Deferred tax assets:
  Operating accruals                                       $ 2,205,000     $ 3,031,000
  Basis differences in software and intangibles              4,439,000      18,545,000
  Net operating loss carryforwards                          17,752,000      25,044,000
                                                            ----------      ----------
  Gross deferred tax assets                                 24,396,000      46,620,000
  Valuation allowance                                               --       8,400,000
                                                            ----------      ----------
  Net deferred tax assets                                  $24,396,000     $38,220,000
                                                            ----------      ----------
Deferred tax liabilities:
  Bonus accrual                                                209,000       1,185,000
  Fixed assets                                                 949,000         316,000
                                                            ----------      ----------
Total deferred tax liabilities                               1,158,000       1,501,000
                                                            ----------      ----------
Total                                                      $23,238,000     $36,719,000
                                                           ===========     ===========
</TABLE>

The Company has net operating loss carryforwards of $73,500,000 at December 31,
1998, which expire between 2003 and 2018. The utilization of certain of these
carryforwards is subject to certain 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.

The Company periodically evaluates the realizability of its tax assets based on,
among other things, the Company's projected future taxable income. During 1998,
in connection with the evaluation process, the Company recorded a valuation
allowance of $8.4 million to reduce the carrying value of the net tax asset to a
level that management believes is more likely than not realizable through future
taxable income. The net deferred tax asset could be further reduced in the
future by an additional valuation allowance if management's estimate of future
taxable income is significantly reduced.

(11)  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 2). 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. 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). The Company has made no additional
borrowings against the credit facility during 1997 or 1998.

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, 1998, the Company was in compliance with all such
covenants and had a maximum borrowing capacity of $6.9 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.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12)  STOCKHOLDERS' EQUITY

(A) CAPITAL AMENDMENT
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.

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

In August 1996, the Company sold approximately 2.0 million shares of newly
issued common stock at $54.125 in a public offering. In connection with this
offering, 216,696 shares were sold by certain stockholders. The Company did not
receive any of the proceeds from the sale of shares by the selling stockholders.

(C) OPTIONS
At December 31, 1996, 1997 and 1998, the Company had outstanding stock options
as follows:


<TABLE>
<CAPTION>
                                          1996            1997            1998
                                          ----            ----            ----
<S>                                       <C>           <C>            <C>
Stock options outstanding pursuant to:
HCIA Stock Option Plan                    956,266       1,399,952      1,427,281
Directors' Option Plan                     57,000          87,000        117,000
Other options                             451,111         388,425        386,703
                                          -------         -------        -------
Total stock options outstanding         1,464,377       1,875,377      1,930,984
                                        =========       =========      =========
</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 either vest
over a period of three or four years and expire over a period of five to ten
years from the date of grant or vest based upon the Company's stock price
reaching certain levels (but in no event later than seven years from the date of
grant) and expire after eight 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. 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>
                                             1996                      1997                    1998
                                       --------------------    --------------------   ----------------------
                                                   WEIGHTED                WEIGHTED                 WEIGHTED
                                                   AVERAGE                 AVERAGE                   AVERAGE
                                                   EXERCISE               EXERCISE                  EXERCISE
                                        SHARES      PRICE        SHARES     PRICE       SHARES        PRICE
                                        ------      -----        ------     -----       ------        -----
<S>                                     <C>         <C>        <C>          <C>        <C>            <C>
Outstanding at beginning of year        700,233     $13.80     1,464,377    $25.89     1,875,377      $24.61
Granted                               1,524,000     $45.61       891,500    $23.87     1,013,222      $ 7.55
Exercised                               (62,605)    $ 9.27       (65,907)   $ 8.50          (167)     $10.50
Canceled                               (697,251)    $58.35      (414,593)   $30.10      (957,448)     $32.67
                                       --------                 --------                --------
Outstanding at end of year            1,464,377     $25.89     1,875,377    $24.61     1,930,984      $11.66
                                       --------                 --------                --------
Options exercisable at end of year      345,215     $13.13       640,905    $20.00       639,345      $15.50
                                       --------                 --------                --------
</TABLE>

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following summarizes information about stock options outstanding as of
December 31, 1998:

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                       ------------------------------------------    ---------------------------------
                         NUMBER         WEIGHTED AVG.    WEIGHTED         NUMBER          WEIGHTED
     RANGE OF          OUTSTANDING       REMAINING       AVERAGE        EXERCISABLE        AVERAGE
  EXERCISE PRICES      AT 12/31/98   CONTRACTUAL LIFE    EXERCISE    PRICE AT 12/31/98  EXERCISE PRICE
  ---------------      -----------   ----------------    --------    -----------------  --------------
<S>                     <C>                   <C>          <C>             <C>              <C>
     $6 to $9           875,187               8.6          $ 6.11          92,098           $ 6.01
    $10 to $14          424,672               3.7           12.31         345,872            12.56
    $15 to $24          590,875               7.2           16.50         161,125            17.51
    $25 to $40            5,750               7.2           28.08           5,750            28.08
    $41 to $60           34,500               7.5           58.70          34,500            58.70
                         ------               ---           -----          ------            -----
                      1,930,984               7.1          $11.66         639,345           $15.50
                      =========               ===          ======         =======           ======
</TABLE>

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 SFAS No. 123, the Company's net
loss and basic loss per share would have been equal to the pro forma amounts
indicated below:


<TABLE>
<CAPTION>
                                       1996         1997         1998
                                       ----         ----         ----
<S>                   <C>            <C>          <C>          <C>
Net loss              As reported    $(42,267)    $(36,959)    $(48,647)
                        Pro forma    $(43,795)    $(40,781)    $(52,489)
Net loss per share    As reported    $  (4.19)    $  (3.12)    $  (4.11)
                        Pro forma    $  (4.34)    $  (3.45)    $  (4.43)
</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 1996, 5.80% in 1997, and
4.70% in 1998; a weighted average expected life of six to seven years; no
dividend payments; and a volatility of 31.29% in 1997, based on the annualized
10 year industry average, and 67.22% and 111.51% for 1997 and 1998,
respectively, based on the historical volatility of the Company's stock price.
The effects of applying SFAS No. 123 in calculating the pro forma net income and
earnings per share for 1996, 1997 and 1998 may not be representative of the
effects on such pro forma information for future years.

(13)  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.

<PAGE>

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

                       None.

                                       10
<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 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders under the heading "Certain
Transactions."


                                       11
<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>    <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.
 23.1           Consent of KPMG 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.

*****     Incorporated by reference to the Registrant's Report on Form 10-K for
          the year ended December 31, 1997.

                                       12
<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 & CEO

                                          Date:   March 27, 1999


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 27, 1999
------------------------       and Chief Executive Officer
George D. Pillari              (principal executive officer)

/s/ Barry C. Offutt           Senior Vice President             March 27, 1999
------------------------      and Chief Financial Officer
Barry C. Offutt                 (principal financial and
                                 accounting officer)

/s/ Richard A. Berman         Director                          March 27, 1999
------------------------
Richard A. Berman

/s/ Richard Dulude            Director                          March 27, 1999
------------------------
Richard Dulude

/s/ W. Grant Gregory          Director                          March 27, 1999
------------------------
W. Grant Gregory

/s/ Phillip B. Lassiter       Director                          March 27, 1999
------------------------
Phillip B. Lassiter

/s/ Carl J. Schramm           Director                          March 27, 1999
------------------------
Carl J. Schramm

                                       13

<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.

*****    Incorporated by reference to the Registrant's Report on Form 10-K for 
         the year ended December 31, 1997.

                                       14
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
HCIA Inc.:

Under date of January 27, 1999, we reported on the consolidated balance sheets
of HCIA Inc. and Subsidiaries (the Company) as of December 31, 1998 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,
1998, as contained in the annual report on Form 10-K for the year 1998. 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 LLP

Baltimore, Maryland
January 27, 1999

                                       15

<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, 1996..................$  454              $ 560          $  28 (A)         $1,042
Year ended December 31, 1997..................$1,042              $ 930          $(412)(A)         $1,560
Year ended December 31, 1998..................$1,560              $ 537          $(281)(A)         $1,816
</TABLE>


(A)  Accounts receivable write-offs and recoveries

                                       16