<PAGE>
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON D. C. 20549

                                   -----------

                                   FORM 10-KSB

(x)    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                 OF 1934 [Fee Required]
                         For the fiscal year ended March 31, 1998
( )    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                             ACT OF 1934 [No Fee Required]
                            Commission File Number 0-27048

                                   -----------

                                   MECON, INC.
                 (Name of small business issuer in its charter)

                     DELAWARE                         94-2702762
     (State or other jurisdiction of              (I.R.S. Employer
           incorporation of organization)          Identification No.)

                200 PORTER DRIVE
               SAN RAMON, CALIFORNIA                     94583
      (Address of principal executive offices)         (Zip Code)

                                     (925) 838-1700
                     Issuer's telephone number, including area code

                                      -----------

       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None
         SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:

<TABLE>
<S>                                                           <C>
        COMMON STOCK, PAR VALUE $.001                                           NASDAQ
SERIES A PARTICIPATING PREFERRED STOCK, PAR VALUE $.001                         NASDAQ
          (Title of each class)                                (Name of each exchange on which registered)
</TABLE>

         Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 ( )

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. ( )

<TABLE>
<S>                                                                              <C>
State issuer's revenues for its most recent fiscal year:.....................    $    15,293,000
State the aggregate market value of the voting stock held by 
   non-affiliates computed using the closing price on                        
   May 29, 1998 of $9.75 (Shares of Common Stock held by each executive    
   officer and director and by each person who owns 5% or more of the    
   outstanding Common Stock have been excluded in that such persons may under 
   certain circumstances be deemed to be affiliates. This determination of    
   executive officer or affiliate status is not necessarily a conclusive    
   determination for other purposes):........................................    $    39,516,000
The number of shares outstanding of each of the registrant's classes of 
   common stock, as of May 29, 1998:.......................................            6,201,068
Transitional Small Business Disclosure Format (check one): Yes ( )  No (x)
</TABLE>
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<PAGE>

PART I

ITEM 1.  BUSINESS

GENERAL

         MECON, Inc. ("MECON" or the "Company") is a leading provider of
benchmarking solutions to the healthcare industry. The benchmarking solution
offered by MECON comprises data/information products, decision support software
and value-added services. The principal focus of the Company's products is to
reduce costs and improve efficiency and effectiveness of departmental and
clinical operations in the healthcare delivery system. The Company's main
product line is based upon a proprietary operations benchmarking database
containing cost and key performance information from hospitals nationwide. In
addition to statistical data, the database incorporates qualitative data derived
from operational profiles provided by hospitals that utilize the Company's
database-related products. The Company's customers use the information provided
by the operations benchmarking database to quantify, develop and implement
strategies to reduce costs and to periodically measure actual performance to
maintain the cost reductions achieved.

         The need to manage costs more effectively in today's healthcare
environment is leading hospitals to seek information which enables them to more
accurately measure and evaluate operating and clinical efficiency. Historically,
such efforts have been hampered by a lack of adequate benchmark information to
identify cost inefficiencies, as well as a lack of integrated advisory services
and sufficient decision support tools to implement and maintain cost reductions.
Accordingly, there is a need for data, advisory services, and information
systems which support long-term cost management strategies through operating
efficiencies, labor cost control, supply and materials management, improved
clinical practices, re-engineered care delivery processes, improved facilities
infrastructure and capital equipment utilization, and general administrative
efficiencies.

RECENT DEVELOPMENTS

         At the beginning of fiscal year 1997-98, the Company restructured its
organization to re-focus the business on its historical strengths. Using the 
MECON operations benchmarking database as its foundation, the Company offers
information products, decision support software and consulting services that
bridge the information gap faced by hospitals and other healthcare providers
seeking to reduce costs and improve operating efficiency. The Company's
database/information products allow hospital executives, clinicians, and
department managers to compare their practices against their peers and best
demonstrated practices. This ability, when combined with the Company's
consulting services, enables hospitals to become more cost-competitive by
quantifying opportunities for immediate cost reduction, developing and
implementing short-term and long-term strategies for achieving cost reduction
opportunities, adjusting ongoing operating costs consistent with changes in
utilization, developing annual resource plans compatible with profit
requirements, and measuring actual performance on a regular basis to maintain
the gains achieved.

PRODUCTS

         The Company's principal products and services include  
MECON-PEERx-TM-, MECON-PEERVIEW-TM-, MECON-OPTIMIS-TM-, MECON-Action-
Point-SM-, MECON-Advisory-SM-, MECON-PEER Practice Management Profiler-TM-, 
and other related analytical products. The foundation of the Company's 
product line is the MECON operations benchmarking database.

MECON-PEERx-TM- - THE OPERATIONS BENCHMARKING DATABASE

         The Company maintains a proprietary database containing information on
labor productivity, costs, resource utilization and practice profiles from
several hundred hospitals nationwide. The database contains 281 hospital
department types, such as nursing, pharmacy, radiology, clinical laboratories
and medical records. Typically, between 15,000 and 36,000 elements of
information are collected from each subscribing healthcare organization. The
combination of statistical and practice profile data in the database allows
hospitals to not only measure cost reduction opportunities, but also to identify
processes that enable such reductions. The Company believes that the MECON
operations benchmarking database is the only commercially available healthcare
operations database that contains both statistical and qualitative data.

         Developed over the last decade, the database does not depend upon 
public domain data. Instead, all of the data is provided by healthcare 
organizations that subscribe to the Company's MECON-PEERx-TM- product 
described below. The subscriber typically submits data annually at the close 
of its fiscal year; however, a subscriber may choose to submit data on a more 
frequent basis. The Company tests and analyzes the data submitted by 
subscribers to ensure comparability with other information contained in the 
database.

         The database runs on an Oracle RDBMS 7.1 platform. The database resides
on a Hewlett-Packard G40 server (mini-computer) that runs the HP-UX (UNIX)
operating system.


<PAGE>

         MECON-PEERx-TM- is a subscription-based information product that 
enables hospitals to compare operational practices against those of the 
industry's most efficient providers or the members of a customer-defined peer 
group. The Company believes that the breadth and depth of the information 
contained in the database, together with the Company's ability to present a 
wide variety of data types in standard formats that are useful to the 
customer, make MECON-PEERx-TM- a valuable resource for use in comparative 
performance analysis or benchmarking. Through operations benchmarking, 
hospitals and other healthcare providers can compare their operational 
practices against those of their peers. Benchmarking allows hospitals to 
identify the "best practices" employed in the industry, facilitates peer 
networking to learn practices that lead to lower costs, and assists hospitals 
in restructuring their operations to reduce costs. The Company has developed 
MECON-PEERx-TM- and its other products and services with the goal of 
maximizing the value of benchmarking analysis.

         Using a specially prepared report comparing subscriber cost and key 
performance data against benchmark data from the Company's operations 
benchmarking database, senior executives and departmental managers can 
evaluate staffing and skill mix configurations, potential opportunities for 
reducing labor expenses, alternative strategies and methods of operations, 
and implications of new technologies. The information and analysis provided 
by the MECON-PEERx-TM- report, together with a variety of standard and 
optional support services, facilitate benchmarking initiatives to improve 
operational practices and efficiencies. Typical applications of the 
MECON-PEERx-TM- analysis include short-term cost reduction initiatives, 
annual budgeting, resource planning, long-term tracking of resource 
utilization, consolidation planning and cost/benefit evaluation of new 
technologies or operating processes.

         Hospitals generally subscribe to MECON-PEERx-TM- for a renewable 
three-year period. Each subscriber to MECON-PEERx-TM- receives the following:

MECON-PEERx-TM- REPORTS

             The Company prepares a report for each subscriber analyzing the 
operating cost data collected by the subscriber in light of the peer group 
and best practice information contained in the MECON database. The following 
table summarizes the typical types of information provided in the report:

                                 MECON-PEERx-TM-


<TABLE>
<CAPTION>
                      CATEGORIES OF OUTPUT                        SPECIFIC EXAMPLES
                      --------------------                        -----------------
<S>                 <C>                          <C>
HOSPITAL LEVEL      Cost Ratios                  Cost per Adjusted Discharge, Cost per 
                                                     Adjusted Patient Day
                    Productivity Ratios          Full Time Equivalent per Occupied Beds
                    Financial Ratios             Gross Margin, Net Margin, Balance Sheet Ratios
                    Characteristics & Profiles   Location, Type, Services Offered
DEPARTMENT LEVEL    Cost Ratios                  Cost per Unit of Measure, Labor Costs, Other Direct
                                                 Expenses
                    Productivity Ratios          Labor Hours per Unit of Measure, Skill Mix
                    Service Intensity Ratios     Department Utilization per Patient Day or Discharge
                    Practices and Quality Data   Organizational Characteristics, Operational Practices
</TABLE>

MECON-PEERVIEW-TM- - A TOOL FOR DATA COLLECTION AND INFORMATION DELIVERY

         In December 1996, MECON-PEERVIEW-TM-, a tool designed to automate 
data collection and information delivery, was introduced. This product was 
built using client server technology and a relational database approach. As a 
complementary product to the MECON-PEERx-TM- product, MECON-PEERVIEW-TM- 
enables more efficient data collection at the customer location through links 
with internal information systems and MECON's national benchmark database. 
Electronic delivery of reports to customers is another key feature of 
MECON-PEERVIEW-TM-.

IMPLEMENTATION, CUSTOMER SUPPORT AND OTHER SERVICES

         The Company provides implementation services at the inception of a 
subscription, including management orientation in the use of benchmark data, 
assistance with initial statistical data collection, development of 
operational profiles and auditing of subscriber data. The Company conducts 
post-report workshops with hospital management to analyze cost reduction 
opportunities. First year subscription fees include charges for 
implementation services, including post-report workshops. To the extent 
requested by customers, these services are provided by the Company for an 
additional fee during subsequent years. After a customer has subscribed to 
MECON-PEERx-TM-, the Company provides, for an additional fee, quarterly 
status checks, advanced management development and training, data auditing 
and software technical support. The Company also offers an optional EXECUTIVE 
SUMMARY - a condensed analysis based on the benchmarking 

<PAGE>

database that provides hospital executives with an overall indication of 
opportunities for short-term and long-term cost reduction, and the specific 
areas in which such opportunities are most prominent.

MECON-OPTIMIS-TM- - AN INTERNAL PERFORMANCE MONITORING SYSTEM

         As a complement to MECON-PEERx-TM-, the Company has developed 
MECON-OPTIMIS-TM-, an internal performance measuring system for hospitals. 
MECON-OPTIMIS-TM- is a PC software product designed to allow hospitals to 
measure their internal performance by tracking their performance against 
specified targets. This allows hospitals to adjust resource levels consistent 
with utilization changes and, thereby, move from a fixed cost operating model 
to a variable cost operating model. MECON-OPTIMIS-TM- measures labor hours 
and costs, non-labor expenses, skill mix, productivity, quality and service 
intensity on a bi-weekly or monthly basis. The application contains the 
following three modules: performance (labor productivity and quality); 
budgeting; and daily staffing simulation. The performance module 
retrospectively reports key performance indicators. The budgeting module 
provides baseline information to plan long-term resource requirements more 
accurately. The daily staffing module forecasts resource requirements based 
on utilization forecasts. These modules assist institutions in achieving 
labor resource utilization targets, in measuring the progress of quality 
improvement initiatives, in facilitating labor budget development and in 
determining department staffing needs by shift. MECON-OPTIMIS-TM- runs on an 
Oracle RDBMS platform and is configured for operation on local area networks.

         MECON-OPTIMIS-TM- relies on payroll, time and attendance and other 
financial information systems at the host facility. The customer collects and 
reports data continually, usually on a per pay period basis. Customers that 
purchase both MECON-PEERx-TM- and MECON-OPTIMIS-TM- can incorporate benchmark 
data from MECON-PEERx-TM- into MECON-OPTIMIS-TM-, thus increasing the value 
of the Company's overall product mix.

MECON-Action-Point-SM- - CLINICAL UTILIZATION ANALYSIS SYSTEM

         On March 29, 1996, MECON acquired Managed Care Information Systems, 
Inc. (MCIS) in a pooling of interest transaction. MCIS's principal product, 
subsequently renamed MECON-Action-Point-SM-, is a decision support product 
designed for clinicians and senior level decision makers in the healthcare 
delivery system. Information provided by MECON-Action-Point-SM- enables 
physician managers and healthcare administrators to identify, analyze, and 
improve physician practice patterns using a PC-based Windows-TM- software. 
The system allows physicians to identify cost, profitability, payor mix, 
resource utilization, and productivity for each physician. Tracking treatment 
patterns enables physicians to review how their peers are using hospital 
resources to meet the needs of their patients. By helping physicians avoid 
overuse or underuse of resources, it enhances patient satisfaction and 
safety. It also enables administrators to fine tune the alignment between the 
mix of services offered and the needs of the population they serve, making 
operations more efficient and facilitating managed care contracting.

MECON-Advisory-SM- - CONSULTING AND VALUE-ADDED SERVICES

         The Company's principal objective is to produce value to customers 
from its database and software products through a series of value-added 
services. Such services include consulting, custom analysis of data, training 
programs, and benchmarking facilitation services. MECON offers a highly 
structured approach to consulting services that is designed to improve 
operations efficiencies and to enable sustainable cost reduction. As a 
front-end to consulting services, MECON performs an overview assessment using 
the database in conjunction with additional qualitative information collected 
through on-site work at the healthcare organization. This provides a detailed 
assessment of facility- and function-specific cost reduction strategies and 
tactics. Subsequent to the overview assessment, the Company performs 
extensive change action planning for clients with the objective of 
implementing departmental operational change that produces immediate, 
significant and sustainable cost savings. The Company also offers a training 
product known as "Benchmarking-in-Action" ("BIA") that is typically sold to 
current MECON-PEERx-TM- clients.

MECON-PEER Practice Management Profiler-TM- - MEDICAL GROUP OPERATIONS 
BENCHMARKING DATABASE

         Using the MECON-PEERx-TM- database structure and software platform, 
MECON has extended its capabilities to meet the needs of the integrated 
health system with the introduction of a new type of comparative information: 
the MECON-PEER Practice Management Profiler-TM-. This product provides key 
financial, clinical and operational performance indicators for medical 
groups. Internal and external comparisons of medical group operating data 
will assist these organizations in not only managing unit cost and labor 
productivity, but also profitability and managed care utilization. The 
company believes this is the first product of its kind in the industry which 
goes beyond balance sheet and financial statement comparison and enhances 
effective resource allocation decisions. The MECON-PEER Practice Management 
Profiler-TM- reflects the core business for most medical group practices:  
Family Practice; Internal Medicine; Primary Care; and OB/GYN.

CUSTOMERS

         Historically, MECON has marketed its products and services to the 
acute care segment of the hospital market, primarily to the hospital sector 
of the healthcare industry. Typically, a customer purchases the three-year 
subscription to MECON-PEERx-TM- as a first step in its effort to control, 
manage and reduce costs. The Company believes that the implementation of all 
of the above products has frequently resulted in immediate, significant and 
sustainable cost benefits to customers.

         MECON's customer base is geographically diverse, including urban and
rural healthcare organizations throughout the United States. The Company's
customers include for-profit, academic/teaching and non-profit hospitals as well
as multi-hospital systems. Revenue from certain member facilities of the
University HealthSystem Consortium Services Corporation, one of the Company's
largest customers, accounted for approximately 7% of net revenue for fiscal
1998. In January 1998, the Company was informed by this consortium that it has
endorsed another vendor for its benchmarking needs. As an alternative to a
consortium endorsement, the Company is seeking individual relationships with a
number of academic medical centers to supply benchmarking data. The Company will
aim to structure such individual relationships to be more profitable.


<PAGE>

SALES AND MARKETING

         MECON employs a direct sales and marketing organization which it 
augments through the efforts of its strategic partner, HBO & Company (HBOC). 
MECON participates in several national and regional trade shows including the 
Healthcare Information and Management Systems Society annual conference. The 
Company uses direct mail, and regionally focused marketing campaigns. 
Additionally, national healthcare related journals routinely publish case 
studies and data trends from the MECON database. Furthermore, MECON sponsors 
client conferences providing case studies, publications, new product 
introductions and a forum for client networking. The Company also generates a 
substantial number of leads directly through customer referrals.

STRATEGIC PARTNER

         During fiscal 1998, the Company strengthened its strategic partner 
relationship with HBOC by renegotiating the partnership agreement. Under the 
new agreement, both the MECON sales staff and the HBOC Trendstar sales force 
actively market the MECON-PEERx-TM- product to Trendstar customers. In 
addition, HBOC completed the development and release of the interface between 
the MECON-PEERx-TM- and Trendstar products.

PRODUCT DEVELOPMENT

         The Company's product development strategy is directed toward 
creating new products that leverage the MECON database, enhancing data 
content in the database, and increasing the functionality of its current 
products and leveraging technology to automate data collection and 
information delivery. As part of this strategy, the Company is currently 
expanding the depth of the data collected from subscribers. Major product 
releases during fiscal 1998 include the MECON-PEERx Practice Management 
Profiler-TM-, the MECON-OPTIMIS-TM- release 4.2 and MECON-Action-Point-SM- 
release 5.0.

COMPETITION

         The market for healthcare information systems and services is highly 
competitive and rapidly changing. The Company believes that the principal 
competitive factors in the healthcare information market are the breadth and 
quality of product offerings, access to proprietary data, the proprietary 
nature of 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 healthcare industry structure and identify information needs is an 
important competitive factor. Although the Company believes that it competes 
favorably with respect to each of these factors, the Company may be at a 
competitive disadvantage with respect to certain competitors and potential 
competitors that have greater financial, product development, technical and 
marketing resources than the Company, and that have substantial installed 
customer bases in the healthcare industry.

         The Company's competitors include other providers of operations and 
financial benchmarking data and products, providers of decision support 
software systems, large healthcare group purchasing alliances, and management 
and healthcare consulting firms. As the market for healthcare cost management 
solutions develops, additional competitors, including other major healthcare 
information companies not presently offering cost management solutions, may 
enter the market and competition may intensify. The Company also faces 
significant competition from internal information services departments at 
large hospital alliances or from for-profit hospital chains, many of which 
have developed or may develop benchmarking information or other cost control 
solutions.

PROPRIETARY RIGHTS

         The Company depends upon a combination of trade secret, copyright 
and trademark laws, nondisclosure and other contractual provisions to protect 
its proprietary rights in its products. Subscribers to MECON-PEERx-TM- enter 
into agreements restricting the disclosure and use of the comparative 
information contained in the database. The Company distributes its 
MECON-OPTIMIS-TM- product under software license agreements which grant 
customers a nonexclusive, nontransferable license to the product and contain 
terms and conditions prohibiting the unauthorized reproduction or transfer of 
the product. In addition, the Company attempts to protect its trade secrets 
and other proprietary information through agreements with employees and 
consultants. The Company also seeks to protect the source code of its 
products as a trade secret and as an unpublished copyright work. The Company 
has not filed any patent applications or copyrights covering its software or 
database technology. There can be no assurance that these protections will be 
adequate or that the Company's competitors will not independently develop 
products and services that are substantially equivalent or superior to the 
Company's products and services. The Company believes that, due to the rapid 
pace of innovation within the software industry, factors such as the 
technological and creative skills of its personnel and its ongoing reliable 
product maintenance and support are more important in establishing and 
maintaining a leadership position within the industry than are the various 
legal protections of its technology. In addition, although the Company 
believes that its products, trademarks and other proprietary rights do not 
infringe upon the proprietary rights of third parties, there can be no 
assurance that third parties will not assert infringement claims against the 
Company in the future.

<PAGE>

EMPLOYEES

         As of March 31, 1998, the Company employed a total of 93 full-time 
employees, of which 53 were in customer service, 10 in marketing and sales, 
18 in research and development and 12 in administration. None of the 
Company's employees is represented by a labor union. The Company has 
experienced no work stoppages and believes that its employee relations are 
good.

ITEM 2.  PROPERTIES

         The Company occupies approximately 17,500 square feet of space at its
headquarters in San Ramon, California under a lease expiring in January 2000.
The Company believes that its existing facilities will be adequate to meet its
currently anticipated requirements and that suitable additional or substitute
space will be available as needed.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not a party to any material legal proceedings.

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

         No matters were brought to a vote of the Company's stockholders in the
quarter ended March 31, 1998.

PART II

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

         The Company consummated its initial public offering of 2,000,000 
common shares on December 6, 1995 at a price of $13.00 per share. The 
Company's Common Stock is quoted on the NASDAQ National Market under the 
symbol "MECN." The following table sets forth the high and low prices of the 
Company's Common Stock for the periods indicated as reported on the NASDAQ 
market.

<TABLE>
<CAPTION>
PERIOD                                                                                                  HIGH      LOW
------                                                                                                  ----      ----
<S>       <C>                                                                                           <C>       <C>
1997      First quarter ...........................................................................     $30.25    $19.62
          Second quarter...........................................................................     $25.00    $14.62
          Third quarter............................................................................     $25.00     $6.31
          Fourth quarter...........................................................................      $7.12     $3.62
1998      First quarter ...........................................................................      $3.69     $2.06
          Second quarter...........................................................................      $6.38     $3.00
          Third quarter............................................................................      $8.13     $5.44
          Fourth quarter...........................................................................     $11.00     $6.63

</TABLE>

         On March 31, 1998 the last reported sale price for the Company's Common
Stock on the NASDAQ National Market was $11.00 per share. At March 31, 1998,
there were approximately 49 record holders of the Company's Common Stock.

         The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company intends to retain all available funds and any future
earnings for use in the operation of its business.


<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OR 
         PLAN OF OPERATIONS

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                             YEAR ENDED MARCH 31,
                                                                                             --------------------
                                                                            1998       1997         1996        1995       1994
                                                                            ----       ----         ----        ----       ----
                                                                                     (IN THOUSANDS, EXCEPT PER SHARE DATE)
<S>                                                                       <C>          <C>        <C>        <C>        <C>
     STATEMENT OF OPERATIONS:
     Revenue:
        Subscription and license......................................... $ 11,550     $ 9,934    $ 8,037    $ 4,821    $ 2,041
        Services.........................................................    3,523       3,661      3,966      4,047      2,979
                                                                          -----------------------------------------------------
             Net revenue.................................................   15,073      13,595     12,003      8,868      5,020
     Cost of revenue.....................................................    5,495       5,959      4,679      4,129      2,704
                                                                          -----------------------------------------------------
        Gross profit.....................................................    9,578       7,636      7,324      4,739      2,316
                                                                          -----------------------------------------------------
     Operating costs:
        Research and development.........................................    2,603       2,336      1,855      1,647        870
        Sales and marketing..............................................    2,658       3,651      3,349      2,588      1,236
        General and administrative.......................................    3,150       3,172      2,273      1,686      1,254
        Reorganization and other special charges.........................      749       1,706        908       -           -
                                                                          -----------------------------------------------------
             Total operating costs.......................................    9,160      10,865      8,385      5,921      3,360
                                                                          -----------------------------------------------------
        Operating income (loss)..........................................      418      (3,229)    (1,061)    (1,182)   (1,044)
     Interest expense....................................................     -          -           (274)      (224)      (25)
     Interest and other income, net......................................      735         808        368         26         53
     Loss on investment..................................................     -          -           -            -       (180)
                                                                          -----------------------------------------------------
       Income (loss) before provision for income taxes..................     1,153      (2,421)      (967)    (1,380)   (1,196)
     Provision for income tax expense....................................       92          40       -            -        (48)
                                                                          -----------------------------------------------------
     Income (loss) before cumulative effect of accounting change.........    1,061      (2,461)      (967)    (1,380)   (1,244)
     Cumulative effect for change in accounting for income taxes.........     -          -           -            -         (7)
                                                                          -----------------------------------------------------
        Net income (loss)................................................    1,061      (2,461)      (967)    (1,380)   (1,251)
                                                                         ------------------------------------------------------
     Accretion of redeemable preferred stock.............................     -          -           (110)      (173)     (110)
                                                                          -----------------------------------------------------
        Net income (loss) attributable to common stockholders............ $  1,061     $(2,461)   $(1,077)   $(1,553)  $(1,361)
                                                                          -----------------------------------------------------

     Basic earnings (loss) per share                                      $   0.17     $ (0.41)   $ (0.26)   $ (0.44)  $ (0.40)
                                                                          -----------------------------------------------------
     Weighted average common stock outstanding                               6,086       5,936      4,144      3,508     3,371
                                                                          -----------------------------------------------------

     Diluted earnings (loss) per share................................... $   0.17     $ (0.41)   $ (0.26)   $ (0.44)  $ (0.40)
                                                                          -----------------------------------------------------

     Weighted average common and dilutive potential common stock
        outstanding......................................................    6,368       5,936      4,144      3,508     3,371
                                                                          ----------------------------------------------------

</TABLE>
<TABLE>
<CAPTION>
                                                                                               MARCH 31,
                                                                                               --------- 
                                                                          1998         1997         1996         1995      1994
                                                                          ----         ----         ----         ----      ----
                                                                                            (IN THOUSANDS)
     <S>                                                                <C>         <C>          <C>          <C>         <C>
     BALANCE SHEET DATA:
     Cash, cash equivalents and securities available-for-sale........   $16,491     $13,678      $19,980      $1,190      $  513
     Total assets....................................................    23,310      20,631       25,581       4,949       1,936
     Redeemable common and preferred stock...........................       -           -            -         3,069         917
     Long-term debt..................................................       -           -            -         4,949       1,936
     Stockholders' (deficit) equity..................................    19,588      17,962       19,901      (3,223)     (1,609)
</TABLE>
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         THE DISCUSSION AND ANALYSIS BELOW CONTAINS TREND ANALYSIS AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES ACT OF 1934. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF THE RISK FACTORS SET FORTH BELOW IN "CERTAIN FACTORS BEARING ON FUTURE
RESULTS" AND OTHER REPORTS FILED BY THE COMPANY.


OVERVIEW

         MECON is a leading healthcare benchmarking solutions company. The
Company's proprietary data, family of premium quality, easy-to-use software
products and consulting services combine to produce and sustain optimum
performance in healthcare delivery systems. From its incorporation until 1989,
MECON's revenue was primarily derived from consulting services for acute care
hospitals. Since 1990, the Company has transitioned into providing a variety of
products and services that employ its proprietary database comprised of acute
care hospitals' operational cost and key performance information. For fiscal
1998, approximately 77% of the Company's revenues were derived from database
subscriptions and software licenses. Within the acute care segment of the
hospital market, MECON has marketed its products and services primarily to
individual hospitals with over 100 beds.

         On March 29, 1996, the Company merged with Managed Care Information
Systems, Inc. (MCIS) in a pooling of interests transaction. In connection with
the merger, the Company exchanged 338,155 shares of its common stock for all of
the outstanding shares of MCIS, assumed 33,052 common stock options, and assumed
a note payable and accrued interest to a third party in the amount of $2.5
million. In addition, the Company recorded special charges of $908,000 for
merger-related costs. Accordingly, all prior period financial information has
been restated.

         The following factors continue to contribute to the Company's
performance during fiscal year 1998. On November 25, 1996, the Company announced
plans to complete the integration of MCIS, centralize management of its product
development, sales and product support organizations, increase its investment in
the development of new products and relocate its headquarters to larger
facilities to accommodate these changes. These actions were intended to position
the Company on a strong footing for long-term growth. In connection with the
implementation of this new corporate structure, the Company recorded pretax
charges of $1.7 million in fiscal 1997 that consisted of $1.3 million of
reorganization charges and charges of $369,000 for acquisition costs and costs
for an aborted acquisition. Included in the reorganization costs were provisions
for shutting down two of the Company's satellite offices, employee severance and
related benefits, asset writedowns and a provision for doubtful accounts which
was established for uncollectible accounts receivable. This reserve was
established because the Company believed its commitment to the development of
new products would change the strategic direction of its product lines.

         As a result of these integration, reorganization and product transition
efforts, revenue and expenses for the third and fourth quarters of fiscal 1997
were adversely affected. Revenue was impacted by declined productivity in the
sales force that led to contract signing delays. The effect of such delays was a
shortfall in revenue recognized in both the third and fourth quarters of fiscal
1997. This shortfall resulted in incurred operating losses, and accordingly, the
Company announced that it would take corrective measures.

         On April 17, 1997, the Company announced a number of strategic and
operational changes intended to improve the Company's financial performance. As
a first step, the Company's original management team rejoined the Company and
adopted a "back-to-basics" strategy of selling the Company's current products
into its current market. Although the Company believed, and still believes, that
additional healthcare market sectors targeted by the Company's increased
investments in developing clinical outcomes and patient satisfaction products
did represent growth opportunities for the Company, the Company also believed
that continued efforts in these areas compromised both its leadership position
in benchmark-based cost management solutions and its profitability.

         Tactics supporting this "back-to-basics" strategy include, but are 
not limited to, selling the MECON Integrated Solution whenever possible, 
cross-selling existing products to existing customers and remaining firm on 
MECON-PEERx-TM-pricing related to the renewal of older, low margin 
subscriptions. The MECON Integrated Solution is a packaged product offering 
that includes a MECON-PEERx-TM- and MECON-PEER Practice Management 
Profiler-TM-subscription, MECON-Action-Point-SM-, MECON-Advisory-SM- and 
MECON-OPTIMIS-TM-. Such a packaged offering is intended to assure that the 
customer achieves and sustains optimum performance by not only receiving 
benchmarked-based cost management reports, but by also receiving MECON's 
integrated consulting approach of implementing cost reduction opportunities 
identified by MECON-PEERx-TM-, MECON-PEER Practice Management Profiler-TM-, 
and MECON-Action-Point-SM- and sustaining those reductions by installing 
MECON-OPTIMIS-TM-, the Company's operational cost monitoring software tool.

         Less than 50% of MECON-OPTIMIS-TM- customers are subscribers to 
MECON-PEERx-TM- because MECON-OPTIMIS-TM- predates MECON-PEERx-TM- and many 
of the early MECON-OPTIMIS-TM- customers, on current maintenance agreements, 
are now sales prospects for the MECON Total Solution. Additionally, less than 
10% of the MECON-Action-Point-SM- customers are MECON-PEERx-TM-

<PAGE>

subscribers because the Company only recently began integrating the selling 
of MECON-Action-Point-SM-, its only clinical product, with its operational 
cost management products. Therefore, a cross-selling opportunity exists that 
has become a tactic of the "back-to-basics" strategy.

         Many of the older multi-year MECON-PEERx-TM- subscriptions were 
grandfathered at substantially lower prices. The Company has adopted a firm 
pricing policy to migrate expiring MECON-PEERx-TM- subscriptions to current 
list prices, and accordingly, certain of these subscribers may not renew 
their low margin subscriptions at higher margins due to pricing sensitivity. 
Accordingly, the Company is emphasizing replacing the revenue stream up for 
renewal more heavily than replacing all the expiring units. During fiscal 
1998, the Company recorded $1.70 in renewal contacts for every $1.00 of 
expiring contracts. However, as a result of this firm pricing tactic, the 
Company believes that some of the expiring contracts may not renew. One such 
contract that recently did not renew is a contract with a hospital consortium 
that covers approximately 40 academic teaching hospitals. During fiscal 1998, 
this contract totaled 7% of revenue. The original three-year contract, signed 
in fiscal 1992, was one of the Company's first multi-year contracts, was 
steeply discounted and hence contributed very low margins. The Company 
believes that the termination of this contract will not adversely affect 
earnings.

         As a second step, the Company took action to reduce its ongoing 
quarterly operating expense base. As a part of the expense reduction effort, 
the Company decreased its workforce by 38 employees on April 17, 1997. This 
reduction was made in an effort to reduce the Company's overall quarterly 
expenses, and along with the Company's renewed focus on its core markets, 
return the Company to profitability and growth. As a part of this expense 
reduction effort, the Company incurred a reorganization charge of $749,000 
during the first quarter of fiscal 1998. This charge was primarily comprised 
of employee outplacement, severance and related benefits relocation and 
additional costs associated with facility shutdowns.

         The Company signed $17.1 million in total contract value during 
fiscal 1998, compared to $15.2 million during fiscal 1997. This increase in 
contract signings continues to build the Company's backlog which is defined 
as the total value of contracts signed that have not been recognized as 
revenue. Backlog is then depleted by the revenue recognized during the 
period. At March 31, 1998, the Company's contract backlog stood at $12.7 
million, an increase of 19% over the prior fiscal year.

         Approximately 25% to 33% of the Company's quarterly revenue is 
derived from backlog. The remaining 67% to 75% is generated from contracts 
signed during that respective quarter. The Company has achieved sequential 
revenue increases throughout fiscal 1998. These sequential revenue increases, 
coupled with strong expense controls since the reductions achieved in the 
April 17, 1997 reorganization, have returned the Company to profitability, 
excluding the reorganization charge in the first quarter of fiscal 1998, for 
the fourth consecutive quarter.

RESULTS OF OPERATIONS

         The following table sets forth certain operating data as a percentage
of net revenue for the period indicated:

<TABLE>
<CAPTION>
                                                                         FISCAL YEAR ENDED MARCH 31,
                                                                           1998     1997      1996
                                                                           ----     ----      ----
<S>                                                                        <C>      <C>         <C>
STATEMENTS OF OPERATIONS:
Revenue:
   Subscription and license...........................................      77%      73%        67%
   Services...........................................................      23%      27%        33%
                                                                         ------------------------
      Net revenue.....................................................     100%     100%       100%
Cost of revenue.......................................................      36%      44%        39%
                                                                         ------------------------
Gross profit..........................................................      64%      56%        61%
Operating costs:
   Research and development...........................................      17%      17%        15%
   Sales and marketing................................................      18%      27%        28%
   General and administrative.........................................      21%      23%        19%
   Reorganization and other special charges...........................       5%      13%         8%
                                                                         ------------------------
      Total operating costs...........................................      61%      80%        70%
                                                                         ------------------------
Operating income (loss)...............................................       3%    (24)%       (9)%
Interest expense......................................................       -       -         (2)%
Interest and other income, net........................................       5%      6%          3%
                                                                         ------------------------
Income (loss) before provision for income taxes.......................       8%   (18)%        (8)%
Provision for income tax expense......................................       1%      -          -
                                                                         ------------------------
Net income (loss).....................................................       7%   (18)%        (8)%
                                                                         -------------------------
Accretion of redeemable preferred stock...............................       -       -         (1)%
Net income (loss) attributable to common stockholders.................        7%   (18)%       (9)%
                                                                         -------------------------
</TABLE>

<PAGE>

FISCAL 1998 COMPARED TO FISCAL 1997

REVENUE

         Revenue for fiscal 1998 increased 11% to $15.1 million compared to 
$13.6 million for fiscal 1997. Subscription and license revenue for fiscal 
1998 increased 16% to $11.6 million compared to $9.9 million for fiscal 1997 
and accounted for essentially all of the increase. This increase was 
primarily due to increases in renewing subscribers, an increased base of 
recurring revenue from multi-year subscription contracts sold in prior years 
and an increase in value added services related to MECON-PEERx-TM-. Services 
revenue for fiscal 1998 decreased 4% to $3.5 million compared to $3.7 million 
in fiscal 1997. Although services revenue decreased, the Company anticipates 
service revenue will increase as a result of the Company's current strategy 
of expanding services, such as training programs and consulting projects, 
that build relationships with customers and enhance benefits that customers 
derive from the Company's products.

COST OF REVENUE

         Cost of revenue for fiscal 1998 decreased 8% to $5.5 million compared
to $6.0 million for fiscal 1997, primarily due to the reduction in workforce
during the April 17, 1997 reorganization, offset by an increase in amortization
of software development costs related to the Company's MECON-PEERVIEW product.
Cost of revenue for fiscal 1998 included $580,000 in amortization expense from
the capitalization of software development expenses compared to $227,000 for
fiscal 1997. Cost of revenue for fiscal 1998 decreased to 36% of total revenue
compared to 44% for fiscal 1997, primarily due to the aforementioned factors.

RESEARCH AND DEVELOPMENT

         Research and development expenses for fiscal 1998 increased 11% to $2.6
million compared to $2.3 million for fiscal 1997, primarily due to the
development of MECON-OPTIMIS Release 4.2, MECON-Action-Point Release 5.0 and
MECON-PEERVIEW Version 5.0's functional specifications. During fiscal 1998,
approximately $832,000 was capitalized for internally developed software related
to product development and internal databases supporting company products.
Although research and development expenses remained constant at 17% of revenue
for both fiscal 1998 and 1997, the dollar amount increased due to a continued
commitment to develop the next generation of MECON-PEERVIEW, Version 5.0.

SALES AND MARKETING

         Sales and marketing expenses for fiscal 1998 decreased 27% to $2.7
million compared to $3.7 million for fiscal 1997, primarily due to the Company's
reduction in workforce during the three months ended June 30, 1997, coupled with
a significant decrease in advertising, tradeshow participation and travel. Sales
and marketing expenses for fiscal 1998 decreased to 18% of revenue compared to
27% for fiscal 1997, primarily due to the aforementioned factors.

GENERAL AND ADMINISTRATIVE

         General and administrative expenses for fiscal 1998 remained relatively
constant at $3.2 million. General and administrative expenses for fiscal 1998
decreased to 21% of revenue compared to 23% for fiscal 1997, primarily due to
the increase in revenue and the implementation of certain cost-cutting measures
relating to travel, telephone infrastructure and directors and officers' 
insurance, as well as a decrease in bad debt expense, rent expense and 
professional services expense.

REORGANIZATION AND OTHER SPECIAL CHARGES

         Reorganization and other special charges for fiscal 1998 decreased 56%
to $749,000 compared to $1.7 million for fiscal 1997. The reorganization charge
for fiscal 1998 was primarily due to the Company's reorganization plan announced
in the first quarter of fiscal 1998 that consisted of employee severance costs
related to the termination of 38 employees. The reorganization charge for fiscal
1997 was primarily due to the Company's reorganization in the third quarter of
fiscal 1997 that consisted of $1.3 million related to centralizing the
management of product development, sales and product support organizations. The
remaining $369,000 related to an aborted acquisition and costs associated with
the prior year merger. Of the total $749,000 reorganization costs incurred for
fiscal 1998, $714,000 was paid during fiscal 1998 and $35,000 remained accrued
and unpaid as of March 31, 1998 and all amounts related to the 1997 charge had
been paid.

FISCAL 1997 COMPARED TO FISCAL 1996

REVENUE

         Revenue for fiscal 1997 increased 13% to $13.6 compared to $12.0
million for fiscal 1996. Subscription and license revenue for 

<PAGE>

fiscal 1997 increased 24% to $9.9 compared to $8.0 million for fiscal 1996 
and accounted for essentially all of the revenue growth. This increase was 
primarily due to increased revenue from new MECON-PEERx-TM- subscription 
contracts and MECON-Action-Point-SM- license fees. Service revenue for fiscal 
1997 decreased 8% to $3.7 million compared to $4.0 million for fiscal 1996. 
This decrease was primarily due to a decrease in consulting revenue 
reflective of the Company's continued shift in focus to product sales from 
consulting services.

 COST OF REVENUE

         Cost of revenue for fiscal 1997 increased 28% to $6.0 million compared
to $4.7 million for fiscal 1996, primarily due to additional staffing to support
the Company's anticipated growth and increased amortization expense of
capitalized software development costs. Cost of revenue for fiscal 1997 included
$227,000 in amortization expense from the capitalization of software development
expenses compared to $89,000 for fiscal 1996. Cost of revenue for fiscal 1997
increased to 44% of total revenue compared to 39% for fiscal 1996, primarily due
to an increase in staffing to support the higher level of contracts signed in
fiscal 1997 compared to fiscal 1996 as well as increase amortization expense
from the capitalization of software development costs.

 RESEARCH AND DEVELOPMENT

         Research and development expenses for fiscal 1997 increased 21% to $2.3
million compared to $1.9 million for fiscal 1996, primarily due to the addition
of technical and programming personnel related to new product development.
During fiscal 1997 approximately $754,000 was capitalized for internally
developed software related to product development compared to $569,000 for
fiscal 1996. Research and development expenses for fiscal 1997 increased to 17%
of revenue compared to 15% for the comparable period in the prior year,
primarily due to a commitment to new product development in advance of related
revenues.

SALES AND MARKETING

         Sales and marketing expenses for fiscal 1997 increased 12% to $3.7
million compared to $3.3 million for fiscal 1996, primarily due to increased
commissions associated with higher levels of contract signings for fiscal 1997
compared to fiscal 1996, the hiring of a Vice President of Marketing, and
investment in certain promotional activities, including trade shows, seminars
and advertising. Sales and marketing expenses for fiscal 1997 decreased to 27%
of revenue compared to 28% for fiscal 1996, primarily due to increased
utilization of sales and marketing capacity developed in prior fiscal years.

GENERAL AND ADMINISTRATIVE

         General and administrative expenses for fiscal 1997 increased 39% to
$3.2 million compared to $2.3 million for fiscal 1996, primarily due to
increased management staffing, expansion of facilities, and general expenses
related to being a public company. General and administrative expenses for
fiscal 1997 increased to 23% of revenue compared to 19% of revenue for fiscal
1996, primarily due to the establishment of a larger infrastructure, including
information systems personnel, a new Chief Executive Officer and larger
facilities, to support increased revenue.

REORGANIZATION AND OTHER SPECIAL COSTS

         Reorganization and other special costs for fiscal 1997 increased 88% to
$1.7 million compared to $908,000 for fiscal 1996, primarily due to the
Company's reorganization plan announced in the third quarter of fiscal 1997. The
reorganization plan called for centralizing the management of product
development, sales and product support organizations. In connection with this
reorganization, the Company recorded a special pretax charge totaling $1.7
million that primarily included a $1.3 million charge for costs associated with
the reorganization, and charges of $369,000 for an aborted acquisition and
additional acquisition costs. Included in the costs associated with the
reorganization were provisions for shutting down two of the Company's satellite
offices, employee severance and related benefits, asset writedowns and a
provision for accounts receivable that management believed would not be
collectible. This reserve was established because the Company believed its
commitment to the development of new products would change the strategic
direction of its product lines. Reorganization and other special costs of
$908,000 for fiscal 1996 primarily included costs of the MCIS merger. Included
in the merger costs were closing costs, professional fees, and other direct
costs related to the merger.

INTEREST AND OTHER INCOME, NET

         Interest and other income, net for fiscal 1997 increased 120% to
$808,000 compared to $368,000 for fiscal 1996, primarily due to larger cash
balances during fiscal 1997 from the continued investment of the net proceeds
received from the initial public offering of the Company's common stock in
December, 1995.

<PAGE>

QUARTERLY RESULTS

         The following table sets forth certain unaudited quarterly financial
data for fiscal 1997 and fiscal 1998. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited information included elsewhere in this annual report and includes
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period:

<TABLE>
<CAPTION>
                                                                   FISCAL YEAR 1997                       FISCAL YEAR 1998
                                                                   ----------------                       ----------------
                                                           Q1       Q2        Q3        Q4        Q1        Q2       Q3        Q4
                                                           --       --        --        --        --        --       --        --
                                                                                       (IN THOUSANDS)
<S>                                                      <C>      <C>       <C>       <C>      <C>        <C>       <C>       <C>
Revenue:
Subscription and license.............................    2,502    3,472     2,163     1,797    2,228      2,736     2,973     3,613
Services.............................................      973    1,138       889       661      977      1,080       924       542
                                                        ---------------------------------------------------------------------------
   Net revenue.......................................    3,475    4,610     3,052     2,458    3,205     3,816      3,897     4,155
Cost of revenue......................................    1,211    1,500     1,483     1,765    1,245     1,442      1,400     1,408
                                                        ---------------------------------------------------------------------------
Gross profit.........................................    2,264    3,110     1,569       693    1,960     2,374      2,497     2,747
                                                        ---------------------------------------------------------------------------
Total operating costs................................    2,004    2,173    3,867*     2,821    2,812**   2,152      2,181     2,015
Operating income (loss)..............................      260      937   (2,298)    (2,128)    (852)      222        316       732
Net income (loss) attributable to common stockholders      313      746   (1,581)    (1,939)    (681)      375        476       891
                                                        ---------------------------------------------------------------------------
</TABLE>
-----------
*        Includes $1.5 million in reorganization and aborted acquisition costs.
**       Includes $749,000 in reorganization costs.


<TABLE>
<CAPTION>
                                                                   FISCAL YEAR 1997                       FISCAL YEAR 1998
                                                                   ----------------                       ----------------        
                                                            Q1       Q2        Q3       Q4        Q1       Q2        Q3       Q4
                                                            --       --        --       --        --       --        --       --
<S>                                                        <C>       <C>      <C>      <C>       <C>       <C>      <C>     <C> 
Revenue:
Subscription and license..............................      72%       75%      71%      73%       70%       72%      76%     87%
Services..............................................      28%       25%      29%      27%       30%       28%      24%     13%
                                                         -----------------------------------------------------------------------
   Net revenue........................................     100%      100%     100%     100%      100%      100%     100%    100%
Cost of revenue.......................................      35%       33%      49%      72%       39%       38%      36%     34%
                                                         -----------------------------------------------------------------------
Gross margin..........................................      65%       67%      51%      28%       61%       62%      64%     66%
                                                         -----------------------------------------------------------------------
Total operating costs.................................      57%       47%     127%     115%       88%       56%      56%     48%
Operating income (loss)...............................       8%       20%     (75%)    (87%)     (27%)       6%       8%     18%
Net income (loss) attributable to common stockholders.       9%       16%     (52%)    (79%)     (21%)      10%      12%     21%
                                                         -----------------------------------------------------------------------
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

         On December 7, 1995, the Company completed an initial public offering
of 2,000,000 shares of its common stock. The offering yielded $23 million in 
net proceeds to the Company. At March 31, 1998, the Company's cash, cash 
equivalents and securities available-for-sale increased by $2.8 million to 
$16.5 million compared to $13.7 million at March 31, 1997, primarily as a 
result of strong cash collections and cash management. The Company generated 
$3.5 million of cash flow from operating activities for fiscal 1998 compared 
to cash used of $2.8 million for fiscal 1997. This improvement was primarily 
due to increased cash collections augmented by strong cash management. The 
Company reduced its days of sales outstanding (DSO) in accounts receivable to 
63 days at March 31, 1998 from 70 days at March 31, 1997. These improvements 
resulted from increased cash collections of approximately $3.8 million in 
fiscal 1998 compared to fiscal 1997.

         As of March 31, 1998, the Company had net working capital of $16.4
million, including cash, cash equivalents and securities available-for-sale of
$16.5 million. Given the Company's strong cash position as of March 31, 1998,
the Company has elected to have no outstanding debt facilities. The Company
currently has no material commitments for capital expenditures.

         The Company believes that with its access to financing sources, strong
cash position, and lack of debt, it will be able to adequately fund its cash
requirements for at least the next twelve months.

<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

         In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME which will be effective for financial statements for periods beginning
after December 15, 1997, and establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company will make the required reporting of
comprehensive income in its consolidated financial statements in fiscal 1999.

         In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS
OF A BUSINESS ENTERPRISE, which will be effective for financial statements for
periods beginning after December 15, 1997, and establishes standards for
disclosures about segments of an enterprise. Earlier application is encouraged.
The Company will make the required disclosures under SFAS No. 131 in its
consolidated financial statements for the fiscal year ending March 31, 1999.

         In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION, which supersedes SOP 91-1. The Company will be
required to adopt SOP 97-2 for software transactions entered into beginning
April 1, 1998, and retroactive application to years prior to adoption is
prohibited. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The revenue allocated to software products
generally is recognized upon delivery of the products. The revenue allocated to
postcontract customer support generally is recognized ratably over the term of
the support and revenue allocated to service elements generally is recognized as
the services are performed. Beginning in fiscal 1998, the Company will recognize
revenue in accordance with SOP 97-2. Under its current practice, the Company
does not expect a significant impact on recognition of revenue from software
transactions upon adoption of SOP 97-2.

CERTAIN FACTORS BEARING ON FUTURE RESULTS

         CERTAIN OF THE STATEMENTS ABOVE ARE FORWARD-LOOKING STATEMENTS. THE 
FOLLOWING ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER 
MATERIALLY FROM THOSE PROJECTED IN ANY SUCH FORWARD-LOOKING STATEMENTS.

PRICING

         The Company announced, on April 17, 1997, that the original management
team had rejoined the Company and adopted a "back-to-basics" strategy. One
tactic supporting this "back-to-basics" strategy is to remain firm on
MECON-PEERx-TM- pricing related to renewal subscriptions. This tactic may result
in certain existing customers not renewing their older, low margin contracts at
higher total contract values due to price sensitivity. Termination of customer
relationships could result in lower subscription revenues for the Company, which
could have a material adverse effect on the Company's business, operating
results and financial condition.

VARIABILITY OF QUARTERLY RESULTS; SEASONALITY

         The Company's quarterly revenues and operating results have varied 
significantly in the past and are likely to vary substantially from quarter 
to quarter in the future. Quarterly revenues and operating results may 
fluctuate as a result of a variety of factors, including: the Company's sales 
cycle and demand for its products and services; changes in distribution 
channels; changes in the Company's product mix; the termination of, or a 
reduction in, subscriptions to the Company's MECON-PEERx-TM- product; the 
loss of customers due to consolidation in the healthcare industry; customer 
delays in providing information needed by the Company to complete 
implementation of, and revenue recognition from, sales of the MECON-PEERx-TM- 
product; changes in customer budgets; investments by the Company in 
marketing, sales, research and development and administrative personnel 
necessary to support the Company's growth; the timing of new product 
introductions and enhancements by the Company and its competitors; marketing 
and sales promotional activities and trade shows; the unpredictability of 
revenues from consulting services; and general economic conditions. 
Accordingly, the Company's operating results for any particular quarterly 
period may not be indicative of results for future periods. Moreover, the 
Company's operating expense levels are relatively fixed and, to a large 
degree, are based on anticipated revenue levels. Consequently, if anticipated 
revenues in any given quarter do not occur as expected, expense levels could 
be disproportionately high and may result in losses.

         The Company's quarterly results have been, and may continue to be, 
affected by hospital budgeting practices that cause many discretionary 
purchase decisions to be made shortly before the budgetary year end, which 
generally occurs on June 30 or December 31. Consequently, the Company's 
operating results have been somewhat seasonal.

<PAGE>

DEPENDENCE ON PRINCIPAL PRODUCT

         For the fiscal year ended March 31, 1998, approximately 77% of the 
Company's revenues were derived from subscriptions and licenses to its 
MECON-PEERx-TM-, MECON-OPTIMIS-TM- and MECON-Action-Point-SM- products. 
Accordingly, any significant reduction in subscriptions to such product would 
have a material adverse effect on the Company's business and operating 
results. Although subscriptions to the MECON-PEERx-TM- database generally 
have three-year terms, there can be no assurance that customers will not 
cancel their subscriptions prior to the end of the subscription period. In 
addition, although the Company has experienced a high customer renewal rate, 
there can be no assurance that the Company's customers will renew their 
subscriptions or that any renewal terms will be as favorable to the Company 
as existing terms.

INTEGRITY AND RELIABILITY OF DATABASE

         The Company's success depends significantly on the integrity of its 
database. 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 
information contained in its database is representative of the operational 
aspects of various types of hospitals, there can be no assurance that such 
information is appropriate for comparative analysis in all cases or that the 
database accurately reflects general or specific trends in the hospital 
market. If the information contained in the database 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.

COMPETITION

         The market for healthcare information systems and services is 
intensely competitive and rapidly changing. The Company's competitors include 
other providers of operations and financial benchmarking data and services, 
providers of decision support software systems and management and healthcare 
consulting firms. Furthermore, other major healthcare information companies 
not presently offering cost management solutions may enter the markets in 
which the Company competes. Many of the Company's competitors and potential 
competitors have significantly greater financial, technical, product 
development and marketing resources than the Company, and currently have, or 
may develop or acquire, substantial installed customer bases in the 
healthcare industry. The Company also faces significant competition from 
internal management information services departments of large hospital 
alliances or for-profit hospital chains, many of which have developed or may 
develop benchmarking information and other cost control solutions. In 
addition, increased competitive pressures, among other factors, could lead to 
lower prices for the Company's products and services, thereby materially 
adversely affecting the Company's operating results. Accordingly, there can 
be no assurance that the Company will be able to compete successfully in the 
future.

MANAGEMENT OF GROWTH

         The Company is currently experiencing a period of growth and expansion
which has placed a significant strain on its personnel and resources. The
Company's growth has resulted in an increase in the level of responsibility for
the Company's key personnel, several of whom were only recently hired. Failure
to manage growth effectively, or to develop, maintain or upgrade management
information and other systems and controls, could have a material adverse effect
on the Company.

DEPENDENCE ON STRATEGIC RELATIONSHIPS

         A key element of the Company's business strategy is to develop
relationships with leading industry organizations in order to increase the
Company's market presence, expand distribution channels and broaden the
Company's product line. The Company has one such strategic relationship with
HBOC. The Company believes that its success in penetrating new markets for its
products and services depends in large part on its ability to maintain this
relationship and cultivate additional relationships. There can be no assurance
that the Company's existing or future strategic partners will not develop and
market products in competition with the Company or otherwise discontinue their
relationships with the Company, or that the Company will be able to successfully
develop additional strategic relationships.

CONSOLIDATION AND UNCERTAINTY IN THE HEALTHCARE INDUSTRY

         Many healthcare providers are consolidating to create larger healthcare
delivery enterprises with greater regional market power. Such consolidation
could erode the Company's existing customer base and reduce the size of the
Company's target market. In addition, the resulting enterprises could have
greater bargaining power, which may lead to price erosion of the Company's
products and services. The reduction in the size of the Company's target market
or the failure of the Company to maintain adequate price levels could have a
material adverse effect on the Company.

<PAGE>

         The healthcare industry is subject to changing political, economic 
and regulatory influences that may effect the procurement practices and 
operation of healthcare industry participants. During the past several years, 
the US healthcare industry has been subject to an increase in governmental 
regulation of, among other things, reimbursement rates and certain capital 
expenditures. Several lawmakers have announced that they intend to propose 
programs to reform the US healthcare system. These programs may contain 
proposals to increase governmental involvement in healthcare, lower 
reimbursement rates and otherwise change the operating environment for the 
Company's customers. Healthcare industry participants may react to these 
proposals and the uncertainty surrounding such proposals by curtailing or 
deferring investments, including those for the Company's products and 
services. The Company cannot predict what impact, if any, such factors might 
have on its business, financial condition and results of operations.

UNCERTAINTY OF ENTRANCE INTO NEW MARKETS

         A substantial majority of the Company's revenues to date have been 
derived from sales to large hospitals in urban areas. The Company's future 
success depends in part upon the Company's ability to market its products and 
services to other healthcare providers, including small and rural hospitals, 
long-term care facilities, large group medical practices, rehabilitation 
hospitals and surgical centers. In order to develop the subscriber base 
necessary for the accumulation of meaningful operations benchmarking data for 
such new markets, the Company may be required to offer significant price 
discounts to prospective customers in such markets. In addition, because such 
providers typically have smaller budgets than the Company's existing 
customers, entry into new markets may require the Company to offer lower 
priced versions of its products. Sales of such new products may result in 
lower gross margins than sales to the Company's existing customer base. 
Moreover, the entry into such new markets may require the Company to increase 
substantially its product development, marketing and other expenses. There 
can be no assurance that the Company will be successful in entering new 
markets.

NEW PRODUCT DEVELOPMENT

         The Company's future success and financial performance will depend in
large part on the Company's ability to continue to meet the increasingly
sophisticated needs of its customers through the timely development and
successful introduction of new and enhanced versions of its database and other
complementary products and services. Product development has been focused on
enhancing existing products or introducing new products and has inherent risks,
and there can be no assurance that the Company will be successful in its product
development efforts or that the market will continue to accept the Company's
existing or new products and services. The Company believes that significant
continuing product enhancement and development efforts will be required to
sustain the Company's growth. There can be no assurance that the Company will
successfully develop, introduce and market new products or product enhancements,
or that products or product enhancements developed by the company will meet
requirements of healthcare providers and achieve market acceptance.

POTENTIAL ACQUISITIONS

         The Company may expand its product line through the acquisition of
complementary businesses, products and technologies. 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. The Company's
management has no prior experience in managing acquisitions. 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. In
addition, such an acquisition may involve the issuance of additional equity
securities, which may be dilutive to stockholders.

DEPENDENCE ON KEY PERSONNEL

         The success of the Company and of its business strategy is dependent in
large part on its key management and operating personnel. The Company believes
that its future success will also depend upon its ability to attract and retain
highly-skilled technical, managerial and marketing personnel. Such individuals
are in high demand and often attract competing offers. In particular, the
Company's success will depend on its ability to retain the services of its
executive officers. The Company will also have an ongoing need to expand its
management personnel and support staff. The loss of the services of one or more
members of management or key employees, or the inability to hire additional
personnel as needed, may have a material adverse effect on the Company.

<PAGE>

YEAR 2000

         The Company is reviewing its internal computer systems and product
offerings to ensure these systems and offerings are adequately able to address
the issues expected to arise in connection with the Year 2000. These issues
include the possibility that software which does not have the capacity to
recognize four digits in a date field may no longer function properly when use
of that date becomes necessary.

         The Company is currently evaluating the status of its products which
are not at present Year 2000 compliant and expects to implement programming
changes necessary to address Year 2000 issues. The Company is also evaluating
its internal systems and expects to implement the systems and programming
changes necessary to address Year 2000 issues on an enterprise-wide basis. The
Company is currently reviewing the cost of such actions. A significant
proportion of these costs are not expected to be incremental costs to the
Company, but will represent redeployment of existing Company resources. The
Company expects such modifications to its products and internal systems will be
made on a timely basis, and presently believes that, with modifications to
existing software or converting to new software, the Year 2000 issue will not
pose significant operational problems for the Company's computer systems;
however, there can be no assurance there will not be a delay in, or increased
costs associated with, the implementation of such changes, and the Company's
inability to implement such changes could have an adverse effect on future
results of operations.

         The Company has not fully determined the extent to which it may be
impacted by third parties' systems, which may not be Year 2000-compliant. The
Year 2000 computer issue creates risk for the Company from third parties with
whom the Company deals on financial transactions worldwide. While the Company
has begun efforts to seek reassurance from its suppliers and service providers,
there can be no assurance that the systems of other companies that the Company
deals with or on which the Company's systems rely will be timely converted, or
that any such failure to convert by another company could not have an adverse
effect on the Company.

<PAGE>

ITEM 7. FINANCIAL STATEMENTS


                                   MECON, INC.
                           CONSOLIDATED BALANCE SHEETS
                             MARCH 31, 1998 AND 1997
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)



                                     ASSETS
<TABLE>
<CAPTION>
                                                                                                1998           1997
                                                                                                ----           ----
<S>                                                                                            <C>            <C>
Current assets:
   Cash and cash equivalents........................................................           $12,647         9,211
   Securities available-for-sale, at market.........................................             3,844         4,467
   Accounts receivable, net of allowances of $308 and $555, respectively............             2,724         2,542
   Unbilled accounts receivable.....................................................               522           886
   Prepaid expenses.................................................................               277           362
   Other current assets.............................................................                81            52
                                                                                         ----------------------------

        Total current assets........................................................            20,095        17,520
Property and equipment, net.........................................................             1,430         1,588
Software development costs, net.....................................................             1,776         1,510
Other assets........................................................................                 9            13
                                                                                         ----------------------------

                                                                                               $23,310        20,631
                                                                                         ----------------------------
                                                                                         ----------------------------
</TABLE>


<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                                      <C>                <C> 
Current liabilities:
   Accounts payable.................................................................              $317           601
   Accrued salaries and benefits....................................................               848           452
   Deferred revenue.................................................................             1,741         1,058
   Other accrued liabilities........................................................               796           533
                                                                                         ----------------------------
        Total current liabilities...................................................             3,702         2,644
Long-term obligations, less current portion.........................................                20            25
                                                                                         ----------------------------
        Total liabilities...........................................................             3,722         2,669
                                                                                         ----------------------------
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $.001 par value; 5,000,000 authorized; none issued and
        outstanding.................................................................                 -             -
   Common stock, $.001 par value; 50,000,000 shares authorized; 6,201,068 and 
      6,000,297 issued and outstanding in 1998 and 1997, respectively...............                 6             6
   Additional paid-in capital.......................................................            25,598        25,033
   Accumulated deficit..............................................................            (6,016)       (7,077)
                                                                                         ----------------------------
        Total stockholders' equity..................................................            19,588        17,962
                                                                                         ----------------------------
                                                                                               $23,310        20,631
                                                                                         ----------------------------
                                                                                         ----------------------------
</TABLE>

             See accompanying notes to consolidated financial statements.

<PAGE>

                                   MECON, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    YEARS ENDED MARCH 31, 1998, 1997 AND 1996
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                             1998          1997          1996
                                                                                             ----          ----          ----
<S>                                                                                      <C>               <C>           <C>   
Revenue:
   Subscription and license..........................................................          $11,550       9,934         8,037
   Services.........................................................................             3,523       3,661         3,966
                                                                                         ----------------------------------------
        Net revenue.................................................................            15,073      13,595        12,003
Cost of revenue.....................................................................             5,495       5,959         4,679
                                                                                         ----------------------------------------
        Gross profit................................................................             9,578       7,636         7,324
                                                                                         ----------------------------------------
Operating costs:
   Research and development.........................................................             2,603       2,336         1,855
   Sales and marketing..............................................................             2,658       3,651         3,349
   General and administrative.......................................................             3,150       3,172         2,273
   Reorganization and other special charges.........................................               749       1,706           908
                                                                                         ----------------------------------------
        Total operating costs.......................................................             9,160      10,865         8,385
                                                                                         ----------------------------------------
Operating income (loss).............................................................               418      (3,229)       (1,061)
Interest expense....................................................................                 -           -          (274)
Interest and other income, net......................................................               735         808           368
                                                                                         ----------------------------------------
Income (loss) before provision for taxes............................................             1,153      (2,421)         (967)
Provision for income taxes..........................................................                92          40             -
                                                                                         ----------------------------------------
        Net income (loss)...........................................................             1,061      (2,461)         (967)
Accretion of redeemable preferred stock.............................................                 -           -          (110)
                                                                                         ----------------------------------------
        Net income (loss) attributable to common stockholders.......................            $1,061      (2,461)       (1,077)
                                                                                         ----------------------------------------
                                                                                         ----------------------------------------

Basic earnings (loss) per share                                                                  $0.17       (0.41)        (0.26)
                                                                                         ----------------------------------------
                                                                                         ----------------------------------------

Weighted average common stock outstanding                                                        6,086       5,936         4,144
                                                                                         ----------------------------------------
                                                                                         ----------------------------------------

Diluted earnings (loss) per share                                                                $0.17       (0.41)        (0.26)
                                                                                         ----------------------------------------
                                                                                         ----------------------------------------

Weighted average common and dilutive potential common stock outstanding                          6,368       5,936         4,144
                                                                                         ----------------------------------------
                                                                                         ----------------------------------------
</TABLE>

         See accompanying notes to consolidated financial statements.

<PAGE>

                                   MECON, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                          MARCH 31, 1998, 1997 AND 1996
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                              COMMON STOCK      ADDITIONAL     STOCKHOLDERS'                          TOTAL
                                          --------------------    PAID-IN           NOTE         ACCUMULATED      STOCKHOLDERS'
                                          SHARES        AMOUNT    CAPITAL        RECEIVABLE         DEFICIT           EQUITY
                                          ------        ------    -------        ----------         -------           ------
<S>                                       <C>           <C>          <C>             <C>               <C>                <C>     
Balances as of March 31, 1995.....        3,437,848         $3            177             (38)          (3,365)            (3,223)
Compensatory stock option grant...          191,993     -                  90        -                 -                       90
Accretion of redeemable preferred
   stock..........................          -           -                 (76)       -                     (34)              (110)
Repurchase of common stock                 (296,269)    -                 (34)       -                    (250)              (284)
Conversion of preferred stock into
   common stock, Series C.........          479,634          1            999                          -                    1,000
Exercise of common stock warrants.           57,013     -            -               -                 -                 -
Exercise of common stock options..            6,728     -                   4        -                 -                        4
Repayment of shareholder notes....          -           -            -                     38          -                       38
Public offering proceeds, net of
   expenses of $2,872.............        2,000,000          2         23,126        -                 -                   23,128
Termination of redemption obligation
   for common stock...............          -           -                 225        -                 -                      225
Net loss..........................          -           -            -               -                    (967)              (967)
                                      ---------------------------------------------------------------------------------------------

Balances as of March 31, 1996.....        5,876,947          6         24,511        -                  (4,616)            19,901
Exercise of common stock options..          102,968     -                 398        -                 -                      398
Employee stock purchase plan
   purchases......................           20,382     -                 144        -                 -                      144
Other.............................          -           -                 (20)       -                 -                      (20)
Net loss..........................          -           -            -               -                  (2,461)            (2,461)
                                      ---------------------------------------------------------------------------------------------

Balances as of March 31, 1997.....        6,000,297          6         25,033        -                  (7,077)            17,962

Exercise of common stock options..          162,487     -                 462        -                 -                      462
Employee stock purchase plan
   purchases......................           38,284     -                 103        -                 -                      103
Net income........................          -           -            -               -                   1,061              1,061
                                      ---------------------------------------------------------------------------------------------

Balances as of March 31, 1998.....        6,201,068         $6         25,598        -                  (6,016)            19,588
                                      =============================================================================================


</TABLE>


                 See accompanying notes to consolidated financial statements.

<PAGE>

                                   MECON, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED MARCH 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                  1998         1997          1996
                                                                                                  ----         ----          ----
<S>                                                                                              <C>         <C>             <C>
Cash flows from operating activities:
  Net income (loss).......................................................................       $1,061      (2,461)          (967)
  Adjustments to reconcile income (loss) to net cash provided by (used in) operating
      activities:
      Depreciation and amortization.......................................................        1,183         622            333
        Loss on write off of fixed assets ................................................          -           328            -
      Bad debt and sales discount provisions..............................................          370         472            223
      Compensation expense related to issuances of common stock and stock option grants...         -             -              90
  Changes in operating assets and liabilities:
        Accounts receivable...............................................................         (552)       (245)        (1,125)
        Unbilled accounts receivable......................................................          364        (360)          (106)
        Prepaid expenses and other current and noncurrent assets..........................           60         (54)            30
        Accounts payable..................................................................         (284)        421             86
        Deferred revenue..................................................................          683        (275)          (264)
        Accrued liabilities and other liabilities.........................................          654      (1,217)           755
                                                                                              ------------------------------------
           Net cash provided by (used in) operating activities............................        3,539      (2,769)          (945)
                                                                                              ------------------------------------

Cash flows from investing activities:
   Purchase of securities available-for-sale..............................................       (6,826)     (8,117)        (4,775)
   Proceeds from sale or maturities of securities available-for-sale...........                   7,449       8,425           -
   Acquisition of property and equipment..................................................         (387)     (1,301)          (628)
   Computer software development costs....................................................         (904)       (814)          (569)
                                                                                             -------------------------------------
           Net cash used in investing activities..........................................         (668)     (1,807)        (5,972)
                                                                                              ------------------------------------

Cash flows from financing activities:
   Bank borrowings........................................................................          -            -             850
   Repayment of bank borrowings...........................................................          -         (1,940)         (850)
   Proceeds from issuance of common stock, net of issuance costs.....................               -            -          23,132
   Proceeds from exercise of stock options and employee stock purchases..............               565          542          -
   Repayment of stockholder note..........................................................          -            -              38
   Repurchase of common stock.............................................................          -            -            (284)
   Redemption of preferred stock..........................................................          -            -          (1,954)
   Other..................................................................................          -            (20)         -
                                                                                              ------------------------------------

           Net cash provided by (used in) financing activities............................          565       (1,418)       20,932
                                                                                              ------------------------------------

Net increase (decrease) in cash and cash equivalents......................................        3,436       (5,994)       14,015
Cash and cash equivalents at beginning of year............................................        9,211       15,205         1,190
                                                                                              ------------------------------------

Cash and cash equivalents at end of year..................................................      $12,647        9,211        15,205
                                                                                              ------------------------------------
                                                                                              ------------------------------------
Supplemental information:
   Cash paid for interest.................................................................        $-             -             33
                                                                                              ------------------------------------
                                                                                              ------------------------------------


</TABLE>


                 See accompanying notes to consolidated financial statements.


<PAGE>
                                   MECON, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          MARCH 31, 1998, 1997 AND 1996

(1)       BUSINESS OF THE COMPANY

         MECON, Inc. (MECON or the Company) is a leading provider of
benchmarking solutions to the healthcare industry. The benchmarking solution
offered by MECON comprises data/information products, decision support software
and value-added services. The principal focus of the Company's products is to
reduce costs and improve efficiency and effectiveness of healthcare delivery
systems. The Company's main product line is based upon a proprietary operations
benchmarking database containing cost and key performance information from
hospitals nationwide. In addition to statistical data, the database incorporates
qualitative data derived from operational profiles provided by hospitals that
utilize the Company's database-related products. The Company's customers use the
information provided by the operations benchmarking database to quantify,
develop and implement strategies to reduce costs and to periodically measure
actual performance to maintain the cost reductions achieved.

(2)       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary Managed Care Information Systems, Inc.
(MCIS). All intercompany balances and transactions have been eliminated in
consolidation.

 CASH EQUIVALENTS

         All highly liquid investments with a maturity of three months or less
at the date of purchase are considered to be cash equivalents. Cash equivalents
consist principally of money market instruments which include: corporate notes,
corporate bonds, certificates of deposits, commercial paper and government
agency securities.

 PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the respective
assets which are generally three to five years.

 SOFTWARE DEVELOPMENT COSTS

         The Company capitalizes internally generated software development costs
for external use in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED. Capitalization of software development costs begins upon the
establishment of technological feasibility for the product. The Company
amortizes such capitalized amounts upon commencement of product introduction at
the greater of the straight-line basis using estimated economic lives of two to
three years or the ratio of actual revenues achieved to total anticipated
revenues over the lives of the products. The realizability of unamortized
capitalized costs is periodically reviewed relative to the estimated future
revenues of the related products. Under SFAS No. 86, the Company capitalized
$740,000, $754,000 and $569,000 of software development costs for the years
ended March 31, 1998, 1997 and 1996, respectively.

         The Company capitalizes software development costs for internal use in
accordance with Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Capitalization of
software development costs begins in the application development stage of the
product. The Company amortizes such capitalized amounts using the straight-line
basis over estimated economic lives of up to three years. Under SOP 98-1, the
Company capitalized $92,000 of software development costs related to internal
databases supporting company products for the year ended March 31, 1998 and no
such costs for prior periods.

 RESEARCH AND DEVELOPMENT

         Research and development expenditures are charged to expense in the
period incurred.

 ADVERTISING COSTS

         All costs associated with advertising and promoting products are
expensed in the period incurred.


<PAGE>
REVENUE RECOGNITION

         The Company accounts for software and related revenues in accordance
with SOP 91-1, SOFTWARE REVENUE RECOGNITION.

         Revenue generated from the initial year of a MECON-PEERx subscription
contract is recognized ratably from the date of contract signing over the
estimated time to deliver a customer's MECON-PEERx report, which is generally
four to five months in duration. Revenue generated from a subsequent year
subscription contract is recognized ratably over the estimated time to deliver a
customer's subsequent year report, which generally takes four to five months
beginning in the second or third year of the contract. Costs to deliver the
MECON-PEERx products are estimated to be incurred evenly throughout the period
beginning with the signing of a contract and ending with the delivery of a
report. Revenue earned and unbilled is recorded as unbilled accounts receivable
and amounts billed and unearned are recorded as deferred revenue.

         Revenue from the licensing of the Company's MECON-OPTIMIS software
product is recognized upon delivery of the software to the customer. Revenue
from MECON-OPTIMIS implementation services, including amounts bundled with the
initial license fee, is recorded as deferred revenue and recognized upon
completion of services, generally over four to five months.

         Although the Company's MECON-Action-Point-SM- software is installed by
the customer, the Company provides customer service support during the
installation as well as technical training to customer personnel during the
initial period subsequent to installation. Revenue is recognized upon completion
of the training period and final customer acceptance, whereupon no further
material obligations exist.

         The Company offers post-contract customer support and implementation
services to its MECON-OPTIMIS and MECON-Action-Point-SM- customers. Revenue from
maintenance and technical support services, including amounts bundled with the
initial license fee, is recorded as deferred revenue and recognized ratably over
the period the post-contract customer support services are provided.

         MECON-Advisory-SM- revenue is recognized as the services are 
performed or as the customer's specific project is completed.

         In October 1997, SOP 97-2, SOFTWARE REVENUE RECOGNITION, was issued
which supersedes SOP 91-1. The Company will be required to adopt SOP 97-2 for
software transactions entered into beginning April 1, 1998. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of the elements.
The revenue allocated to software products generally is recognized upon delivery
of the products. The revenue allocated to postcontract customer support
generally is recognized ratably over the term of the support and revenue
allocated to service elements generally is recognized as the services are
performed. Beginning in fiscal 1999, the Company will recognize revenue in
accordance with SOP 97-2. Under its current practice, the Company does not
expect a significant impact on recognition of revenue from software transactions
upon adoption of SOP 97-2.

 INCOME TAXES

         The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109 deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

 EARNINGS (LOSS) PER SHARE

         In December 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE,
which requires the presentation of basic earnings per share (EPS) and, for
companies with complex capital structures, diluted EPS. Basic earnings (loss)
per share is calculated using the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share is calculated
using the weighted average number of common and dilutive potential common stock
outstanding during the period. Dilutive potential common stock represents
outstanding options which are calculated using the treasury stock method.
Earnings (loss) per share amounts have been restated for all periods presented
to conform to the requirements of SFAS No. 128.

         For the purposes of the 1996 net loss per share computations, net loss
has been increased by the amount of the periodic accretion for redeemable
preferred shares. Upon the completion of the Company's initial 1995 public stock
offering, the Series A and B preferred shares were redeemed.

<PAGE>
 CONCENTRATION OF CREDIT RISK

         Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents,
securities available-for-sale and trade receivables. The Company has investment
policies that limit investments to short-term low risk investments. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral. The Company maintains an allowance for
doubtful accounts to cover potential credit losses.

 USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities at the
date of the consolidated financial statements and of revenues and expenses
during the reporting period, as well as the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. A change in
the facts and circumstances surrounding these estimates could result in a change
to the estimates and impact future operating results.

 RECOVERABILITY OF LONG-LIVED ASSETS

         The Company assesses the recoverability of long-lived assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Pursuant to SFAS No. 121, the
Company assesses the recoverability of the carrying amount of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may be impaired. If the estimated future undiscounted
operating cash flows over the remaining useful life of the long-lived asset is
less than the carrying amount of the asset, a charge to income would be
recognized for the excess of the carrying amount of the asset over its fair
value.

STOCK-BASED COMPENSATION

         The Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, effective April 1, 1995. This statement establishes financial
accounting and reporting standards for stock-based compensation, including
employee stock purchase plans and stock option plans. As allowed by SFAS No.
123, the Company continues to measure compensation expense for awards granted to
employees under the provisions of APB No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations.

RECLASSIFICATIONS

         Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform to the 1998 presentation. Such
reclassifications had no effect on previously reported results of operations.

(3)      REORGANIZATION AND OTHER SPECIAL CHARGES

         During fiscal 1998, the Company took action to reduce its ongoing
quarterly operating expense base. As a part of the expense reduction effort, the
Company decreased its workforce by 38 employees on April 17, 1997 and incurred a
$749,000 reorganization charge during the first quarter of fiscal 1998. This
charge was primarily comprised of employee severance and related benefits and
additional costs associated with facility shutdowns. The following table sets
forth a description of the reorganization charge for the year ended March 31,
1998:

<TABLE>
<CAPTION>
                                                                                                     ACCRUAL
                                                                                                     -------
                                                                   TOTAL            USED OR            AT
                                                                   -----            ------           ------
                  REORGANIZATION COST                             EXPENSE            PAID            3/31/98
                  -------------------                             -------            ----            -------
<S>                                                             <C>              <C>               <C>
Salaries and termination benefits of 38 employees.....           $634,000          599,000           35,000
Facilities shutdown...................................             38,000           38,000              -
Professional fees.....................................             77,000           77,000              -
                                                         ----------------- ---------------- ---------------
                                                                 $749,000          714,000           35,000
                                                         ----------------- ---------------- ---------------
                                                         ----------------- ---------------- ---------------
</TABLE>


         During fiscal 1997, the Company implemented a plan to reorganize its
operations by centralizing the management of its product development, sales and
product support organizations to better achieve its strategic growth objectives.
In connection with the implementation of this new corporate structure, the
Company recorded a pretax charge of $1,337,000 for costs associated with
employee severance and related benefits; asset writedowns; expansion of the
corporate headquarters; and a provision for accounts receivable that management
believed would not be collectible. This reserve was established because the
Company believed its commitment to the development of new products would change
the strategic direction of its product lines. The following table sets forth a
description of the type and amount of reorganization costs recognized as expense
for the year ended March 31, 1997:


<PAGE>
<TABLE>
<CAPTION>
                                                                                    USED            ACCRUAL
                                                                                    ----            -------
                                                                  TOTAL              OR                AT
                                                                  -----              --                --
                  REORGANIZATION COST                            EXPENSE            PAID            3/31/97
                  -------------------                            -------            ----            -------
<S>                                                            <C>               <C>               <C>    
Salaries and termination benefits.....................           $529,000          529,000             -
Facilities shutdown...................................            285,000          285,000             -
Professional fees.....................................              5,000            5,000             -
Asset writedowns......................................            218,000          218,000             -
Provision for doubtful accounts.......................            300,000           51,325           248,675
                                                         ----------------- ---------------- -----------------
                                                               $1,337,000        1,088,325           248,675
                                                         ----------------- ---------------- -----------------
                                                         ----------------- ---------------- -----------------
</TABLE>

         During fiscal 1998, the Company  utilized for bad debt write-offs 
the remaining  balance of $248,675 that was identified at the time of the 
restructuring and there were no remaining amounts at March 31, 1998.

         Other special charges of $369,000 were incurred during fiscal 1997 
related to additional  acquisition  costs from the prior year merger and 
costs associated with aborted acquisitions.

         On March 29,  1996,  the Company  merged with  Managed  Care  
Information  Systems,  Inc.  (MCIS) in a pooling of interests transaction.  
In connection  with the merger,  the Company  exchanged  338,155 shares of 
its common stock for all of the outstanding shares of MCIS,  assumed  33,052  
common  stock  options,  and assumed a note  payable and accrued  interest to 
a third party in the amount of $2.5 million which was repaid during the first 
fiscal quarter of 1997.  Accordingly,  all prior year financial information 
has been  restated.  In  addition,  the Company  recorded  charges  totaling  
$908,000 for  merger-related  costs for the year ended March 31, 1996.

(4)      FAIR VALUE OF FINANCIAL INSTRUMENTS

        In accordance with the requirements of SFAS No. 115, ACCOUNTING FOR 
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Company has classified 
its investments in certain debt securities as "available-for-sale." Such 
investments are recorded at fair value based on quoted market prices, with 
unrealized gains and losses, deemed by the Company as temporary in nature, 
reported as a separate component of stockholders' equity. At March 31, 1998 
and 1997, cost of available-for-sale securities approximated fair value of 
such securities.

        At March 31, 1998 and 1997, available-for-sale securities consisted 
of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                            1998         1997
                                                                                            ----         ----
         <S>                                                                               <C>           <C> 
         Government securities.......................................................          $522         778
         Corporate debt securities...................................................        13,484      11,143
         Foreign debt securities.....................................................       -               532
                                                                                        -----------------------
                                                                                            $14,006      12,453
                                                                                        -----------------------
                                                                                        -----------------------
</TABLE>


         At March 31, 1998 and 1997, these securities were classified in the
Consolidated Balance Sheet as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                            1998        1997
                                                                                            ----        ----
         <S>                                                                                <C>           <C> 
         Cash equivalents............................................................       $10,162       7,986
         Securities available-for-sale........................................                3,844       4,467
                                                                                        -----------------------
                                                                                            $14,006      12,453
                                                                                        -----------------------
                                                                                        -----------------------
</TABLE>


         The contractual maturity of all available-for-sale securities as of 
March 31, 1998 was one year or less.

         During  fiscal  1998,  1997 and  1996,  there  were no  gross  
realized  gains or  losses  on sales of  securities  held as 
available-for-sale.

         The carrying amounts of all other financial instruments approximate 
fair value because of their short maturity.

<PAGE>
(5)       PROPERTY AND EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS

         The following is a summary of property and equipment at March 31, 1998
and 1997 (in thousands):

<TABLE>
<CAPTION>


                                                                                            1998       1997
                                                                                            ----       ----
<S>                                                                                         <C>        <C>  
Office furniture and equipment........................................................         $523        458
Computers.............................................................................        2,132      1,994
Leasehold improvements................................................................          191          7
                                                                                         ----------------------

                                                                                              2,846      2,459
Less accumulated depreciation.........................................................       (1,416)      (871)
                                                                                         ----------------------
                                                                                             $1,430      1,588
                                                                                         ----------------------
                                                                                         ----------------------

</TABLE>

         Depreciation expense was $545,000, $395,000 and $244,000 for the years
ended March 31, 1998, 1997 and 1996, respectively.

         The following is a summary of software development costs at March 31,
1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
                                                                                            1998       1997
                                                                                            ----       ----

<S>                                                                                        <C>         <C>
Purchased software...................................................................          $230        158
Internally developed software........................................................         3,163      2,331
                                                                                         ----------------------
                                                                                              3,393      2,489
Less accumulated amortization........................................................        (1,617)      (979)
                                                                                         ----------------------
                                                                                             $1,776      1,510
                                                                                         ----------------------
                                                                                         ----------------------
</TABLE>

         Amortization expense was $638,000, $227,000 and $89,000 for the years
ended March 31, 1998, 1997 and 1996, respectively.

 (6)      COMMITMENTS AND CONTINGENCIES

         The Company leases office space under operating leases with terms of 60
months. Certain office equipment is leased under operating leases with terms of
approximately 36 months.

         Future minimum lease commitments under operating leases are as follows
(in thousands):

<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S>                                                                                        <C>
1999..........................................................................             $216,980
2000..........................................................................              164,273
2001..........................................................................                1,761
2002 and thereafter...........................................................                  -
                                                                                  ------------------
   Total......................................................................             $383,014
                                                                                  ------------------
                                                                                  ------------------
</TABLE>

         Rent  expense  under  operating  leases for the years  ended  March 
31,  1998,  1997 and 1996 was  $401,000,  $520,000  and $363,000, 
respectively.

(7)       RELATED PARTY TRANSACTIONS

         IT Solutions, Inc. (ITS) is partially owned by certain stockholders 
of the Company. Prior to April 1, 1996, ITS subleased office space from the 
Company and purchased office and administrative services from the Company 
totaling approximately $27,000, which is included as a reduction of general 
and administrative expenses, during the year ended March 31, 1996. The 
Company purchased contract software programming services from ITS totaling 
approximately $3,000, $500,000 and $338,000, capitalized as software 
development costs or expensed as research and development costs, during the 
years ended March 31, 1998, 1997 and 1996, respectively. As of March 31, 1998 
and 1997, receivables from ITS were insignificant and there were no payables 
to ITS.

<PAGE>
(8)       INCOME TAXES

         Income tax expense for the years ended March 31, 1998, 1997 and 1996
consists of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                           1998      1997     1996
                                                                                           ----      ----     ----
Current:
<S>                                                                                        <C>      <C>     <C> 
   Federal............................................................................       $31        3     -
   State..............................................................................        61       16     -
                                                                                         -------------------------
                                                                                              92       19     -
Deferred:
   Federal............................................................................        -        16     -
   State..............................................................................        -         5     -
                                                                                         -----------------------------
                                                                                              -        21     -
                                                                                         -----------------------------
      Total tax expense...............................................................       $92       40     -
                                                                                         -----------------------------
                                                                                         -----------------------------
</TABLE>

         Income tax expense for the years ended March 31, 1998, 1997 and 1996
differed from the amounts computed by applying the U.S. Federal income tax rate
of 34% of pretax income (losses) as a result of the following (in thousands):


<TABLE>
<CAPTION>
                                                                                            1998    1997     1996
                                                                                            ----    ----     ----
<S>                                                                                         <C>      <C>      <C>
Computed "expected" tax benefit.....................................................        $392     (823)    (328)
Nondeductible expenses and merger costs.............................................          26       87      293
Research credits....................................................................        -        (196)     -
State taxes.........................................................................          40       15      -
Utilization of net operating loss and research credit carryforwards.................        (464)    -         -
Change in beginning of year valuation allowance.....................................        -        -        (114)
Expected tax benefit due to acquisition not includible for tax purposes.............        -        -         223
Change in valuation allowance due to acquisition....................................        -        -         (72)
Losses and credits for which no benefit was taken...................................        -         953      -
Other...............................................................................          98        4       (2)
                                                                                        ---------------------------
                                                                                             $92       40      -
                                                                                        ---------------------------
                                                                                        ---------------------------
</TABLE>

         The tax effects of temporary differences that gave rise to significant
portions of deferred income tax assets and liabilities as of March 31, 1998 and
1997 are as follows (in thousands):


<TABLE>
<CAPTION>
                                                                                            1998      1997
                                                                                            ----      ----
<S>                                                                                         <C>       <C>
Deferred tax assets:
   Net operating loss.................................................................           $790     1,434
   Compensated absences...............................................................            153       105
   Research credit carryforwards......................................................            438       401
   Research expenses capitalized for state tax purposes...............................            143     -
   Capital loss carryforward..........................................................            259       259
   Allowance for bad debts............................................................            122       220
   Depreciation.......................................................................             70        48
   MCIS tax accounting method change..................................................            173       305
   Other..............................................................................             46        16
                                                                                         -----------------------
        Total gross deferred tax assets...............................................          2,194     2,788
Less valuation allowance..............................................................        (1,778)   (2,076)
                                                                                         -----------------------
        Net deferred tax assets.......................................................            416       712
Deferred tax liabilities:
   Software costs.....................................................................          (416)     (712)
                                                                                         -----------------------
        Total gross deferred tax liabilities..........................................          (416)     (712)
                                                                                         -----------------------
        Net deferred tax asset........................................................        $-          -
                                                                                         -----------------------
                                                                                         -----------------------
</TABLE>

<PAGE>

         The (decrease) increase in the valuation allowance of approximately
$(298,000), $1,733,000 and ($123,000) for the years ended March 31, 1998, 1997
and 1996, respectively, was primarily due to the uncertainty regarding the
ultimate realization of the gross deferred asset arising from capital losses
that are only deductible for tax purposes to the extent of future capital gains
and the utilization of net operating losses and research credit carryforwards.

         At March 31, 1998, the Company had federal net operating loss
carryforwards of approximately $2,322,000, which expire from 2011 through 2013.

         At March 31, 1998, the Company had research credit carryforwards for
federal and California income tax purposes of approximately $314,000 and
$187,000, respectively, which are available to offset future tax liabilities, if
any, from 1999 through 2013 for federal and for an unlimited period of time for
California.

         A portion of the net operating loss carryforward is attributable to the
exercise of nonqualified and disqualified stock options which when realized,
will result in approximately $715,000 of deferred tax assets being credited to
additional paid-in capital.

(9)       EMPLOYEE RETIREMENT AND SAVINGS PLAN

         The Company has a qualified 401(k) savings plan. All full-time
employees with one year of service may defer a portion of their salary. At the
discretion of the Board of Directors, the Company may also make a matching
contribution for all eligible employees. Contributions by the Company to the
plan were approximately $49,000, $26,000 and zero for the years ended March 31,
1998, 1997 and 1996, respectively.

(10)     PREFERRED SHARE PURCHASE RIGHTS PLAN

         Pursuant to the Preferred Shares Rights Agreement (the Rights
Agreement) dated April 9, 1997, the Company's Board of Directors declared a
dividend of one right (the Rights) on each outstanding share of the Company's
common stock payable to stockholders of record as of March 14, 1997 and payable
in the same ratio as each future common share is issued. The exercise price of
the Right shall be $55 per right, and the redemption price shall be $0.01 per
right. The Rights are exercisable upon certain events as defined in the Rights
Agreement and expire on the earlier of (i) February 26, 2007 or (ii) exchange or
redemption of the Rights.

         Series A Preferred purchasable upon exercise of the Rights will not be
redeemable. Each share of Series A Preferred will be entitled to an aggregate
dividend of 1,000 times the dividend declared per common share. In the event of
liquidation, the holders of the Series A Preferred will be entitled to a minimum
preferential liquidation payment equal to 1,000 times the aggregate amount to be
distributed per share to holders of common shares plus an amount equal to any
accrued and unpaid dividends on the Series A Preferred. Each share of Series A
Preferred will have 1,000 votes, and will vote together with the common shares.
In the event of any merger, consolidation or other transaction in which the
common shares are changed or exchanged, each share of Series A Preferred will be
entitled to receive 1,000 times the amount received per common share. These
rights are protected by certain anti-dilution provisions.

(11)     STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128

         The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted EPS computations under SFAS No. 128 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                                                              YEAR ENDED MARCH 31,
                                                                                              --------------------
                                                                                           1998        1997        1996
                                                                                        ------------------------------------
<S>                                                                                        <C>         <C>         <C> 
Net income (loss) attributable to common stockholders...............................         $1,061     (2,461)     (1,077)
                                                                                        ------------------------------------
                                                                                        ------------------------------------
Denominator for basic earnings (loss) per share -- weighted average common shares             6,086       5,936       4,144
Dilutive stock options..............................................................            282      -           -
                                                                                        ------------------------------------
Denominator for diluted earnings (loss) per share...................................          6,368       5,936       4,144
                                                                                        ------------------------------------
                                                                                        ------------------------------------
Basic earnings (loss) per share.....................................................          $0.17       (0.41)      (0.26)
                                                                                        ------------------------------------
                                                                                        ------------------------------------
Diluted earnings (loss) per share...................................................          $0.17       (0.41)      (0.26)
                                                                                        ------------------------------------
                                                                                        ------------------------------------
</TABLE>

<PAGE>
         Options to purchase 421,638 shares of the Company's common stock at
March 31, 1998 were not included in the computation of diluted earnings per
share because their exercise prices were greater than the average market price
of the Company's common stock of $5.75 per share. All options to purchase shares
of the Company's common stock at March 31, 1997 and 1996, respectively, were not
included in the computation of diluted loss per share as their effect would have
been antidilutive. (Note 12).

(12)     STOCK-BASED COMPENSATION PLANS

         1994 INCENTIVE STOCK OPTION PLAN

         The Company's 1994 Incentive Stock Option Plan (the 1994 Plan)
provides for the grant of incentive stock options to employees of the Company.
The Board of Directors has determined that no further options will be granted
under the 1994 Plan. Outstanding options granted under the 1994 Plan generally
become exercisable at a rate of 1/5 of the shares subject to the option at a
specified date after the date of grant and an additional 1/5 of the shares at
the end of each subsequent anniversary of the initial vesting date, subject to
continued service as an employee, consultant or director. The term of each
outstanding stock option is seven years. The exercise price of all options
granted under the 1994 Plan was at least equal to the fair market value of the
common stock of the Company on the date of grant. Payment of the exercise price
may be made in cash, promissory notes or other shares of the Company's common
stock.

         1995 STOCK PLAN

         The Company's 1995 Stock Plan (the 1995 Plan) was adopted in October
1995 and became effective in December 1995. The 1995 Plan provides for the grant
of incentive stock options to employees, officers, consultants and directors and
for the grant of nonstatutory stock options and stock purchase rights (Rights)
to employees and consultants of the Company. A total of 1,200,000 shares of
common stock has been reserved for future issuance under the 1995 Plan. The
exercise price of options granted under the 1995 Plan is generally at least
equal to the fair market value of the common stock of the Company on the date of
grant. However, with respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of stock of the Company, the
exercise price of any incentive stock option granted must equal at least 110% of
fair market value on the grant date and the maximum term of the option must not
exceed five years. The term of all other options granted under the 1995 Plan may
not exceed ten years. Generally, options vest 20% on the date of grant, and 20%
each year thereafter for four years. As of March 31, 1998, there were 387,621
shares available for future grant under the 1995 Plan.

         In conjunction with the MCIS merger, the Company assumed the MCIS stock
option plan. Information with respect to this plan has been included in the
stock option table below. MCIS's stock option plan was terminated upon
consummation of the merger.

         1995 DIRECTOR OPTION PLAN

         The Company's 1995 Director Option Plan (the Director Plan) was
adopted in October 1995 and became effective in December 1995. Initially, a
total of 50,000 shares of common stock was reserved for issuance under the
Director Plan. As of July 1997, the Director Plan was amended to increase the
number of shares of the Company's common stock reserved for issuance under the
Director Plan to 100,000 shares. The Director Plan, as amended in January 1997,
provides for the grant of nonstatutory stock options to certain non-employee
directors of the Company (Outside Directors) pursuant to an automatic,
nondiscretionary grant mechanism. The Director Plan provides that each new
Outside Director shall be granted a nonstatutory stock option to purchase 15,000
shares of common stock (10,000 shares prior to the January 1997 amendment) upon
the date which such person first becomes an Outside Director. Thereafter, each
Outside Director shall be automatically granted an option to purchase 5,000
shares of common stock on January 16 of each year (a Subsequent Option), if on
such date, such Outside Director shall have served on the Company's Board of
Directors for at least six (6) months. The Director Plan provides that each
initial grant to new Directors will be exercisable three years from the date of
grant and the subsequent options will vest immediately. The exercise price per
share of all options granted under the Director Plan shall be equal to the fair
market value of a share of the Company's common stock on the date of grant.
Options granted to Outside Directors under the Director Plan have a ten year
term, but will expire unless exercised within three months following the
termination of an Outside Director's status as a director. If not terminated
earlier, the Director Plan will have a term of ten years. As of March 31, 1998,
there were 19,028 shares available for future grant under the Director Plan. 
In addition, the Director Plan was amended in January 1997 to include an 
annual retainer of $10,000 for Outside Directors, a per meeting fee of $1,000 
for Board meetings, and $750 for separately held committee meetings.

         1995 EMPLOYEE STOCK PURCHASE PLAN

         The Company's 1995 Employee Stock Purchase Plan (the Purchase Plan)
was adopted in October 1995 and became effective in December 1995. A total of
150,000 shares of common stock has been reserved for issuance under the Purchase
Plan.

<PAGE>

         The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 7 1/2% of an employee's base
compensation, including commissions, bonuses and overtime, at a price equal to
85% of the fair market value of the common stock at the beginning of each
offering period or the end of a six month purchase period, whichever is lower.
Unless terminated sooner, the Purchase Plan will terminate ten years after its
effective date. The Board of Directors has authority to amend or terminate the
Purchase Plan provided no such action may adversely affect the rights of any
participant. The Company sold 38,284 and 20,382 shares to employees under the
Purchase Plan for the years ended March 31, 1998 and 1997, respectively. No
shares were sold under the Purchase Plan in prior years. As of March 31, 1998,
there were 91,334 shares available for future grant under the Purchase Plan.

         OPTION PLAN ACTIVITY

         The following table summarizes option activity for the three years
ended March 31, 1998, in the format consistent with SFAS No. 123:

<TABLE>
<CAPTION>
                                                                                INCENTIVE STOCK          WEIGHTED 
                                                                                ---------------          --------
                                                                                    OPTIONS              AVERAGE 
                                                                                    -------              -------- 
                                                                                  OUTSTANDING         EXERCISE PRICE
                                                                                  -----------         --------------
<S>                                                                             <C>                   <C>
         Balance at March 31, 1995...........................................            232,558               $0.57

         Options granted.....................................................            479,742               10.56
         Options canceled....................................................             (7,500)               8.00
         Options exercised...................................................             (6,728)               0.59
                                                                               ---------------------------------------
         Balance at March 31, 1996...........................................            698,072                7.36
         Options granted.....................................................          1,032,385               10.82
         Options canceled....................................................           (541,450)              14.52
         Options exercised...................................................           (102,968)               3.86
                                                                               ---------------------------------------
         Balance at March 31, 1997...........................................          1,086,039                7.39
         Options granted.....................................................            564,888                4.07
         Options canceled....................................................           (546,581)               6.26
         Options exercised...................................................           (162,487)               2.84
                                                                               ---------------------------------------
         Balance at March 31, 1998...........................................            941,859               $6.83
                                                                               ---------------------------------------
                                                                               ---------------------------------------
</TABLE>

         The  weighted  average  fair value of options  granted was $3.11,  
$7.98 and $6.04 per share for the years ended  March 31, 1998, 1997 and 1996, 
respectively.

         The following table summarizes information about fixed stock options 
outstanding at March 31, 1998:

<TABLE>
<CAPTION>
                                        OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                                        -------------------                           ------------------- 
                                           WEIGHTED-
                                           ---------
                                            AVERAGE           WEIGHTED-                             WEIGHTED-
                                            -------           ---------                             ---------
      RANGE OF                             REMAINING           AVERAGE                               AVERAGE
      --------                             ---------           -------                               -------
      EXERCISE             NUMBER         CONTRACTUAL         EXERCISE             NUMBER            EXERCISE
      --------             ------         -----------         --------             ------            --------
       PRICES            OUTSTANDING         LIFE               PRICE           OUTSTANDING           PRICE
       ------            -----------         ----               -----           -----------           -----
        <S>              <C>                <C>               <C>               <C>                 <C>        
         $0.57 - 2.37        231,803              6.3              $1.49           105,336               $1.16
          2.38 - 3.25        185,565              9.2               3.00            66,166                3.10
          4.81 - 6.88        202,018              8.3               6.10            48,965                5.98
          7.25 - 8.88        148,024              6.8               7.86            63,288                7.91
                13.00         52,742              4.4              13.00            37,272               13.00
        15.00 - 16.26         16,735              4.1              15.60            13,085               15.77
        17.88 - 21.25         50,972              8.3              17.88            20,972               17.88
        21.63 - 23.78         54,000              7.8              23.62            24,000               23.42
---------------------- ---------------- ---------------- -------------------- ----------------- -------------------
        $0.57 - 23.78        941,859              7.4              $6.83           379,084               $7.26
---------------------- ---------------- ---------------- -------------------- ----------------- -------------------
---------------------- ---------------- ---------------- -------------------- ----------------- -------------------

</TABLE>
<PAGE>

         PRO FORMA INFORMATION

         The Company continues to apply APB No. 25 in accounting for its
employee stock-based compensation plans. Accordingly, no compensation cost has
been recognized in the accompanying consolidated statements of operations for
its fixed stock option plans and its stock purchase plan. Had compensation cost
for the Company's stock-based compensation plans been determined in accordance
with the fair value method prescribed in SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share would have been changed to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                                                        1998           1997           1996
                                                                                        ----           ----           ----
          <S>                                                     <C>                   <C>            <C>            <C>
          Net income (loss) attributable to common stockholders
          (IN THOUSANDS).......................................   As reported            $1,061        (2,461)        (1,077)
                                                                  Pro forma              (1,701)       (4,082)        (1,253)
          Basic and diluted earnings (loss) per share..........   As reported              0.17         (0.41)         (0.26)
                                                                  Pro forma               (0.28)        (0.69)         (0.30)


</TABLE>


         The above pro forma amounts include compensation  expense for 
options and purchase rights granted since April 1, 1995, and may not be 
representative of that to be expected in future years.

         The fair value of each option granted under the option plans and
purchase rights granted under the Purchase Plan are estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996:


<TABLE>
<CAPTION>
                                               STOCK OPTION PLANS                   EMPLOYEE STOCK PURCHASE PLAN
                                               ------------------                   ----------------------------
                                        1998          1997          1996          1998          1997           1996
                                        ----          ----          ----          ----          ----           ----
<S>                                   <C>            <C>           <C>            <C>            <C>           <C>
Expected volatility............              98%           95%           95%           98%            95%           95%
Expected life..................       6.38 years     4.5 years     4.5 years      6 months       6 months      6 months
Risk-free interest rate........            6.21%         6.32%         5.84%         5.45%          5.05%         5.18%


</TABLE>


         A dividend  yield of zero was used for each year.  The 
weighted-average fair value of purchase rights granted under the Purchase 
Plan in fiscal 1998, 1997 and 1996 was $1.79, $2.57 and $8.44 per share, 
respectively.

         OPTION REPRICING

         On January 16, 1997, the Company offered certain key employees holding
options with exercise prices in excess of $12.00 per share the opportunity to
exchange such options for options with an exercise price of $5.625 per share,
the fair market value of the Company's stock on that date, provided that such
options be subject to a revised four-year vesting schedule beginning on the new
grant date. Options to purchase 412,176 shares were so exchanged and are
included in fiscal 1997 options granted and canceled.

(13)      MAJOR CUSTOMERS

         For the year ended March 31, 1998, one significant  customer 
accounted for 20% of the Company's fiscal 1998 revenues.  At March 31, 1998, 
receivables from two different customers constituted 24% of total accounts 
receivable.  At March 31, 1998, unbilled receivables from two other customers 
constituted 23% of total unbilled accounts receivables.

         For  the  years  ended  March 31,  1997  and  1996,  the  Company  
had  a  different  significant  customer  which  covered approximately 50 
academic hospitals. This contract,  totaling 11% of 1997 and 1996 revenues 
and 15% of total unbilled receivables at March 31, 1997, was renewed in  
January 1995  for services to be rendered  through  March 1998.  As of March 
31, 1998, this contract had not been renewed.

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
MECON, Inc.:

         We have audited the accompanying consolidated balance sheets of 
MECON, Inc. and subsidiary as of March 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 March 31, 1998. These 
consolidated financial statements are the responsibility of the Company's 
management. Our responsibility is to express an opinion on these consolidated 
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 
MECON, Inc. and subsidiary as of March 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 March 31, 1998, in conformity with generally accepted accounting 
principles.

                                                         KPMG Peat Marwick LLP

San Francisco, California
May 1, 1998


<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 
         AND FINANCIAL DISCLOSURE

         There were no changes in nor were there any disagreements with the
Company's accountants on accounting or financial disclosure matters during the
two years ended March 31, 1998.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL 
         PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1998 annual meeting of stockholders.

ITEM 10.  EXECUTIVE COMPENSATION

         Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1998 annual meeting of stockholders.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required to be set forth hereunder has been omitted and 
will be incorporated by reference, when filed, to the Company's Proxy 
Statement for its 1998 annual meeting of stockholders.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required to be set forth hereunder has been omitted and
will be incorporated by reference, when filed, to the Company's Proxy Statement
for its 1998 annual meeting of stockholders.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS


<TABLE>
<CAPTION>

  EXHIBIT NUMBER                                                        EXHIBIT
  --------------                                                        -------


<S>                <C>
 2.1(1)            Agreement and Plan of Reorganization dated as of March 26, 1996 by and among Registrant, Managed Care
                   Information Systems, Inc. ("MCIS"), MECON Acquisition Corp. and certain shareholders of MCIS
 3.1(2)            Certificate of Incorporation of Registrant
 3.2(2)            Form of Restated Certificate of Incorporation of Registrant
 3.3(2)            Bylaws of Registrant
 4.1(2)            Specimen Common Stock Certificate of Registrant
 4.2(2)            Warrants, dated September 9, 1994, issued by Registrant to Summit Ventures III, L.P. and Summit Investors II,
                   L.P.
10.1(2)            Property Lease covering Registrant's facilities in San Ramon, California
10.2(2)            Stock and Warrant Purchase Agreement dated September 9, 1994 among Registrant and certain investors
10.3*(2)           1994 Incentive Stock Option Plan of Registrant
10.4*(2)           1995 Stock Plan and Form of Stock Option Agreement
10.5*(2)           1995 Director Option Plan and Form of Director Option Agreement
10.6*(2)           1995 Employee Stock Purchase Plan and Form of Subscription Agreement
10.7(2)            Investor Rights Agreement dated as of September 9, 1994 among the Registrant and certain stockholders of the
                   Registrant
10.8**(2)          Business Partner Marketing Agreement dated September 27, 1995, between the Registrant and HBO & Company
10.9**(2)          Letter Agreement dated April 8, 1995 between the Registrant and Arthur Andersen LLC
10.10(2)           Business Loan Agreement and Commercial Security Agreement dated August 7, 1995, between the Registrant and
                   Silicon Valley Bank

</TABLE>
<PAGE>

<TABLE>
<S>                <C>
10.11(2)           Form of Indemnification Agreement
10.12*(2)          Employment Agreement between the Registrant and Raju Rajagopal dated September 9, 1994
10.13*(2)          Employment Agreement between the Registrant and Vasu R. Devan dated September 9, 1994
10.14(2)           Independent Contractor Services Agreement between the Registrant and IT Solutions, Inc.
10.15(2)           Equity Purchase Agreement among Registrant, ICI Partnership and Thomas Alexander dated May 17, 1995
10.16(2)           Series A Preferred Stock and Common Stock Exchange and Repurchase Agreement between Registrant and Lutheran
                   Health Services dated January 11, 1993, as amended
10.17**(2)         Agreement to provide MECON-PEERx-TM- Operations Benchmarking Database Services to University Hospital Consortium
                   Service Corporation members revised February 24, 1995
10.18(2)           Form of MECON-PEERx-TM-subscription agreement
10.19(2)           Form of MECON-OPTIMIS-TM-software agreement
11.1(4)            Computation of per share earnings
23.1(3)            Consent of KPMG Peat Marwick LLP
24.1(3)            Power of Attorney
27.1(3)            Financial Data Schedules
</TABLE>

-----------

(*)      Management contract or compensation plan or arrangement required to 
         be filed as an exhibit to this report on Form 10-KSB

(**)     Confidential treatment requested.

(1)      Incorporated by reference from the Registrant's Form 8-K filed on 
         April 12, 1996.

(2)      Incorporated by reference from the Registrant's Registration 
         Statement on Form SB-2 (file No. 33-98206-LA), as amended, filed on 
         December 6, 1996.

(3)      Previously filed.

(4)      Incorporated by reference from the Registrant's Form 10-K, Footnote 
         11 of Notes to Consolidated Financial Statements filed on June 26, 
         1998.

(b)  REPORTS ON FORM 8-K

         On April 14, 1997, the Company filed a report on form 8-A12G dated
April 14, 1997 which announced the registration of certain classes of securities
pursuant to section 12(b) or (g) of the Securities Exchange Act of 1934.

         On May 9, 1997, the Company filed a report on form 8-K dated April 17,
1997 which announced certain management changes and a renewed focus on the
Company's historical strengths.



<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Date:  June 26, 1998

                              MECON, Inc.

                              By:        /s/ DAVID J. ALLINSON



                              Mr. David J. Allinson

                      VICE PRESIDENT, FINANCE AND ADMINISTRATION AND CHIEF 
                 FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)



         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-KSB has been signed by the following persons in the capacities and
on the dates indicated:


<TABLE>
<CAPTION>
                     NAME                                                    TITLE                                      DATE
                     ----                                                    -----                                      ----
             <S>                                <C>                                                                 <C>
 
               /s/ VASU R. DEVAN                Chairman of the Board, President and Chief Executive Officer        June 26, 1998
               -----------------                (Principal Executive Officer)
                (Vasu R. Devan)                 

             /s/ DAVID J. ALLINSON              Vice President, Finance and Administration and Chief Financial      June 26, 1998
             ---------------------              Officer (Principal Financial and Accounting Officer)
              (David J. Allinson)               

              /s/ RAJU RAJAGOPAL                Senior Vice President, Chief Operations Officer                     June 26, 1998
              ------------------
               (Raju Rajagopal)

                /s/ RICH MCCANN                 Director                                                            June 26, 1998
              ------------------
                 (Rich McCann)

               /s/ M. GREG ALLIO                Director                                                            June 26, 1998
              ------------------
                (M. Greg Allio)

           /s/ KATHY BRITTAIN WHITE             Director                                                            June 26, 1998
           ------------------------
            (Kathy Brittain White)
</TABLE>