HCIA INC, 424B4, 1996-08-15

HCIA INC
424B4, 1996-08-15
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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Filed pursuant to Rule 424B4

PROSPECTUS

2,216,696 Shares
[HCIA Logo]
Common Stock
------------------------

Of the 2,216,696 shares of common stock, par value $.01 per share (the
"Common Stock"), of HCIA Inc. ("HCIA" or the "Company") offered hereby (the
"Offering"), 2,000,000 shares are being sold by the Company and 216,696 are
being sold by certain stockholders of the Company (the "Selling Stockholders").
See "Principal and Selling Stockholders." The Company will not receive any of
the proceeds from the sale of the shares of Common Stock being sold by the
Selling Stockholders.

The Common Stock of the Company is traded on the Nasdaq National Market
("NASDAQ") under the symbol "HCIA." On August 13, 1996, the last reported sales
price for the Company's Common Stock on NASDAQ was $54 1/4 per share.

------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share............ $ 54.125 $ 2.35 $ 51.775 $ 51.775
Total(3)............. $119,978,671 $5,209,236 $103,550,000 $11,219,435
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 332,505 additional shares of Common Stock at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments, if any. If the over-allotment option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $137,975,504, $5,990,623 and $120,765,446, respectively. See
"Underwriting."

------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York, on or
about August 19, 1996.
------------------------

Merrill Lynch & Co.

Alex. Brown & Sons
Incorporated

Hambrecht & Quist

Montgomery Securities

Robertson, Stephens & Company
------------------------

The date of this Prospectus is August 13, 1996.

<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
------------------------

"HCIA" IS A REGISTERED TRADEMARK OF HCIA INC. THIS PROSPECTUS ALSO INCLUDES
PRODUCT NAMES AND OTHER TRADEMARKS OF HCIA AND OTHER COMPANIES.

<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED OR UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES
NO EXERCISE OF THE OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE
UNDERWRITERS.

THE COMPANY

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

As a result of its unique ability to integrate health care data collected
from numerous sources and across varied treatment settings, the Company believes
that it is well positioned to offer the information systems and products
necessary to continue to increase average revenue per customer through the sale
of more sophisticated and comprehensive Decision Support Systems. The Company
continually seeks to enhance its systems and products through internal product
development efforts and acquisitions of other companies, product lines and data
resources, as well as through the creation of strategic relationships with key
health care industry participants. Since 1991 the Company has acquired, as part
of its overall growth strategy, a total of 15 health care information companies,
product lines and data resources. Most recently, on August 9, 1996 the Company
acquired LBA Health Care Management, Inc. ("LBA"), a provider of sophisticated
health care information products. See "Business -- Recent Developments."

The Company utilizes a highly specialized direct field sales force to
market Decision Support Systems. The Company's marketing and pricing strategies
are focused on the generation of recurring revenue from Decision Support Systems
through multi-year agreements (typically two to three years) and through the
renewal of its Syndicated Products, which are updated annually. During 1995,
approximately 69% of the Company's revenue was recurring in nature. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."

Unless the context otherwise requires, references in this Prospectus to
"HCIA" and the "Company" refer to HCIA Inc. and its predecessors and
subsidiaries. The Company's executive offices are located at 300 East Lombard
Street, Baltimore, Maryland 21202, and its telephone number is (410) 895-7470.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company................... 2,000,000 shares
Common Stock offered by the Selling Stockholders...... 216,696 shares
Common Stock to be Outstanding after the Offering..... 11,767,348 shares(1)
Use of Proceeds by the Company........................ For repayment of acquisition indebtedness and for general
corporate purposes, including future acquisitions and
working capital requirements. See "Use of Proceeds."

NASDAQ Symbol......................................... HCIA
</TABLE>

- ---------------

(1) As of June 30, 1996, adjusted to include 492,961 shares of Common Stock
issued in connection with the acquisition of LBA. Excludes 692,306 shares of
Common Stock issuable upon exercise of outstanding stock options.

<PAGE>

RECENT ACQUISITIONS

LBA HEALTH CARE. On August 9, 1996, the Company acquired LBA for
approximately $130 million, $100 million of which was paid in cash and $30
million of which was paid by the delivery of Common Stock. LBA is a provider of
health care information products that combine data collection, benchmarking and
decision support tools that enable its customers to achieve significant cost
savings by (i) improving quality of outcomes, (ii) reducing clinical resource
consumption and (iii) optimizing labor utilization. LBA's principal products
include its VALUE ENHANCEMENT systems and Centers of Excellence programs which
utilize comparative data base analyses and a clinical implementation management
team to assist customers in reducing clinical resource consumption and improving
outcomes in specific practice areas, such as orthopaedics and cardiology. LBA's
proprietary data bases contain detailed data from approximately 250 providers
and provider groups that are LBA customers.

RESPONSE HEALTHCARE. In May 1996, the Company acquired Response Healthcare
Information Management, Inc. ("Response") for approximately $6.2 million in
cash. The acquisition of Response provides the Company with expertise and
products in patient-centered data collection and represents a significant
enhancement of the Company's system and product offerings to the managed care
market.

<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 1996
--------------------------
PRO FORMA,
ACTUAL AS ADJUSTED(6)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................................... $ 41,971 $ 46,942
Total assets........................................................................ 124,054 217,867
Long-term liabilities............................................................... -- --
Stockholders' equity................................................................ 112,188 202,794
</TABLE>

- ---------------
(1) Effective as of January 1, 1994, the Company divested certain of its
software product lines, which generated revenue of approximately $3.0
million during 1993. During 1995 and 1996, the Company completed several
acquisitions which were accounted for using the purchase method of
accounting. In connection with certain of these acquisitions, the Company
recorded one-time charges related to acquired in-process research and
development costs. See "Pro Forma Financial Statements" and Note 1 of the
Notes to Consolidated Financial Statements.

(2) Exclusive of a one-time charge incurred in 1995, operating income, net
income and net income per share would have been $7,164,000, $4,843,000 and
$0.60, respectively.

(3) As adjusted using the purchase method of accounting to give effect to the
acquisitions of (i) Datis Corporation ("Datis"), (ii) the CHAMP unit
("CHAMP") of William M. Mercer, Incorporated ("Mercer"), (iii) the minority
interest in CHKS Limited ("CHKS"), (iv) Response and (v) LBA (together, the
"Acquired Companies") as if such acquisitions had occurred immediately
before the beginning of the period presented. Also adjusted to reflect the
sale by the Company of 2,000,000 shares of Common Stock offered hereby at
the offering price of $54 1/8 per share, after deducting underwriting
discounts and commissions and estimated offering expenses and the
application of the estimated net proceeds therefrom as described under "Use
of Proceeds." The pro forma information is not necessarily indicative of
future results of operations of the Company or the results which would have
occurred had the operations and management of the Company and the Acquired
Companies been combined during the period presented. See "Pro Forma
Financial Statements."

(4) Exclusive of a one-time charge incurred in 1996, operating income, net
income and net income per share would have been $5,538,000, $3,631,000 and
$0.38, respectively.

(5) As adjusted using the purchase method of accounting to give effect to the
Response and LBA acquisitions as if they had occurred on December 31, 1995.
Also adjusted to reflect the sale by the Company of 2,000,000 shares of
Common Stock offered hereby at the offering price of $54 1/8 per share,
after deducting underwriting discounts and commissions and estimated
offering expenses and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds." The pro forma information is
not necessarily indicative of future results of operations of the Company or
the results which would have occurred had the operations and management of
the Company, Response and LBA been combined during the period presented. See
"Pro Forma Financial Statements."

(6) As adjusted using the purchase method of accounting to give effect to the
LBA acquisition as if it had occurred on December 31, 1995. Also adjusted to
reflect the sale by the Company of 2,000,000 shares of Common Stock offered
hereby at the offering price of $54 1/8 per share, after deducting
underwriting discounts and commissions and estimated offering expenses and
the application of the estimated net proceeds therefrom as described under
"Use of Proceeds." The pro forma information is not necessarily indicative
of future results of operations of the Company or the results which would
have occurred had the operations and management of the Company and LBA been
combined during the period presented. See "Pro Forma Financial Statements."

<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE INVESTORS.

ACQUISITIONS. The Company has, in part, expanded its systems and products
through the acquisition of health care information companies, product lines and
data resources, including the Company's recent acquisitions of Response and LBA.
The Company intends to continue the acquisition of methodological, analytical
and technical resources that will further enhance and expand the Company's
systems and products. The Company currently has no agreements, commitments or
understandings with respect to any such acquisitions.

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

In connection with the LBA acquisition, the Company expects to incur a
one-time charge in the third quarter of 1996 of approximately $41.2 million
related to acquired in-process research and development costs. The Company also
will record significant goodwill and other intangible assets associated with the
LBA acquisition, which the Company intends to amortize over periods of six to
twenty years. In addition, the LBA acquisition will result in a significant
expansion of the Company's system and product offerings, and the integration of
LBA with the Company will require significant management time and resources.
There can be no assurance that the Company will be able to integrate LBA systems
with the Company's existing systems and products or achieve the operating
synergies necessary to make the acquisition successful.

MANAGEMENT OF GROWTH. The Company is currently experiencing a period of
rapid growth and expansion which could place a significant strain on the
Company's personnel and resources. The Company's growth has resulted in an
increase in the level of responsibility for both existing and new management
personnel. Many of the Company's management personnel have had limited or no
experience in managing companies as large as the Company. The Company has sought
to manage its current and anticipated growth through the recruitment of
additional management and technical personnel and the implementation of internal
systems and controls. However, the failure to manage growth effectively could
adversely affect the Company's operating results. See "Business -- Business
Strategy" and "Management."

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

SHORT HISTORY OF PROFITABILITY; VARIATIONS IN QUARTERLY RESULTS. After
achieving profitability during 1993 and 1994, the Company recorded a net loss
for 1995 as a result of the one-time charge incurred during the period related
to acquired in-process research and development costs in connection with the
CHAMP acquisition. The Company has recorded net income of approximately $964,000
for the six months ended June 30, 1996. However, there can be no assurance that
revenue growth or profitable operations can be sustained in the future. The
Company has experienced and expects to continue to experience variations in
quarterly results. Recent quarterly variations are primarily due to the effect
of one-time charges related to acquired in-process research and development
costs. Quarterly results are also influenced by the timing of release of certain
systems and products as a result of the annual release of certain external data
sources. The Company's operating results for any particular quarterly

<PAGE>
or annual period may not be indicative of results for future periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."

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

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

MAJOR CUSTOMERS. In 1994, one customer, Amgen Inc., accounted for
approximately 12% of the Company's revenue. In 1995, no customer accounted for
10% or more of the Company's revenue. During 1994 and 1995, the Company's ten
largest customers accounted for approximately 29% and 36%, respectively, of the
Company's revenue. Many of the Company's contractual arrangements with its
customers are subject to annual renewal. The loss of one or more of the
Company's largest customers could have a material adverse effect on the Company.
See "Business -- Customers."

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

POTENTIAL COST OF PERFORMANCE GUARANTEES. As part of its VALUE ENHANCEMENT
systems, LBA has guaranteed that each customer will achieve a cost savings
identified as at least equal to the fees the customer pays for the system. To
the extent such cost savings are not achieved, LBA may be subject to claims
related to such guarantees. Although LBA has never incurred a claim under its
guarantee, there can be no assurance that this will continue to be the case.
Liabilities related to such claims could have a material adverse effect on the
Company's business and operating results could be materially and adversely
affected.

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

CHANGES IN THE HEALTH CARE INDUSTRY. The health care industry is subject
to changing political, economic and regulatory influences that may affect the
procurement practices and operation of health care industry participants. During
the past several years, the U.S. health care industry has been subject to an
increase in governmental

<PAGE>
regulation of, among other things, reimbursement rates and certain capital
expenditures. Various programs have been proposed to reform the U.S. health care
system. Many of these programs contain proposals to increase governmental
involvement in health care, lower reimbursement rates and otherwise change the
operating environment for the Company's customers. Health care industry
participants may react to these proposals and the uncertainty surrounding such
proposals by curtailing or deferring investments, including those for the
Company's systems and products. The Company cannot predict what impact, if any,
such factors might have on its business, financial condition and results of
operations. In addition, many health care providers are consolidating to create
larger health care delivery enterprises with greater regional market power. As a
result, the remaining enterprises could have greater bargaining power, which may
lead to price erosion of the Company's systems and products. See
"Business -- Industry Background."

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

---------------

CERTAIN STATEMENTS CONTAINED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SUCH AS STATEMENTS CONCERNING
FUTURE ACQUISITIONS, PRODUCT DEVELOPMENT EFFORTS AND INVESTMENTS, CERTAIN
STATEMENTS CONTAINED IN "BUSINESS" SUCH AS STATEMENTS CONCERNING THE COMPANY'S
BUSINESS STRATEGY, AND OTHER STATEMENTS CONTAINED HEREIN REGARDING MATTERS THAT
ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED
IN THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")); AND BECAUSE
SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED ABOVE.

<PAGE>
PRICE RANGE OF COMMON STOCK

Since the initial offering of the Company's Common Stock at $14.00 per
share on February 22, 1995, the Common Stock has been traded on NASDAQ under the
symbol "HCIA". Prior to such date, there was no public market for the Common
Stock.

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

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
- ----
1st Quarter (from February 22, 1995)............................................................ $25 $17 5/8
2nd Quarter..................................................................................... 31 5/8 21
3rd Quarter..................................................................................... 31 1/4 24 1/2
4th Quarter..................................................................................... 46 3/4 22 3/4
1996
- ----
1st Quarter..................................................................................... 55 3/4 41 7/8
2nd Quarter..................................................................................... 67 7/8 45 5/8
3rd Quarter (through August 13, 1996)............................................................ 66 3/8 51 3/8
</TABLE>

On August 13, 1996, there were 43 holders of record of the Company's Common
Stock. The number of record holders is not representative of the number of
beneficial holders since many shares are held by depositories, brokers or other
nominees. On August 13, 1996, the last reported sale price of the Company's
Common Stock on NASDAQ was $54 1/4 per share.

DIVIDEND POLICY

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

<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock offered
by it hereby at the offering price of $54 1/8 per share are estimated to be
103.1 million ($120.3 million if the Underwriters' over-allotment option is
exercised in full), after deducting the underwriting discounts and estimated
offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholders.

The Company intends to use the net proceeds (i) to repay $86 million
borrowed under a credit facility with First Union National Bank of North
Carolina, as agent and as an issuing bank ("First Union"), in connection with
the acquisition of LBA and (ii) for general corporate purposes, including future
acquisitions and funding the increased working capital requirements of the
Company as a result of its growth. Any proceeds not utilized to repay
indebtedness or for the other above-described purposes will be invested in
short-term, interest-bearing securities.

Borrowings under the credit facility bear interest at varying rates based
on an index tied to First Union's prime rate or LIBOR (currently 8.75%). Upon
application of the net proceeds to the Company of the Offering to repay the
borrowings outstanding under the credit facility, the Company will maintain a
$50 million revolving line of credit for general corporate purposes, including
future acquisitions and working capital requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
June 30, 1996, (ii) on a pro forma basis to give effect to the LBA acquisition
and (iii) as further adjusted to reflect the sale by the Company of the
2,000,000 shares of Common Stock offered hereby (at the offering price of
$54 1/8 per share) and the application of the estimated net proceeds to be
received by the Company therefrom as described under "Use of Proceeds." This
table should be read in conjunction with the Company's consolidated financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
(IN THOUSANDS)
PRO PRO FORMA,
ACTUAL FORMA(1) AS ADJUSTED(1)(2)
-------- -------- -----------------
<S> <C> <C> <C>
Long-term liabilities........................................ $ -- $ 76,000 $ --
Stockholders' equity:
Preferred Stock, $.01 par value per share: 500,000 shares
authorized; no shares outstanding....................... -- -- --
Common Stock, $.01 par value per share: 15,000,000 shares
authorized; 9,274,387, 9,767,348 and 11,767,348 shares
issued and outstanding, respectively(3)................. 92 97 117
Additional paid-in capital................................. 116,141 144,851 247,883
Accumulated deficit........................................ (3,989) (45,150) (45,150)
Cumulative unrealized depreciation of short-term
investments............................................. (32) (32) (32)
Cumulative effect of currency translation adjustment....... (24) (24) (24)
-------- -------- -----------------
Total stockholders' equity............................ 112,188 99,742 202,794
-------- -------- -----------------
Total capitalization............................... $112,188 $175,742 $ 202,794
-------- -------- -----------------
-------- -------- -----------------
</TABLE>

- ---------------

(1) Includes the effect of a one-time charge related to acquired in-process
research and development costs in connection with the LBA acquisition of
$41.2 million. Also includes $86 million of bank indebtedness incurred by
the Company and 492,961 shares of Common Stock issued in connection with the
recent acquisition of LBA. See "Pro Forma Financial Statements."

(2) Assumes repayment of $86 million of bank indebtedness with a portion of the
net proceeds to the Company from the Offering and no exercise of the
Underwriters' over-allotment option.

(3) Excludes 692,306 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $17.19 per
share. See "Management -- Stock Options."

<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes certain selected consolidated financial data
that should be read in conjunction with the Company's consolidated financial
statements, and the notes thereto, as of December 31, 1994 and 1995 and for each
of the years in the three-year period ended December 31, 1995, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this Prospectus. The selected
consolidated financial data set forth below as of and for each of the years in
the three-year period ended December 31, 1995 are derived from the Company's
consolidated financial statements, which have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The selected consolidated
financial data presented below for the six months ended June 30, 1995 and 1996
and as of June 30, 1996 have been derived from the unaudited consolidated
financial statements of the Company and, in the opinion of the Company, reflect
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations of the Company for those periods. The results of operations for the
six months ended June 30, 1996 are not necessarily indicative of the results
that may be expected for a full year.

<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------------------------
1995 1996
--------------------------- 1995 ---------------------------
PRO FORMA, ------- PRO FORMA,
1993 1994 ACTUAL(2) AS ADJUSTED(3) ACTUAL ACTUAL(4) AS ADJUSTED(5)
------- ------- --------- --------------- ------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Operations Data (1):
Revenue......................... $28,111 $30,711 $ 48,015 $76,223 $21,005 $30,718 $ 46,148
Salaries, wages and benefits.... 14,168 15,457 21,932 31,947 10,163 13,558 18,922
Other operating expenses........ 7,884 8,538 11,841 23,476 5,496 6,358 8,730
Provision for doubtful
accounts...................... 727 87 214 214 40 458 458
Depreciation and amortization... 4,595 4,826 6,864 13,863 2,960 4,806 7,762
Write-off of acquired in-process
research and development
costs......................... -- -- 12,152 -- -- 4,372 --
------- ------- --------- ------- ------- --------- ---------------
Operating income (loss)....... 737 1,803 (4,988) 6,723 2,346 1,166 10,276
Interest income................. -- 111 1,290 1,259 417 566 472
Interest expense................ (111) (131) (187) (436) (39) (142) (152)
------- ------- --------- ------- ------- --------- ---------------
Income (loss) before income
taxes, minority interest in
loss (income) of
consolidated subsidiaries
and cumulative effect of
change in accounting for
income taxes................ 626 1,783 (3,885) 7,546 2,724 1,590 10,596
Benefit (provision) for income
taxes......................... (362) (759) 1,554 (3,940) (1,189) (626) (4,294)
Minority interest in loss
(income) of consolidated
subsidiaries.................. 90 (3) (74) -- (28) -- --
------- ------- --------- ------- ------- --------- ---------------
Income (loss) before
cumulative effect of change
in accounting for income
taxes....................... 354 1,021 (2,405) $ 3,606 $ 1,507 $ 964 $ 6,302
Cumulative effect of change in
accounting for income taxes... (142) -- -- -- -- -- --
------- ------- --------- ------- ------- --------- ---------------
Net income (loss)............. $ 212 $ 1,021 $ (2,405) $ 3,606 $ 1,507 $ 964 $ 6,302
------- ------- --------- ------- ------- --------- ---------------
------- ------- --------- ------- ------- --------- ---------------
Net income (loss) per share..... $ 0.19 $ (0.31) $ 0.34 $ 0.21 $ 0.10 $ 0.52
------- --------- ------- ------- --------- ---------------
------- --------- ------- ------- --------- ---------------
Shares used in per share
calculation................... 5,518 7,733 10,572 7,173 9,549 12,042
------- --------- ------- ------- --------- ---------------
------- --------- ------- ------- --------- ---------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, --------------------------
------------------------------ PRO FORMA,
1993 1994 1995 ACTUAL AS ADJUSTED(6)
------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......................................... $ 3,852 $ 5,620 $ 35,671 $ 41,971 $ 46,942
Total assets............................................ 41,122 40,865 108,401 124,054 217,867
Long-term liabilities, excluding current installments... 2,136 1,835 699 -- --
Stockholders' equity.................................... 32,762 34,371 98,044 112,188 202,794
</TABLE>

(2) Exclusive of a one-time charge incurred in 1995, operating income, net
income and net income per share would have been $7,164,000, $4,843,000 and
$0.60, respectively.

(3) As adjusted using the purchase method of accounting to give effect to the
acquisitions of the Acquired Companies as if such acquisitions had occurred
immediately before the beginning of the period presented. Also adjusted to
reflect the sale by the Company of 2,000,000 shares of Common Stock offered
hereby at the offering price of $54 1/8 per share, after deducting
underwriting discounts and commissions and estimated offering expenses and
the application of the estimated net proceeds therefrom as described under
"Use of Proceeds." The pro forma information is not necessarily indicative
of future results of operations of the Company or the results which would
have occurred had the operations and management of the Company and the
Acquired Companies been combined during the period presented. See "Pro Forma
Financial Information."

(4) Exclusive of a one-time charge incurred in 1996, operating income, net
income and net income per share would have been $5,538,000, $3,631,000 and
$0.38, respectively.

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

HCIA is a health care information content company that develops and markets
Decision Support Systems and Syndicated Products. In 1991, HCIA began a series
of acquisitions of health care information companies, product lines and data
resources. These acquisitions established the Company's ability to provide
systems and products which rely on the integration of detailed clinical and
financial data. Effective as of January 1, 1994, the Company divested certain of
its software product lines, which had generated revenue of approximately $3.0
million during 1993. During 1995, the Company completed several additional
acquisitions of health care information companies, including Datis and the CHAMP
unit of Mercer. In connection with the CHAMP acquisition, the Company recorded a
one-time charge related to acquired in-process research and development costs of
approximately $12.2 million. As a result of this charge, the Company recorded a
net loss for the year ended December 31, 1995. In May 1996, the Company acquired
Response for approximately $6.2 million in cash. In connection with the Response
acquisition, the Company recorded a one-time charge during the three months
ended June 30, 1996 of approximately $4.4 million related to acquired in-process
research and development costs. On August 9, 1996, the Company acquired LBA. In
connection with the LBA acquisition, the Company expects to incur a one-time
charge during the three months ended September 30, 1996 of approximately $41.2
million related to acquired in-process research and development costs. The
Company's results of operations include the results of the acquired or divested
entities or product lines since the date of acquisition or prior to the date of
divestiture, as applicable. See Note 1 of the Notes to Consolidated Financial
Statements.

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

The Company's internal product development efforts are generally in
connection with customer contracts, and the related costs are included as a
component of operating expenses in the year incurred. The Company capitalizes
costs related to internal product development which is not in connection with a
specific customer contract from the point of technological feasibility to the
point of general availability. With respect to acquired companies, product lines
and data resources, the Company has historically completed the acquisitions
using available cash or a deferred payment plan, with recent acquisitions being
funded by the proceeds of the Company's public offerings. The cash portion of
the LBA acquisition was financed by a credit facility which will be repaid with
a portion of the proceeds to the Company from the Offering. The Company also
issued a total of 492,961 shares of Common Stock to the stockholders of the
parent company of LBA. See " -- Liquidity and Capital Resources."

As a result of its acquisition of health care information companies,
product lines and data resources, the Company has acquired intangible assets,
the cost of which it amortizes over various useful lives. In addition, the
Company has capitalized internal development costs and acquired assets relating
to the development of methodologies, clinical measurement tools and technical
resources, including its data base, of $3.3 million, $3.4 million, $6.9 million
and $6.3 million during 1993, 1994, 1995 and the six months ended June 30, 1996,
respectively. Consequently, the Company has recorded amortization expense of
$3.9 million, $3.9 million, $5.2 million and $3.7 million during 1993, 1994,
1995 and the six months ended June 30, 1996, respectively. See Notes 2 and 4 of
the Notes to Consolidated Financial Statements. On a pro forma basis, assuming
the completion of the Response and LBA acquisitions at the beginning of the
respective periods, the Company would have recorded additional amortization
expense of $5.1 million and $2.6 million during 1995 and the six months ended
June 30, 1996, respectively.

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

The Company's revenue is comprised of both recurring revenue from the
Company's installed customer base as well as from first time sales. The Company
seeks to generate recurring revenue from Decision Support Systems through
multi-year agreements (typically two to three years) and through renewals of its
Syndicated Products, which are updated annually. The Company defines its
recurring revenue percentage as revenue recognized during the period from a sale
of a system or product to a customer who purchased a similar system or product
in the prior period, divided by the Company's total revenue in the prior period.
In determining its recurring revenue percentage, the Company includes in its
revenue the revenue of entities acquired during the period as if such
acquisitions had occurred at the beginning of the prior period. The Company does
not classify revenue as recurring to the extent that it exceeds the revenue from
a similar system or product purchase in the prior period. The Company's
recurring revenue percentages for 1994 and 1995 were approximately 64% and 69%,
respectively.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER ENDED
31, JUNE 30,
-------------------- ------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue.............................................................. 100% 100% 100% 100% 100%
Salaries, wages and benefits......................................... 51 50 46 48 44
Other operating expenses............................................. 28 28 25 26 22
Provision for doubtful accounts...................................... 2 -- -- -- --
Depreciation and amortization........................................ 16 16 14 14 16
Write-off of acquired in-process research and development costs...... -- -- 25 -- 14
Operating income (loss)............................................ 3 6 (10) 11 4
Net interest income.................................................. -- -- 2 2 1
Income (loss) before income taxes, minority interest in loss
(income) of consolidated subsidiaries and cumulative effect of
change in accounting for income taxes........................... 3 6 (8) 13 5
Benefit (provision) for income taxes................................. (1) (3) 3 (6) (2)
Income (loss) before cumulative effect of change in accounting for
income taxes.................................................... 2 3 (5) 7 3
Cumulative effect of change in accounting for income taxes........... 1 -- -- -- --
Net income (loss).................................................. 1% 3% (5)% 7% 3%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

REVENUE. Revenue for the six months ended June 30, 1996 was $30.7 million,
an increase of $9.7 million or 46% over the six months ended June 30, 1995. The
increase was primarily the result of a 49% increase in revenue from the sale of
Decision Support Systems. Revenue from the sale of Decision Support Systems
represented 81% of the revenue for the six months ended June 30, 1996 and
Syndicated Products represented the remaining 19% of revenue.

<PAGE>

The increase in Decision Support Systems revenue was primarily the result
of the Company's continued success in expanding its customer relationships in
the provider and supplier markets, and as a result of the acquisitions of Datis
and CHAMP.

SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits decreased to 44%
of revenue for the six months ended June 30, 1996 from 48% for the six months
ended June 30, 1995. This decrease was a result of the continued leveraging of
the Company's historical investments in technology and basic infrastructure as
revenue increased.

OTHER OPERATING EXPENSES. Other operating expenses, which include
occupancy, travel, and marketing expenses, decreased to 22% of revenue for the
six months ended June 30, 1996 from 26% for the six months ended June 30, 1995.
This decrease was a result of certain of these expenses growing at a slower rate
than revenue.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
16% of revenue for the six months ended June 30, 1996 from 14% for the six
months ended June 30, 1995. This increase was a result of the additional
amortization associated with the acquisitions of Datis and CHAMP as well as
depreciation of other acquired assets.

WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. In
connection with the acquisition of Response, the Company acquired Response's
ongoing research and development activities. The Company recorded a one-time
charge of $4.4 million during the six months ended June 30, 1996 related to
acquired in-process research and development costs.

INTEREST INCOME AND EXPENSE. Net interest income was $424,000 for the six
months ended June 30, 1996 compared with net interest income of $378,000 for the
six months ended June 30, 1995. This increase was the result of a higher
invested balance in 1996.

INCOME TAXES. The Company's effective tax rate was 39.4% for the six months
ended June 30, 1996 compared with 43.6% for the six months ended June 30, 1995.
The decrease was the result of a portion of the Company's investments being
placed in tax-exempt securities, as well as the tax benefit associated with the
exercise of certain non-qualified stock options. This decrease was partially
offset by an increase in non-deductible goodwill and the non-deductible
write-off of the in-process research and development costs resulting from the
Response acquisition.

1995 COMPARED TO 1994

REVENUE. Revenue for 1995 was $48.0 million, an increase of $17.3 million
or 56% over 1994. The increase was primarily the result of a 77% increase in
revenue from the sale of Decision Support Systems. Revenue from the sale of
Decision Support Systems represented 80% of revenue for 1995 and Syndicated
Products represented the remaining 20% of revenue.

The Decision Support Systems revenue increase was primarily the result of
increased sales of Decision Support Systems to providers, particularly as a
result of the acquisition of Datis during the year, and to a lesser extent, due
to increased sales through CHKS, the Company's English subsidiary. Sales of the
Company's Systems to the buyer and supplier markets also increased. In
particular, the Company met several performance milestones pursuant to its
contract with CIGNA Healthcare during the year.

SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits decreased to
46% of revenue for 1995 from 50% for 1994. This decrease was a result of the
leveraging of the Company's historical investments in technology and basic
infrastructure as revenue increased.

OTHER OPERATING EXPENSES. Other operating expenses, which include
occupancy, travel and marketing expenses, decreased to 25% of revenue for 1995
from 28% for 1994. This decrease was a result of certain of these expenses
growing at a slower rate than revenue.

<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased to
14% of revenue for 1995 from 16% of revenue for 1994. The decrease was the
result of the fixed nature of a large component of the depreciation and
amortization, which is the result of prior acquisitions, being measured against
a larger revenue base.

WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. In
connection with the acquisition of CHAMP, the Company acquired CHAMP's ongoing
research and development activities. At the time of the acquisition, the Company
recorded a one-time charge resulting from the write-off of the acquired
in-process research and development costs. This charge totaled approximately
$12.2 million or 25% of the Company's revenue for 1995. These costs related to
the development of a client server based system to process and deliver health
care data and analysis tools to CHAMP customers. The amount of the one-time
charge was equal to the estimated current fair value, based on the risk adjusted
cash flows (at a discount rate of 20%, which included cost of capital of 18% and
an incremental risk premium of 2%), of specifically identified technologies for
which technological feasibility had not yet been established pursuant to
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," and for which
future alternative uses did not exist.

INTEREST INCOME AND EXPENSE. Net interest income was $1.1 million or 2% of
revenue for 1995 compared with net interest expense of $20,000 for 1994. The
increase in net interest income was the result of a portion of the proceeds of
the Company's public offerings being utilized to repay the amount due under the
Company's credit agreement with the Company's former majority stockholder, AMBAC
Inc. ("AMBAC") (approximately $1.9 million), with the balance being invested in
cash equivalents and short-term investments.

INCOME TAXES. The Company's effective income tax rate was (39)% for 1995
compared with 43% for 1994. The change was a result of the Company recording a
net loss in 1995.

1994 COMPARED TO 1993

REVENUE. Revenue for 1994 was $30.7 million, an increase of $2.6 million
or 9% over 1993. Effective January 1, 1994, the Company divested certain of its
software product lines which generated revenue of approximately $3.0 million
during 1993. After eliminating the revenue from these product lines, revenue for
1994 increased by $5.6 million or 22% over 1993. Revenue increased in both of
the Company's product classifications. The increase in Decision Support Systems
revenue was primarily due to increased sales of high-end Decision Support
Systems, offset by a decrease in sales of certain entry-level Decision Support
Systems which the Company is no longer actively marketing. Syndicated Product
revenue increased primarily as a result of the increased penetration of existing
products and the introduction of new products, including THE OUTPATIENT
UTILIZATION PROFILE and THE DIRECTORY OF HEALTH CARE PROFESSIONALS.

SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits decreased to
50% of revenue for 1994 from 51% for 1993. This decrease was a result of the
leveraging of the Company's historical investments in technology and basic
infrastructure as revenue increased. However, during 1994, the Company continued
to increase its investment in sales and marketing personnel at a rate in excess
of revenue growth in order to expand the market penetration of existing systems
and products and to allow for the introduction of new systems and products.

OTHER OPERATING EXPENSES. Other operating expenses, which include
occupancy, travel and marketing expenses, were 28% of revenue for 1994 and 1993.
Decreases in outside data processing and travel costs were offset by slightly
higher marketing and occupancy costs.

PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
decreased to less than 1% of revenue for 1994 from 2% for 1993. This decrease
was a result of enhanced credit and collection processes and additional
personnel resulting in reduced bad debt losses.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization was 16% of
revenue for 1994 and 1993. The depreciation and amortization is primarily
related to the Company's acquisitions and certain capitalized costs related to
the development of methodologies, clinical measurement tools and technical
resources.

INCOME TAXES. During 1994 and 1993, the Company's effective tax rates were
43% and 51%, respectively. These rates were in excess of statutory rates
primarily as a result of the non-deductibility of the amortization of certain
goodwill. The reduction in the effective rate was primarily due to the increased
earnings of the Company resulting in a reduced impact of the amortization of
certain goodwill.

<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly financial data
for 1994 and 1995 and the first and second quarters of 1996. In the opinion of
the Company's management, this unaudited information has been prepared on the
same basis as the audited information 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>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenue............... $6,784 $7,741 $ 8,163 $8,023 $8,749 $ 12,256 $ 13,220 $ 13,790 $ 14,229
Depreciation and
amortization........ 1,171 1,187 1,203 1,265 1,291 1,669 1,851 2,053 2,310
Write-off of acquired
in-process research
and development
costs............... -- -- -- -- -- -- -- 12,152 --
Operating income...... 137 503 812 351 437 1,909 2,489 (9,823) 1,930
Net income............ 67 278 446 230 343 1,164 1,618 (5,530) 1,291

JUNE 30,
1996
--------
<S> <C>

Revenue............... $ 16,489
Depreciation and
amortization........ 2,495
Write-off of acquired
in-process research
and development
costs............... 4,372
Operating income...... (763)
Net income............ (327)
</TABLE>

The following table sets forth, as a percentage of revenue, certain
unaudited quarterly financial data:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................... 100% 100% 100% 100% 100% 100% 100% 100% 100%
Depreciation and
amortization............ 17 15 15 16 15 14 14 15 16
Write-off of acquired in-
process research and
development costs....... -- -- -- -- -- -- -- 88 --
Operating income.......... 2 6 10 4 5 16 19 (71) 14
Net income................ 1 4 5 3 4 9 12 (40) 9

JUNE 30,
1996
--------
<S> <C>
Revenue................... 100%
Depreciation and
amortization............ 15
Write-off of acquired in-
process research and
development costs....... 27
Operating income.......... (5)
Net income................ (2)
</TABLE>

The Company has experienced quarterly fluctuations in operating results,
which it expects to continue for the foreseeable future. During the three months
ended December 31, 1995, the Company recorded a one-time charge related to
acquired in-process research and development costs in connection with the CHAMP
acquisition. In addition, during the three months ended June 30, 1996, the
Company recorded a $4.4 million one-time charge related to acquired in-process
research and development costs in connection with the Response acquisition.
Similarly, the Company expects to incur a $41.2 million charge in connection
with the LBA acquisition during the three months ended September 30, 1996.
Quarterly results are also influenced by the annual availability of certain data
sources, which affects the timing of the release of certain Syndicated Products
and entry-level Decision Support Systems. As a result, the Company generally
recognizes greater revenue from sale of these systems and products during the
second and third quarters of each year.

<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

In February 1995, the Company completed an initial public offering of
2,012,500 shares of Common Stock at an initial public offering price of $14.00
per share. The net proceeds to the Company from the offering were approximately
$25.7 million. The Company utilized approximately $1.9 million of the proceeds
to repay amounts due to AMBAC under a line of credit. During August 1995, the
Company completed an additional offering of 1.5 million shares of Common Stock
at a price of $28.50 per share. The net proceeds to the Company were
approximately $40.3 million. In May 1996, the Company issued 261,951 shares at a
price of $51.00 per share pursuant to the exercise of an over-allotment option
granted by the Company to the underwriters in connection with the sale of all of
the shares of Common Stock owned by AMBAC and its wholly owned subsidiary, AMBAC
Indemnity Corporation ("AIC"). The net proceeds to the Company from the exercise
of the over-allotment option were approximately $12.8 million.

On August 8, 1996, the Company obtained from First Union a credit facility
totalling $100 million, consisting of a $50 million term loan and a $50 million
revolving line of credit. The Company incurred a one-time facility fee of
$500,000 and is also required to pay a commitment fee on the average daily
unused portion of the facility at a rate ranging from 0.25% to 0.375% per annum,
depending on the Company's debt/cash flow ratio. Borrowings bear interest at
varying rates based on an index tied to First Union's prime rate or LIBOR
(currently 8.75%). The Company has drawn down the entire $50 million term loan
and approximately $36 million of the revolving line of credit in connection with
the LBA acquisition and will repay these borrowings with a portion of the net
proceeds to the Company of the Offering. The Company will then maintain a $50
million revolving line of credit for general corporate purposes, including
future acquisitions and working capital requirements. Borrowings are
collateralized by substantially all of the Company's assets. The credit facility
also contains financial covenants applicable to HCIA, including a debt/cash flow
ratio and ratios of debt to capital. The Company was in compliance with these
covenants after drawing on the credit facility and expects to continue to be in
compliance thereafter.

During 1993, 1994, 1995 and the six months ended June 30, 1996, the Company
generated net cash from operations of approximately $2.4 million, $4.4 million,
$3.1 million and $3.7 million, respectively. During 1995 and the six months
ended June 30, 1996, approximately $7.3 million and $6.8 million of cash
generated from operations was used to fund the increase in accounts receivable.
The increases in accounts receivable were primarily the result of revenue
growth, as well as the timing of receipt of payments from certain major
customers. During 1995, approximately $1.7 million of cash generated from
operations was used to fund the decrease in deferred revenue, which was the
result of the timing of delivery of products to Datis customers subsequent to
the acquisition of Datis by the Company, as well as a decrease in the revenue
from product lines generating a significant portion of the historical deferred
revenue balance. Net cash provided by financing activities during 1993, 1994,
1995 and the six months ended June 30, 1996 was approximately $3.7 million,
$568,000, $66.2 million and $12.4 million, respectively, primarily as a result
of borrowings under the line of credit from AMBAC, the issuance of preferred
stock to AMBAC and AIC (subsequently exchanged for shares of Common Stock) and
the Company's public offerings in February and August 1995 and May 1996. The net
cash provided by operations and financing activities has been utilized primarily
for capital expenditures and acquisitions.

The Company made capital expenditures (including capitalized leases)
totaling $2.0 million, $1.6 million, $3.1 million and $2.4 million during 1993,
1994, 1995 and the six months ended June 30, 1996, respectively. As of June 30,
1996, the Company had net working capital of $42.0 million, including cash, cash
equivalents and short-term investments in the amount of $26.1 million, and did
not have any material commitments for capital expenditures.

In March 1995, the Company completed the acquisition of substantially all
of the assets of John Froehlich Associates for the payment of approximately
$520,000 in cash and the issuance of a note payable in the amount of $480,000,
which was paid in full in February 1996. In April 1995, the Company acquired
certain assets from MetriCor Inc. for a payment of $485,000 in cash and the
assumption of certain liabilities. Also in April 1995, the Company completed the
acquisition of all of the outstanding capital stock of Datis. The purchase price
for the capital stock of Datis was approximately $14.6 million in cash, which
included approximately $14.25 million funded by the Company and $386,000 funded
with the proceeds received from the exercise of certain options to

<PAGE>
purchase Datis stock. In addition, the Company repaid approximately $900,000 of
outstanding debt of Datis. In December 1995, the Company acquired the CHAMP unit
of Mercer for $17.5 million in cash and, in May 1996, the Company completed the
acquisition of Response for approximately $6.2 million in cash. Each of these
acquisitions has been accounted for using the purchase method of accounting and,
accordingly, the assets have been valued at their estimated fair market value.
Funding for the acquisitions was provided by the proceeds of the Company's
public offerings and cash generated by operations.

The Company expects to incur additional costs of $7 to $10 million to
complete the development efforts related to systems and products obtained in
connection with the acquisitions of CHAMP, Response and LBA, and to integrate
these products with the Company's other products. Such costs are expected to
consist of direct labor and contracted labor costs and are expected to be
incurred over the next two to three years.

RECENTLY ISSUED ACCOUNTING STANDARDS

In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123"), was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation expense
in the income statement, or the pro forma effect on net income and earnings per
share of such compensation expense to be disclosed in the footnotes to the
Company's consolidated financial statements commencing with the Company's 1996
fiscal year. The Company expects to adopt SFAS No. 123 on a disclosure basis
only. As such, implementation of SFAS No. 123 is not expected to impact the
Company's consolidated financial statements.

In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of " ("SFAS No. 121"), was issued. This statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles which are to be
disposed. Implementation of SFAS No. 121 is not expected to have a material
impact on the Company's consolidated financial statements.

<PAGE>
BUSINESS

GENERAL

HCIA is a leading health care information content company that develops and
markets integrated clinical information systems and products. The Company's
systems and products range from standardized data bases to highly focused
Decision Support Systems that assist its customers in evaluating the efficacy
and economics of health care delivery. HCIA currently sells its Decision Support
Systems to more than 325 customers, including hospitals, integrated delivery
systems, self-insured employers, pharmaceutical companies and managed care
organizations. The Company's Syndicated Products are sold to over 7,000
customers. As a result of its unique ability to integrate health care data
collected from numerous sources and across varied treatment settings, the
Company believes that it is well positioned to offer the information systems and
products necessary to continue to increase average revenue per customer through
the sale of more sophisticated and comprehensive Decision Support Systems. The
Company's marketing and pricing strategies are focused on the generation of
recurring revenue from Decision Support Systems through multi-year agreements
(typically two to three years) and through the renewal of its Syndicated
Products, which are updated annually. During 1995, approximately 69% of the
Company's revenue was recurring in nature. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."

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

RECENT ACQUISITIONS

LBA HEALTH CARE. On August 9, 1996, the Company acquired LBA for
approximately $130 million. LBA, which had revenue during the year ended
December 31, 1995 and the six months ended June 30, 1996 of approximately $16.6
million and $14.4 million, respectively, is a provider of health care
information products and services that combine data collection, benchmarking and
decision support tools to identify and quantify cost reduction and quality
improvement opportunities in clinical settings. LBA's principal products,
including its VALUE ENHANCEMENT systems and Health Care Financing Administration
("HCFA") Centers of Excellence program, utilize comparative data base analyses
and a clinical implementation management team to assist customers in reducing
clinical resource consumption and improving outcomes in specific practice areas,
such as orthopaedics and cardiology. LBA's proprietary data bases contain
detailed data on cost, quality, clinicial resource consumption and
labor/productivity obtained from approximately 250 providers and provider groups
that are LBA customers. The level of information contained in LBA's data bases
is similar to HCIA's ICCS-level data base. HCIA plans to utilize its ICCS
System(TM) to standardize the LBA data bases and integrate them with the
ICCS-level data base.

LBA's systems enable its customers to achieve significant cost savings by
(i) improving quality of outcomes, (ii) reducing clinical resource consumption
and (iii) optimizing labor utilization. The Company believes that LBA's clinical
implementation methodologies will significantly enhance its ability to deliver
clinical solutions that identify and quantify cost reduction and quality
improvement opportunities. Typical LBA customers spend approximately $75,000 to
$100,000 per year on VALUE ENHANCEMENT systems, and approximately 75% of LBA's
customers have purchased at least two systems. As part of a VALUE ENHANCEMENT
system, LBA guarantees that each customer will achieve a cost savings at least
equal to the fees paid to LBA.

Pursuant to the acquisition agreement, the Company acquired all of the
capital stock of LBA's parent company, HealthVISION, Inc. ("HealthVISION").
Prior to the acquisition, all of the assets and liabilities of HealthVISION not
associated with LBA were distributed to certain then-current stockholders of
HealthVISION. The purchase price for the acquisition was approximately $130
million (which included the payment of certain

<PAGE>

liabilities, including bank debt and management bonuses), $100 million of which
was paid in cash and $30 million of which was paid by the delivery of 492,961
shares of Common Stock of HCIA. The Company utilized $86 million in borrowings
under a credit facility with First Union to fund the cash portion of the
purchase price, which the Company intends to repay with a portion of the net
proceeds to the Company of the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Pursuant to the acquisition agreement, the Company has
agreed to file and maintain under the Securities Act a shelf registration
statement for the benefit of certain former stockholders of HealthVISION.

RESPONSE HEALTHCARE. In May 1996, the Company acquired all of the
outstanding capital stock of Response for approximately $6.2 million in cash.
Response, which had revenue of approximately $2.6 million for the year ended
December 31, 1995, specializes in capturing and analyzing point-of-care,
patient-centered data relating to disease-specific outcomes measurement,
member/patient satisfaction and functional status, as well as the development of
Internet applications. Response's primary customers include managed care
organizations and pharmaceutical companies.

INDUSTRY BACKGROUND

Market driven efforts to contain rising health care costs have resulted in
an increasing demand for access to sophisticated heath care information. During
the five years ended in 1995, the average annual increase in U.S. health care
expenditures was approximately double the rate of general inflation as measured
by the Consumer Price Index. It is estimated that health care expenditures
exceeded $1 trillion, or approximately 14% of U.S. Gross Domestic Product, in
1995. Historically, cost containment efforts have focused on controlling
administrative costs even though approximately 65% of health care costs are
related to the clinical delivery of care (i.e., the costs directly associated
with the treatment of illness).

Clinical costs are driven by the choice of therapeutic resources and the
intensity and frequency of the delivery of such resources. The inappropriate or
excess consumption of therapeutic resources is referred to as "clinical
inefficiency." Clinical inefficiency manifests itself in many ways, including
clinically unjustified lengths of stay, excessive readmission rates,
above-average clinical complication and mortality rates, and excessive primary
care physician referrals to specialists.

Efforts to measure and control the clinical costs of health care
traditionally have been hampered by the lack of "benchmark" data required to
study the appropriateness, efficiency and effectiveness of health care delivery.
Structural changes and industry consolidation are driving the major health care
constituencies (providers, buyers and suppliers) to utilize information and
analytical tools to better measure clinical effectiveness. The increased
industry emphasis on "outcomes measurement" and "disease management" reflects
recognition of the need to properly understand and evaluate clinical costs.

Each of the major health care constituencies demands clinical information
for different reasons. In order to compete more effectively, providers are
increasingly demanding information that allows them both to measure the cost,
quality and outcome of the care they are delivering and to "benchmark" data to
measure performance against the industry's best practices. Buyers are
increasingly demanding a quality outcome at a fixed or capitated price for a
bundle of medical services. As a result, the overall efficiency and
effectiveness of the services delivered has become the central issue in the
selection of providers and in the continued analysis of the performance of
existing providers. Suppliers are increasingly required to demonstrate the
clinical and economic utility of their products when compared with alternatives
because of the increasing emphasis on costs and efficiency and the growing use
of mechanisms such as formularies to restrict physician drug choice.

<PAGE>
BUSINESS STRATEGY

HCIA's strategy is to maintain and extend its position as a leading
provider of content-based clinical information systems and products to all
market constituencies. Key elements of the Company's strategy are to:

BUILD RECURRING REVENUE. HCIA's marketing and pricing objectives are
focused on the generation of recurring revenue through multi-year contracts and
annually renewable contracts, as well as regular sales and updates of its
Syndicated Products. The Company's recurring revenue percentage for 1995 was
approximately 69%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." The Company believes that the
high level of sophistication of its systems and products, combined with the
costs associated with switching to substitute information suppliers, encourage
its customers to continue their relationships with HCIA.

EXPAND THE SIZE AND SCOPE OF CUSTOMER RELATIONSHIPS. As a result of its
unique ability to integrate health care data collected from numerous sources and
across varied treatment settings, the Company believes that it is
well-positioned to offer the information systems and products necessary to
continue to increase average revenue per customer through the sale of more
sophisticated and comprehensive Decision Support Systems. The demand for more
sophisticated health care information systems and products has been driven by
the recognition of the need for more comprehensive information on costs,
outcomes and utilization to assess and manage risk while improving the quality
of care.

DEVELOP AND ACQUIRE NEW DATA RESOURCES AND TECHNOLOGIES. HCIA seeks to
develop and acquire new methodological, analytical and technical resources that
will continue to enhance the Company's ability to deliver clinical solutions. In
addition to its internal product development efforts, the Company seeks to
continue the acquisition of other data resources and technologies. The Company
intends to integrate and leverage these assets into product-line extensions
across its markets. The Company believes that its management and product-line
infrastructures, as well as its historical success in acquiring and assimilating
new products and companies, will allow it to continue the successful development
and acquisition of new systems and products.

DEVELOP STRATEGIC RELATIONSHIPS WITH KEY INDUSTRY PARTICIPANTS. HCIA seeks
to transcend the traditional customer-vendor relationship and forge long-term
alliances with key industry participants that are driving market evolution in
the health care industry. Through its strategic relationships with industry
leaders, the Company can add substantial value to its information systems and
products and promote the Company's proprietary data bases and methodologies as
an industry standard.

SYSTEMS AND PRODUCTS

HCIA's information systems and products are broadly classified as Decision
Support Systems, which contributed approximately 80% and 81% of revenue for 1995
and the six months ended June 30, 1996, respectively, and Syndicated Products,
which contributed approximately 20% and 19% of revenue for the same respective
periods. The Company offers its information systems and products through a
variety of media and distribution channels, including print, magnetic media,
CD-ROM and on-line access through SoleSource(TM), its client/server workstation.

DECISION SUPPORT SYSTEMS

HCIA offers a range of Decision Support Systems, which are utilized by the
three major health care market constituencies:

PROVIDERS, such as hospitals, physician groups and integrated delivery
systems, use the Company's Decision Support Systems to measure and analyze the
cost and quality of medical interventions. The Company's entry-level Systems
provide customers with competitor specific information such as market share by
specialty, local market utilization rates compared with regional and national
norms and customer specific analyses of product line and physician level
resource consumption. High-end Decision Support Systems incorporate benchmarks
for specific medical resource consumption and are designed to help providers
understand the best practice for a medical intervention.

<PAGE>
BUYERS, such as managed care organizations, indemnity insurers and
self-insured employers, utilize the information and analyses on medical resource
usage and outcomes derived from the Company's Decision Support Systems to select
and monitor the performance of network providers, channel specific types of
patients towards the most clinically effective providers, and negotiate fair
prices and appropriate utilization criteria, as well as to manage the overall
health status of a covered population. The acquisitions of CHAMP and Response
have increased the Company's access to self-insured employers and managed care
organizations.

SUPPLIERS, such as pharmaceutical, biotechnology and medical supply and
device companies, utilize the Company's Decision Support Systems in market
analysis, product positioning and pharmacoeconomic analysis. Pharmacoeconomic
analysis provides suppliers with information needed to measure the specific
benefit/cost and outcome of an individual product against those of competing
products, alternative therapies or, in the case of a new drug or product, the
STATUS QUO therapy.

The Company's entry-level Systems are generally priced from $25,000
annually, while high-end Systems are generally priced from $250,000 to more than
$1.0 million annually. HCIA has entered into a number of strategic relationships
with state hospital associations, business partners such as HBO & Company
("HBOC"), and large users of data such as CIGNA Healthcare, Amgen Inc. and
Columbia/HCA.

HCIA's Decision Support Systems are based on the Company's DataBridge(TM)
collection of data bases and data handling technologies and SoleSource(TM)
desktop analytical software, and are supplemented by its clinical implementation
management team.

DATABRIDGE.(TM) DataBridge(TM) is HCIA's collection of proprietary data
bases and data-handling technologies. A typical Decision Support System customer
submits data in an electronic, computer-readable format. In creating the
interface for the customer's data stream, HCIA enables the transfer of customer
data and the subsequent application of the Company's proprietary software
algorithms and data-standardization technologies to the incoming data,
transforming the data into HCIA's proprietary standardized formats.
DataBridge(TM) has several components, including:

DATA BASE. A large number of the Company's customers are also its data
suppliers. Most of the Company's Decision Support System contracts provide that
as the Company extracts data from the customer (as part of the process of
delivering a system to the customer), the data become part of the Company's data
base. The Company supplements its data base with data it purchases or licenses
from federal and state governments, trade groups and other industry sources. The
Company maintains more than a terabyte of live health care data, including data
from medical records, laboratory, pharmacy, imaging, outpatient clinics,
physician's offices, insurance claims, managed care encounters and point-of-care
member patient surveys.

The Company's data base resides in a relational data base structure that
utilizes a network of large Sun Microsystems servers. The Company believes that
its current software and hardware platforms are scaleable and provide it with a
cost and flexibility advantage. The Company has made a significant investment in
an open-network architecture which links its several geographical locations and
provides customers with leased-line and dial-up access. The Company supports
most of the major relational data base platforms, such as Informix, Oracle, DB2,
Sybase and SQL Server.

The Company has personnel drawn from several key health care disciplines
(e.g., pharmacists, clinical nurses and medical technologists) who are
responsible for the auditing, editing and standardizing of its data base, as
well as the upgrading and maintaining of its core methodologies. The Company
believes that its data base provides more clinical detail and better outcomes
measurement capabilities than competitive systems. Furthermore, the detailed
medical content of the data and HCIA's experience in collecting and
standardizing this information provide additional competitive advantages.

The acquisitions of the CHAMP and Response data bases have significantly
expanded the Company's outpatient and episode-of-care capabilities. The recent
acquisition of LBA should significantly expand the Company's ICCS-level data
base through the addition of detailed clinical data from approximately 250
providers and provider groups which are LBA customers. As a result of
acquisitions and its internal growth, the Company believes that it has built one
of the largest and most sophisticated collections of integrated clinical,
financial and labor/productivity data in the health care industry.

<PAGE>
ICCS SYSTEM.(TM) The Company holds a perpetual and exclusive license to
the ICCS System(TM), subject only to the Company's obligation to use all
commercially reasonable efforts to maintain and upgrade the system. The ICCS
System(TM) assigns a discrete and clinically detailed 12-digit code to every
product and service consumed in the treatment of patients. The Company believes
that the ICCS System(TM) is the health care industry's most widely implemented
uniform classification system for tracking and measuring the use of medical
resources (e.g., drugs, devices, laboratory tests, blood units, diagnostic
imaging and clinical services) across health care providers. The ICCS System(TM)
allows for the standardization and comparison of detailed clinical data,
regardless of the original source of the data (e.g., medical records, insurance
claims, laboratory or pharmacy systems). As of December 31, 1995, there were
more than 69,600 separate ICCS codes, and, during the 12 months ended December
31, 1995, more than 4,100 new codes were added to the ICCS System(TM).

The ICCS System(TM) is used by the Company to create the most clinically
detailed portion of its data base. The Company develops a set of proprietary
software interfaces with each customer who is a supplier of such data. The
interfaces are built by a series of proprietary "data-mapping" applications that
incorporate the ICCS System(TM) and a series of algorithms that allow the
mapping applications to "learn" each time a new clinical item is encountered. In
doing so, the applications are able to automatically standardize more data each
time a new interface is created. As the volume of ICCS-level data entering the
data base expands, the efficiency of the interface-creation process increases.
In 1990, the Company typically required more than six months to create an
interface to extract ICCS-level data. With more than 175 interfaces created to
date, the typical interface creation process has been reduced to less than six
weeks.

Set forth below is an illustration of the application of the ICCS
System(TM) to the delivery of a common anti-infective drug.

<TABLE>
<S> <C> <C>
ICCS Code ICCS Structure Example
4 Service Type Pharmacy
41 General Therapeutic Category Anti-infective
412 Specific Therapeutic Category Cephalosporin
412020 Generic Drug Type Cefazolin
412020.2 Route of Administration Parenteral
412020.232 Dosage Form IV Piggy Back
412020.23279 Dosage Strength 500
412020.232792 Dosage Unit Milligrams
</TABLE>

SOLESOURCE.(TM) SoleSource(TM) is the Company's workstation that provides
customers with access to and analyses of information obtained with a Decision
Support System. SoleSource(TM) utilizes Microsoft Foundation Classes Software
and accesses a variety of data base configurations, including Microsoft SQL
Server, Microsoft Access and Informix. As the Company has worked with a variety
of different health care organizations during the last several years (e.g.,
hospitals, managed care organizations and pharmaceutical companies), it has
developed an extensive library of proprietary health care data base
applications. In addition, as a result of the CHAMP, Response and LBA
acquisitions, the Company has recently expanded, and will continue to expand,
the scope of its data base applications. Depending on the customer, the size of
the data base and the sophistication of the Decision Support System, the Company
licenses various SoleSource(TM) applications to customers as part of a Decision
Support System.

CLINICAL IMPROVEMENT METHODOLOGY AND MANAGEMENT. In addition to providing
data bases and application software, the Company, utilizing proprietary
methodologies, assists customers with the implementation of clinical solutions.
The Company's knowledge-based clinical improvement methodologies allow HCIA to
leverage its ICCS-level information and enable clients to realize improved
clinical outcomes and lower costs through

<PAGE>
the modification of medical and behavioral practice patterns. The Company's
methodologies link the costs, quality, utilization and outcomes of medical
services delivered to patients in various clinical settings and focus on
episodes of illness that offer the greatest opportunity for improving outcomes
and reducing costs.

As a result of the LBA acquisition, the Company will significantly expand
its clinical improvement methodologies and implementation management
capabilities. The Company also intends to integrate LBA's data bases,
methodologies and staff with HCIA's, creating additional leverage from its
ICCS-level data base and SoleSource(TM) delivery platform. LBA's VALUE
ENHANCEMENT systems utilize data base analyses, clinical improvement
methodologies and an implementation management team of approximately 50 people
to assist customers in reducing clinical resource consumption and improving
outcomes in major specialties, including:

<TABLE>
<S> <C>
(Bullet) invasive cardiovascular (Bullet) vascular

(Bullet) orthopaedics (Bullet) neurosciences

(Bullet) oncology (Bullet) pulmonary

(Bullet) medical cardiology (Bullet) women's services
</TABLE>

In addition to its VALUE ENHANCEMENT systems, LBA assists hospitals in
obtaining Center of Excellence designation by HCFA. Center of Excellence
designation by HCFA conveys select medical status to high volume, premier
facilities in the practice areas of cardiology and orthopaedics. LBA's Centers
of Excellence program provides the necessary metrics, methodologies and data
bases to assist hospitals in achieving Center of Excellence designation for
specific clinical practice areas. The Company intends to enhance LBA's Centers
of Excellence program following the acquisition and believes that it will be
uniquely positioned to work with hospitals in motivating physicians and other
clinical practitioners to change behavior and achieve measurable improvements in
costs, outcomes, and clinical resource consumption -- the fundamental
requirements for Center of Excellence designation.

SYNDICATED PRODUCTS

Syndicated Products include publications and standardized databases which
are generally priced between $100 to $2,000, with certain Products priced up to
$25,000. The Products are developed from specific portions of the Company's data
base, and feature particular industry niches. Most Syndicated Products are sold
as annually renewable subscriptions or as multi-year contracts. Syndicated
Products range from data base directories (e.g., health care industry
professionals, nursing homes and managed care organizations) to more complex
analyses (e.g., cost and outcome summaries for each U.S. hospital).

HCIA also markets to managed care clients a number of more sophisticated
Syndicated Products containing national and regional normative data on length of
stay, costs and medical necessity. The Company markets these products directly
to managed care organizations, and through alliances with information systems
vendors, third-party administrators and other entities that process data streams
for managed care organizations and payors. These Syndicated Products generally
are used for utilization management, claims adjudication and actuarial
forecasting and generally result in annual revenue of $100,000 or more per
customer.

CUSTOMERS

The Company's customers include numerous health care industry participants
located throughout the United States and the United Kingdom, including major
provider and provider groups, managed care organizations, and pharmaceutical,
biotechnology and medical device companies. As of December 31, 1995, the Company
had more than 325 Decision Support System customers and more than 7,000
Syndicated Product customers. In 1994, one customer, Amgen Inc., accounted for
approximately 12% of the Company's revenue. In 1995, no single customer
accounted for 10% or more of the Company's revenue. HCIA's ten largest customers
accounted for approximately 29% and 36% of its revenue during 1994 and 1995,
respectively.

<PAGE>
SALES AND MARKETING

HCIA markets its information systems and products through a variety of
means that are designed to enhance its name recognition and facilitate the
marketing of additional systems and products to its customer base. The Company
utilizes a direct sales approach with the existing customer base to market its
Decision Support Systems. The Company's field sales force is highly specialized
and frequently draws on the Company's clinical implementation management team.
The field sales force seeks to present proposals in face-to-face meetings at the
executive level. In addition, HCIA has recently entered into agreements with
HBOC, Transition Systems and ActaMed, whereby the Company's Systems are marketed
through their respective sales forces.

The Company also approaches each of the major market constituencies through
the sale of lower-priced Syndicated Products. Many of these products, such as
the 100 TOP HOSPITALS study, are specifically designed to increase the
visibility of the Company as an industry-leading source of health care
information. The Company uses both telemarketing and direct-mail efforts in the
sales of its Syndicated Products.

HCIA continually seeks opportunities to create name recognition as a
leading provider of health care information. As part of this strategy, the
Company is widely quoted in the media, including publications such as THE WALL
STREET JOURNAL and MODERN HEALTHCARE, and its senior officers are frequently
asked to speak at industry conferences and serve on the editorial boards of
industry newsletters and publications.

COMPETITION

The Company believes that the principal competitive factors in the health
care information market are the breadth and quality of system and product
offerings, access to proprietary data, 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 health care industry
structure and identify information needs is an important competitive factor. The
Company believes that it competes favorably with respect to each of these
factors.

The market for health care information products and services is intensely
competitive. Competitors vary in size and in the scope and breadth of products
and services offered, and the Company competes for the sale of systems and
products and the resulting access to data with different companies in each of
its target markets. Many of the Company's competitors have significantly greater
financial, technical, product development and marketing resources than the
Company. Furthermore, other major information companies not presently offering
clinical health care information services may enter the markets in which the
Company competes.

The Company's potential competitors include specialty health care
information companies, health care information system and software vendors and
large data processing and information companies. Many of these competitors have
substantial installed customer bases in the health care industry and the ability
to fund significant product development and acquisition efforts.

INTELLECTUAL PROPERTY

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

The Company also relies on a combination of trade secret, copyright and
trademark laws, contractual provisions in agreements with customers and
technical measures to protect its rights in various methodologies, systems and
products and data bases. The Company has not filed any patent applications or
copyright registration applications covering its software technology. Due to the
nature of its software applications, the Company believes that patent, trade
secret and copyright protection are less significant than the Company's ability
to further develop, enhance and modify its current systems and products.

<PAGE>
GOVERNMENT REGULATION

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

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

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

EMPLOYEES

As of June 30, 1996, the Company had 588 employees, including 59 in sales
and marketing, 335 in health care data, 110 in technology and 84 in finance and
administration. None of the Company's employees are represented by a union or
other bargaining group. The Company believes its relationships with its
employees to be satisfactory. As of June 30, 1996, LBA had 162 employees, none
of whom are represented by a union or other bargaining group.

PROPERTIES

The Company's executive and corporate offices are located in Baltimore,
Maryland, in approximately 57,000 square feet of leased office space, under a
lease that expires on December 31, 2002, and which includes an option for an
additional term of up to five years. The Company also leases approximately
36,500 square feet of office space in Ann Arbor, Michigan, under a lease that
expires on March 31, 2000. The Company also maintains seven other offices in the
United States and three offices in Europe. LBA maintains corporate offices in
Denver, Colorado, in approximately 41,962 square feet of leased office space
under a lease that expires in September 2001. The Company believes that its
facilities are adequate for its current operations.

<PAGE>
LITIGATION

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

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
George D. Pillari............................... 33 Chairman of the Board, President and Chief
Executive Officer
Richard Dulude.................................. 63 Director
Richard A. Berman............................... 51 Director
W. Grant Gregory................................ 55 Director
Phillip B. Lassiter............................. 52 Director
Mark C. Rogers, M.D. ........................... 53 Director
Carl J. Schramm, Ph.D. ......................... 49 Director
Sachi J. Morishige.............................. 30 Senior Vice President and Chief Operating
Officer
Barry C. Offutt................................. 34 Senior Vice President and Chief Financial
Officer
Jean Chenoweth.................................. 49 Senior Vice President -- Industry Relations
Lawrence J. Byrne............................... 57 Senior Vice President
Kevin J. Hicks.................................. 37 Senior Vice President
</TABLE>

Mr. Pillari co-founded the Company in 1985, and has served as its Chief
Executive Officer since 1987, also serving as President from 1987 to April 1992
and since October 1992. He has served as Chairman of the Board since April 1992.

Mr. Dulude has been a director of the Company since December 1994. He
retired as Vice Chairman of Corning Incorporated in April 1993, having served in
that capacity since November 1990, and as Group President of Corning
Incorporated from 1983 to November 1990. Mr. Dulude is a director of AMBAC, AIC
and Raychem Corporation.

Mr. Berman has been a director of the Company since October 1995. He has
served as President of Manhattanville College in New York since January 1995.
From November 1991 to January 1995, he served as the President and Chief
Executive Officer of Howe-Lewis International, an executive search and
management consulting firm. Prior to that time, Mr. Berman held several
positions in educational institutions, government and the private sector,
including serving as Special Assistant to the U.S. Department of Health and
Human Services and as a health care practice leader at McKinsey & Company, a
management consulting firm.

Mr. Gregory has been a director of the Company since December 1994. He has
served as Chairman of Gregory & Hoenemeyer, Inc., merchant bankers, since 1988.
Mr. Gregory retired as Chairman of the Board of Touche Ross, Inc. in 1987. He is
a director of AMBAC, AIC, InaCom Corp. and Renaissance Hotel Group N.V.

Mr. Lassiter has been a director of the Company since October 1992. He has
served as Chairman and Chief Executive Officer of AMBAC and AIC since April
1991, and as President since August 1992. From 1969 to July 1991, Mr. Lassiter
served in various capacities with Citibank, N.A., including Deputy Section Head
for North American investment, corporate banking and institutional insurance
activities. He is a director of Diebold Inc.

Dr. Rogers has been a director of the Company since January 1995. He was
appointed Senior Vice President, Corporate Development and Chief Technology
Officer of Perkin Elmer in May 1996. From 1992 until assuming his present
position, Dr. Rogers served as the Vice Chancellor for Health Affairs, Duke
University Medical Center, and the Executive Director and Chief Executive
Officer, Duke University Hospital and Health Network. From 1990 until 1992, Dr.
Rogers was Associate Dean for Clinical Affairs at The Johns Hopkins University

<PAGE>
School of Medicine and, from 1980 until 1992, he also served as Professor and
Chairman of the Department of Anesthesiology and Critical Care Medicine at The
Johns Hopkins University School of Medicine.

Dr. Schramm has served as a director of the Company since January 1995. He
is presently serving as President of Greenspring Advisors, Inc., which provides
strategic, financial and other advice to businesses. From January 1993 to May
1995, Dr. Schramm served as Executive Vice President of Fortis, Inc., and from
May 1987 to December 1992, served as President of the Health Insurance
Association of America. He was Director of The Johns Hopkins Center for Hospital
Finance and Management from January 1980 to May 1987. Dr. Schramm co-founded the
Company in 1985, and served as an officer and director of the Company until
1988.

Ms. Morishige has been employed by the Company in various capacities since
its founding in 1985, and currently serves as Senior Vice President and Chief
Operating Officer.

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

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

Mr. Byrne was recently appointed a Senior Vice President of the Company
following the Company's acquisition of LBA. Mr. Byrne founded the predecessor of
LBA in 1978 and served as its chief executive officer from that time until its
recent sale to the Company. He also served as an Executive Vice President of
HealthVISION from September 1995 until the Company's recent acquisition of LBA.

Mr. Hicks was recently appointed a Senior Vice President of the Company
following the Company's acquisition of LBA. Mr. Hicks served as Executive Vice
President of LBA from 1990 to 1993 and also served as chief operating officer of
LBA from 1993 until its recent sale to the Company. He also served as an
Executive Vice President of HealthVISION from September 1995 until the Company's
recent acquisition of LBA.

EMPLOYMENT AGREEMENT

Effective as of January 1, 1995, the Company entered into an employment
agreement with Mr. Pillari pursuant to which the Company continued his
employment as Chairman of the Board, President and Chief Executive Officer.
Pursuant to the employment agreement, Mr. Pillari receives an annual base salary
of $265,000 and is entitled to participate in bonus arrangements under which he
is eligible to earn an annual bonus based on the Company's achieving certain
performance goals to be established by the Board of Directors. The employment
agreement has an initial term of two years, and unless the Board of Directors
notifies Mr. Pillari otherwise, the term of the agreement automatically renews
daily for succeeding two year periods.

The employment agreement provides that in the event of the termination of
Mr. Pillari's employment for certain reasons, including certain terminations
resulting from a change in control of the Company (as defined in the employment
agreement), Mr. Pillari would be entitled to receive for the remainder of the
employment term contemplated in the agreement, compensation at an annualized
rate equal to the sum of his base annual salary and target bonus at the time of
termination (such sum being not less than 140% of such base annual salary). In
addition, he would continue to participate in all Company benefit plans until
the earlier of two years from the date of termination or such time as he is
covered by a comparable plan of a subsequent employer. Mr. Pillari is also
subject to certain restrictions under the agreement prohibiting him from
competing with the Company or any of its subsidiaries and from divulging any
confidential proprietary information obtained by him while in the employ of the
Company and for a period of time thereafter.

MANAGEMENT RETENTION AGREEMENTS

The Company has entered into a management retention agreement with each of
its officers (other than Mr. Pillari). These agreements provide for payments and
other benefits if there is a change in control (as defined in the agreement) of
the Company and, within two years of such change in control, the officer's
employment is

<PAGE>
terminated by the Company or its successor other than for cause (as defined in
the agreement), or the officer resigns for good reason (as defined in the
agreement). Under each agreement, the officer would receive, following
termination of employment under such circumstances, cash payments equal to two
times the sum of (i) the officer's highest annual rate of base salary, and (ii)
the product of the officer's highest bonus percentage (as a percentage of base
salary) times his highest base salary (such sum being the "Reference Amount").
The officer may elect to receive payment of one times the Reference Amount
either in a lump sum or in the form of periodic payments following his
termination of employment. Amounts in excess of one times the Reference Amount
will be made in the form of periodic payments, and will be subject to reduction,
on a dollar-for-dollar basis, by any compensation the officer earns from a
subsequent employer unrelated to the Company.

In addition to the payments described above, the officer would be fully
vested in all stock options and other Awards under the HCIA 1994 Stock and
Incentive Plan (the "Stock Option Plan") upon a change in control and would
receive following termination of employment a lump-sum payment equal to the
amount that the Company would have contributed for the officer's account under
the Company's Savings Incentive Plan during the two years following termination
of employment. The officer and his family will remain eligible to participate in
the Company's medical and other welfare benefits programs for two years from the
officer's termination of employment (except that coverage will end to the extent
the officer begins coverage under the plans of a subsequent employer).

STOCK OPTIONS

NON-PLAN OPTIONS. The Company has granted non-qualified options (the
"Options"), pursuant to individual stock option award agreements, to certain of
its past and present employees (the "optionees") to purchase shares of the
Company's Common Stock. Options were granted in December 1992, and in February,
April and October 1994 (collectively the "Options"). The Options granted in
October 1994 expire on October 21, 2004. The remainder of the Options expire on
July 1, 2000.

The Options have exercise prices ranging from $6.00 to $10.50 per share.
With respect to the Options granted in December 1992 and February and April
1994, 50% of the shares of Common Stock may be exercised on or after February
22, 1996 and the balance of the Options may be exercised on or after February
22, 1997. The Options granted in October 1994 become exercisable upon their
vesting, which is over a three-year period which commenced in October 1995.
Under the Options, if the optionee's employment with the Company terminates for
any reason other than death or permanent disability (as defined in the option
agreement), the Option shares not vested are forfeited. If the optionee's
employment terminates by reason of death or permanent disability prior to the
vesting of an Option, the Option is fully vested as of the date of death or
termination due to permanent disability. The Options granted in October 1994
also vest in full if the optionee's employment terminates due to retirement.

The Company's Chief Executive Officer was granted, in connection with the
Company's initial public offering, a non-plan option to purchase 160,000 shares
of Common Stock at an exercise price equal to the initial public offering price
of $14.00 per share. This option is exercisable in full and will expire on
February 22, 2000.

STOCK OPTION PLAN. The Company's Stock Option Plan was approved by the
Board of Directors on December 22, 1994 and thereafter by the Company's
stockholders. The Stock Option Plan provides for the grant or award of stock
options, stock appreciation rights, restricted stock, restricted stock units and
other performance awards which may or may not be denominated in shares of Common
Stock or other securities (collectively, the "Awards"). Stock options granted
under the Stock Option Plan may be either incentive stock options or non-
qualified options. The purpose of the Stock Option Plan is to attract and retain
outstanding employees through the incentives of stock ownership and monetary
payments. Any regular full-time employee of the Company, including officers but
excluding directors who are not officers, is eligible to receive awards.

The Stock Option Plan is administered by the Compensation Committee.
Subject to the provisions of the Stock Option Plan, the Compensation Committee
has the authority to designate participants, determine the types of Awards to be
granted, the number of shares to be covered by each Award, the time at which
each Award is exercisable or may be settled, the method of payment and any other
terms and conditions of the Awards. All Awards shall be evidenced by an Award
Agreement between the Company and the participant.

<PAGE>

While the Compensation Committee determines the prices at which options and
other Awards may be exercised under the Stock Option Plan, the exercise price of
an option shall be at least 100% of the fair market value (as determined under
the terms of the Stock Option Plan) of a share of Common Stock on the date of
grant. The aggregate number of shares of Common Stock available for awards under
the Plan is currently 1,350,000. No Awards may be made under the Stock Option
Plan after December 31, 2004.

DIRECTORS OPTION PLAN. Under the HCIA 1995 Non-Employee Directors Stock
Option Plan (the "Directors Option Plan"), each director who is not an officer
or employee of the Company or its affiliates (an "outside director") is
initially granted an option to purchase 5,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock at the time of
grant. In addition, each current outside director, and each person who is
subsequently elected as an outside director, will be granted an option at each
annual meeting of stockholders to purchase 5,000 shares of Common Stock at an
exercise price equal to the fair market value on the date of grant. A total of
200,000 shares of Common Stock are currently available for awards under the
Plan.

<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth as of August 13, 1996, as adjusted to
reflect the sale of shares by the Company and the Selling Stockholders, certain
information with respect to the beneficial ownership of the Common Stock by: (i)
each of the Selling Stockholders; (ii) each person known by the Company to
beneficially own more than 5% of the Common Stock; (iii) each director and
executive officer of the Company; and (iv) all directors and executive officers
of the Company as a group. The Company believes that the beneficial owners of
the Common Stock listed below, based on information furnished by such owners,
have sole voting and investment power with respect to such shares, except as
noted below:

<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) THE OFFERING(1)(2)
-------------------- SHARES ------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Warburg, Pincus Investors, L.P. (3)......................... 221,485 2.3% 199,393 22,092 *%
United HealthCare Services, Inc. (4)........................ 17,102 * 7,698 9,404 *
HLM Partners V, L.P. (5).................................... 4,267 * 1,921 2,346 *
HLM Partners VII, L.P. (5).................................. 17,071 * 7,684 9,387 *
George D. Pillari(6)........................................ 386,600 3.9 -- 386,600 3.2
Lawrence J. Byrne........................................... 116,518 1.2 -- 116,518 1.0
Kevin J. Hicks.............................................. 116,518 1.2 -- 116,518 1.0
Sachi J. Morishige(7)....................................... 48,694 * -- 48,694 *
Barry C. Offutt(7).......................................... 13,915 * -- 13,915 *
Jean Chenoweth(7)........................................... 11,610 * -- 11,610 *
Richard Dulude(8)........................................... 3,250 * -- 3,250 *
Richard Berman.............................................. -- -- -- -- --
W. Grant Gregory(8)(9)...................................... 12,250 * -- 12,250 *
Phillip B. Lassiter......................................... 2,000 * -- 2,000 *
Mark C. Rogers, M.D.(8)..................................... 2,250 * -- 2,250 *
Carl J. Schramm, Ph.D.(8)................................... 2,250 * -- 2,250 *
FMR Corp(10)................................................ 981,100 10.0 -- 981,100 8.3
Essex Investment Management Company(11)..................... 607,785 6.2 -- 607,785 5.2
All directors and executive officers as a group (12
persons)(12).............................................. 715,855 7.2% -- 755,855 6.0%
</TABLE>

- ---------------
* Less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the
Commission and includes voting or investment power with respect to the
shares. Shares of Common Stock subject to options currently exercisable or
exercisable within 60 days of August 13, 1996 are deemed outstanding for
computing the percentage of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person.

(2) Assumes no exercise of the 30-day option to purchase up to 332,505 shares
of Common Stock solely to cover over-allotments, if any, granted by the
Company to the Underwriters.

(3) The sole general partner of Warburg, Pincus Investors, L.P. ("WP
Investors") is Warburg, Pincus & Co., a New York general partnership
("WP"). E.M. Warburg, Pincus & Company, a New York general partnership
manages WP Investors. WP has a 20% interest in the profits of WP Investors
and, through its wholly owned subsidiary, E.M. Warburg, Pincus & Co., Inc.
owns 1.13% of the limited partnership interests in WP Investors. The
address of WP Investors is 466 Lexington Avenue, New York, New York 10017.

(4) The address of United HealthCare Services, Inc. is 9900 Bren Road, East,
Minnetonka, Minnesota 55343.

(5) The address of HLM Partners is 222 Berkeley Street, Suite 2150, Boston, MA
02116.

(6) Includes (i) 226,150 shares as to which Mr. Pillari shares beneficial
ownership with his wife, (ii) 450 shares held as custodian and (iii) a
currently exercisable option to acquire 160,000 shares of Common Stock.

(7) Includes 44,444, 10,110, and 13,165 shares subject to options held by Sachi
J. Morishige, Jean Chenoweth and Barry C. Offutt, respectively.

(8) Includes 2,250 shares subject to options under the Directors Option Plan.

(9) Includes 4,000 shares owned through a partnership of which Mr. Gregory is a
partner.

(10) Based on a Schedule 13G filed by the listed entity on behalf of itself and
certain affiliates. According to the Schedule 13G, there is sole
dispositive power with respect to all shares and neither sole nor shared
voting power with respect to any such shares. The address of FMR Corp is 85
Devonshire Street, Boston, Massachusetts 02109.

(11) Based on a Schedule 13G filed by the listed entity. According to the
Schedule 13G, there is sole dispositive power as to all such shares and
sole voting power as to 426,905 shares. The address of Essex Investment
Management Company is 125 High Street, Boston, Massachusetts 02110.

(12) Includes 236,719 shares subject to options held by all directors and
executive officers as a group.

<PAGE>
UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Company, the Selling Stockholders and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons
Incorporated, Hambrecht & Quist LLC, Montgomery Securities and Robertson,
Stephens & Company LLC (the "Underwriters"), the Company and the Selling
Stockholders have agreed to sell to each of the Underwriters, and each of the
Underwriters has severally agreed to purchase from the Company and the Selling
Stockholders, the number of shares of Common Stock set forth opposite its name
below. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby if any of such shares are purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................................... 443,340
Alex. Brown & Sons Incorporated.................................................. 443,339
Hambrecht & Quist LLC............................................................ 443,339
Montgomery Securities............................................................ 443,339
Robertson, Stephens & Company LLC................................................ 443,339
---------
Total................................................................ 2,216,696
---------
---------
</TABLE>

The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $1.40 per share. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of $0.10 per share to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.

The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 332,505
additional shares of Common Stock at the public offering price set forth on the
cover page of this Prospectus, less the underwriting discount. The Underwriters
may exercise this option only to cover over-allotments, if any, made on the sale
of the shares of Common Stock offered hereby. If the Underwriters exercise this
option, each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the foregoing
table is of the 2,216,696 shares initially offered hereby.

The Company and certain officers of the Company and HealthVISION have
agreed not to offer, sell, contract to sell or otherwise dispose of, directly or
indirectly, or file or cause to be filed a registration statement under the
Securities Act with respect to, any shares of Common Stock, securities
convertible into, exchangeable for or repayable with such shares or rights or
warrants to acquire such shares, for a period of 90 days after the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, except that the Company may, without such consent, grant
options pursuant to the Stock Option Plan and the Directors Option Plan or issue
shares of Common Stock upon exercise of options currently outstanding, or issue,
or file registration statements with respect to, up to a specified number of
shares of Common Stock in connection with acquisitions under certain
circumstances.

In connection with the Offering, certain Underwriters (and selling group
members, if any) may engage in passive market making transactions in the Common
Stock on NASDAQ in accordance with Rule 10b-6A under the Exchange Act. Rule
10b-6A permits, upon satisfaction of certain conditions, underwriters and
selling group members participating in a distribution that are also NASDAQ
market makers in the security being distributed to engage in limited market
making transactions during the period when Rule 10b-6 under the Exchange Act
would otherwise prohibit such activity. Rule 10b-6A prohibits underwriters and
selling group members engaged in passive market making, generally, from entering
a bid or effecting a purchase at a price that exceeds the highest bid for those
securities displayed on NASDAQ by a market maker that is not participating in
the distribution. Under Rule 10b-6A, each underwriter or selling group member
engaged in passive market making is subject to a daily

<PAGE>
net purchase limitation equal to 30% of such entity's average daily trading
volume during the two full consecutive calendar months immediately preceding the
date of the filing of the registration statement under the Securities Act
pertaining to the security to be distributed.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.

LEGAL MATTERS

The validity of the Common Stock being offered hereby will be passed upon
for the Company and the Selling Stockholders by Whiteford, Taylor & Preston
L.L.P., Baltimore, Maryland. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Brown & Wood LLP, New York,
New York.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1994 and 1995, and for each of the years in the three-year period ended December
31, 1995 included herein and in the Registration Statement of which this
Prospectus is a part, and the financial statements of Datis Corporation as of
March 31, 1993 and for the year ended March 31, 1993 and the financial
statements of William M. Mercer, Incorporated National Health Analysis Unit as
of December 31, 1994 and September 30, 1995 and for the years ended December 31,
1993 and 1994 and the nine months ended September 30, 1995 incorporated in this
Prospectus by reference to the Company's Current Report on Form 8-K dated July
19, 1996, as amended, have been included herein and incorporated by reference in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein or incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.

The report by KPMG Peat Marwick LLP covering the consolidated financial
statements of the Company noted above refers to the adoption of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes."

The combined balance sheet of LBA Health Care Management, Inc. and
Healthcare Data Source, Inc. (collectively, the "Predecessor Business") as of
December 31, 1994 and the combined statements of operations and retained
earnings and cash flows for the Predecessor Business for each of the years ended
December 31, 1993 and 1994 and for the period from January 1, 1995 through
September 27, 1995, the balance sheet of LBA Health Care Management, Inc. as of
December 31, 1995 and the statements of operations and retained earnings and
cash flows of LBA Health Care Management, Inc. for the period from September 28,
1995 through December 31, 1995 and the consolidated balance sheet of
HealthVISION, Inc. as of December 31, 1994 and 1995 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1995 and for the period February 2, 1994 (inception) through
December 31, 1994 appearing in this Prospectus and Registration Statement, or
incorporated in this Prospectus and Registration Statement by reference to the
Company's Current Report on Form 8-K dated July 19, 1996, as amended, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement or
incorporated in this Prospectus and Registration Statement by reference to the
Company's Current Report on Form 8-K dated July 19, 1996, as amended, and are
included in reliance upon such reports given on the authority of such firm as
experts in accounting and auditing.

The financial statements of Datis Corporation as of May 31, 1993 and 1994
and for the year ended May 31, 1994 and the two months ended May 31, 1993
incorporated in this Prospectus by reference to the Form 8-K of HCIA Inc. dated
July 19, 1996, as amended, have been so incorporated in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.

<PAGE>
ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). The reports and other
information filed by the Company with the Commission in accordance with the
Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's regional offices at Seven World Trade Center, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at its principal office in
Washington, D.C. at prescribed rates. Such reports, proxy statements and other
information concerning the Company can be inspected at the offices of NASDAQ at
1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a Web site
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.

The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Securities Act and the rules and regulations of the
Commission thereunder. The Registration Statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily complete
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.

<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The following documents or portions of documents filed by the Company with
the Commission are incorporated herein by reference:

(1) Annual Report on Form 10-K for the year ended December 31, 1995, as
amended by the Form 10-K/A filed on April 30, 1996.

(2) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.

(3) Current Report on Form 8-K dated July 19, 1996, as amended by the Form
8-K/A filed August 13, 1996.

(4) The description of the Common Stock contained in the Company's
Registration Statement under the Exchange Act on Form 8-A filed on
January 13, 1995.

All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the Offering shall be deemed to be incorporated
by reference in this Prospectus and to be part hereof from the filing date of
such documents.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is incorporated or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Subject to the foregoing, all information appearing in this Prospectus is
qualified in its entirety by the information appearing in the documents
incorporated herein by reference.

THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON WRITTEN OR ORAL
REQUEST, AT NO CHARGE, FROM THE COMPANY. REQUESTS SHOULD BE DIRECTED TO THE
COMPANY, 300 EAST LOMBARD STREET, BALTIMORE, MARYLAND 21202, ATTENTION: BARRY C.
OFFUTT, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER.

<PAGE>
HCIA INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements of HCIA Inc.:
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets (December 31, 1994 and 1995)................................................. F-3
Consolidated Statements of Operations (Years Ended December 31, 1993, 1994 and 1995)..................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Years Ended December 31, 1993, 1994 and
1995)................................................................................................. F-5
Consolidated Statements of Cash Flows (Years Ended December 31, 1993, 1994 and 1995)..................... F-6
Notes to Consolidated Financial Statements (December 31, 1993, 1994 and 1995)............................ F-7
Unaudited Consolidated Financial Statements of HCIA Inc.:
Consolidated Balance Sheets (December 31, 1995 and June 30, 1996)........................................ F-18
Consolidated Statements of Operations (Six Months Ended June 30, 1995 and 1996).......................... F-19
Consolidated Statement of Changes in Stockholders' Equity (Year Ended December 31, 1995 and Six Months
Ended June 30, 1996).................................................................................. F-20
Consolidated Statements of Cash Flows (Six Months Ended June 30, 1995 and 1996).......................... F-21
Notes to Unaudited Consolidated Financial Statements..................................................... F-22
Financial Statements of LBA Health Care Management, Inc.:
Report of Independent Auditors........................................................................... F-23
Balance Sheets (December 31, 1994 and 1995).............................................................. F-24
Statements of Operations and Retained Earnings (Years Ended December 31, 1993 and 1994, Period from
January 1, 1995 through September 27, 1995, and Period from September 28, 1995 through December 31,
1995)................................................................................................. F-25
Statements of Cash Flows (Years Ended December 31, 1993 and 1994, Period from January 1, 1995 through
September 27, 1995, and Period from September 28, 1995 through December 31, 1995)..................... F-26
Notes to Financial Statements............................................................................ F-27
Unaudited Financial Statements of LBA Health Care Management, Inc.:
Balance Sheet (December 31, 1995 and June 30, 1996)...................................................... F-34
Statements of Operations and Retained Earnings (Six Months Ended June 30, 1995 and 1996)................. F-35
Statements of Cash Flows (Six Months Ended June 30, 1995 and 1996)....................................... F-36
Notes to Unaudited Financial Statements.................................................................. F-37
Pro Forma Financial Statements:
Unaudited Pro Forma Financial Information................................................................ F-38
Unaudited Pro Forma Balance Sheet (December 31, 1995).................................................... F-39
Unaudited Pro Forma Balance Sheet (June 30, 1996)........................................................ F-40
Unaudited Pro Forma Statement of Operations (Year Ended December 31, 1995)............................... F-41
Unaudited Pro Forma Statement of Operations (Six Months Ended June 30, 1996)............................. F-42
Notes to Unaudited Pro Forma Financial Statements........................................................ F-43
</TABLE>

F-1

<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
HCIA Inc.:

We have audited the accompanying consolidated balance sheets of HCIA Inc.
and subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HCIA Inc.
and subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.

As discussed in Notes 2 and 8 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standard Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."

KPMG PEAT MARWICK LLP

Baltimore, Maryland
January 19, 1996

F-2

<PAGE>
HCIA INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 696 $ 3,190
Short-term investments................................................................... -- 23,280
Trade accounts receivable, net of allowance for doubtful accounts of $359 in 1994 and
$454 in 1995.......................................................................... 8,607 16,623
Prepaid expenses......................................................................... 924 2,236
------- --------
Total current assets................................................................ 10,227 45,329
Furniture and equipment, net (notes 2 and 3)............................................... 3,896 6,576
Computer software costs, net (note 2)...................................................... 6,031 11,012
Other intangible assets, net (note 4)...................................................... 19,025 42,338
Net deferred tax asset (note 8)............................................................ -- 3,090
Note receivable from related party (note 1)................................................ 1,551 --
Other...................................................................................... 135 56
------- --------
Total assets........................................................................ $40,865 $108,401
------- --------
------- --------
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 605 $ 732
Accrued salaries, benefits and other liabilities (note 5)................................ 2,521 4,222
Capital lease obligations (note 6)....................................................... 102 174
Notes payable (note 1)................................................................... -- 2,265
Income taxes payable (note 8)............................................................ 125 1,098
Deferred revenue......................................................................... 1,254 1,167
------- --------
Total current liabilities........................................................... 4,607 9,658
Net deferred tax liability (note 8)........................................................ 535 --
Notes payable (note 1)..................................................................... -- 699
Amounts due to related party (note 11)..................................................... 1,300 --
------- --------
Total liabilities................................................................... 6,442 10,357
------- --------
Minority interest (note 2)................................................................. 52 --
------- --------
Stockholders' equity (note 10):
Preferred stock -- $0.01 par value; authorized 500,000 shares; no shares issued and
outstanding in 1994 and 1995.......................................................... -- --
Common stock -- $.01 par value; authorized 15,000,000 shares; issued and outstanding
5,437,005 as of December 31, 1994 and 8,955,932 as of December 31, 1995............... 54 90
Additional paid-in capital............................................................... 36,876 102,882
Accumulated deficit...................................................................... (2,548) (4,953)
Cumulative unrealized appreciation of short-term investments............................. -- 44
Cumulative effect of currency translation adjustment..................................... (11) (19)
------- --------
Total stockholders' equity.......................................................... 34,371 98,044
------- --------
Total liabilities, minority interest and stockholders' equity....................... $40,865 $108,401
------- --------
------- --------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3

<PAGE>
HCIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenue.......................................................................... $28,111 $30,711 $48,015
Salaries, wages and benefits..................................................... 14,168 15,457 21,932
Other operating expenses......................................................... 7,884 8,538 11,841
Provision for doubtful accounts.................................................. 727 87 214
Depreciation..................................................................... 654 957 1,619
Amortization..................................................................... 3,941 3,869 5,245
Write-off of acquired in-process research and development costs (note 1)......... -- -- 12,152
------- ------- -------
Operating income (loss)........................................................ 737 1,803 (4,988)
Interest income.................................................................. -- 111 1,290
Interest expense on related party borrowings (note 11)........................... (72) (110) (83)
Interest expense on capital leases............................................... (39) (21) (104)
------- ------- -------
Income (loss) before income taxes, minority interest in loss (income) of
consolidated subsidiaries and cumulative effect of change in accounting for
income taxes................................................................ 626 1,783 (3,885)
Benefit (provision) for income taxes (note 8).................................... (362) (759) 1,554
Minority interest in loss (income) of consolidated subsidiaries (note 2)......... 90 (3) (74)
------- ------- -------
Income (loss) before cumulative effect of change in accounting for income
taxes....................................................................... 354 1,021 (2,405)
Cumulative effect of change in accounting for income taxes....................... (142) -- --
------- ------- -------
Net income (loss).............................................................. $ 212 $ 1,021 $(2,405)
------- ------- -------
------- ------- -------
Net income (loss) per share (note 2)............................................. $ 0.19 $ (0.31)
------- -------
------- -------
Shares used in per share calculation (note 2).................................... 5,518 7,733
------- -------
------- -------
</TABLE>

See accompanying notes to consolidated financial statements

F-4

<PAGE>
HCIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
UNREALIZED EFFECT OF
PREFERRED PREFERRED PREFERRED TOTAL ADDITIONAL APPRECIATION OF CURRENCY
STOCK STOCK STOCK PREFERRED COMMON PAID-IN ACCUMULATED SHORT-TERM TRANSLATION
SERIES A SERIES B SERIES C STOCK STOCK CAPITAL DEFICIT INVESTMENTS ADJUSTMENT
--------- --------- --------- --------- ------ ---------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1,
1993.......... $ 10,662 $ 2,500 $ 6,400 $ 19,562 $ 30 $ 10,627 $(1,367) $ -- $ 55
Capital
contributions... -- -- -- -- -- 605 -- -- --
Tax benefit
from exercise
of employee
stock
options....... -- -- -- -- -- 87 -- -- --
Issuance of
preferred
stock......... -- 3,000 -- 3,000 -- -- -- -- --
Net income..... -- -- -- -- -- -- 212 -- --
Effect of
currency
translation
adjustment.... -- -- -- -- -- -- -- -- (49)
--------- --------- --------- --------- ------ ---------- ----------- --- -----
BALANCE AT
DECEMBER 31,
1993.......... 10,662 5,500 6,400 22,562 30 11,319 (1,155) -- 6
--------- --------- --------- --------- ------ ---------- ----------- --- -----
Capital
contributions... -- -- -- -- -- 605 -- -- --
Conversion of
preferred
stock......... (10,662) (5,500) (6,400) (22,562) 24 24,952 (2,414) -- --
Net income..... -- -- -- -- -- -- 1,021 -- --
Effect of
currency
translation
adjustment.... -- -- -- -- -- -- -- -- (17)
--------- --------- --------- --------- ------ ---------- ----------- --- -----
BALANCE AT
DECEMBER 31,
1994.......... -- -- -- -- 54 36,876 (2,548) -- (11)
--------- --------- --------- --------- ------ ---------- ----------- --- -----
Sale of common
stock to the
public........ -- -- -- -- 36 66,006 -- -- --
Net loss....... -- -- -- -- -- -- (2,405) -- --
Effect of
currency
translation
adjustment.... -- -- -- -- -- -- -- -- (8)
Unrealized
appreciation
of short-term
investments... -- -- -- -- -- -- -- 44 --
--------- --------- --------- --------- ------ ---------- ----------- --- -----
BALANCE AT
DECEMBER 31,
1995.......... $ -- $ -- $ -- $ -- $ 90 $102,882 $(4,953) $ 44 $ (19)
--------- --------- --------- --------- ------ ---------- ----------- --- -----
--------- --------- --------- --------- ------ ---------- ----------- --- -----

TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT
JANUARY 1,
1993.......... $28,907
Capital
contributions. 605
Tax benefit
from exercise
of employee
stock
options....... 87
Issuance of
preferred
stock......... 3,000
Net income..... 212
Effect of
currency
translation
adjustment.... (49)
------
BALANCE AT
DECEMBER 31,
1993.......... 32,762
------
Capital
contributions. 605
Conversion of
preferred
stock......... --
Net income..... 1,021
Effect of
currency
translation
adjustment.... (17)
------
BALANCE AT
DECEMBER 31,
1994.......... 34,371
------
Sale of common
stock to the
public........ 66,042
Net loss....... (2,405)
Effect of
currency
translation
adjustment.... (8)
Unrealized
appreciation
of short-term
investments... 44
------
BALANCE AT
DECEMBER 31,
1995.......... $98,044
------
------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5

<PAGE>
HCIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................................. $ 212 $ 1,021 $ (2,405)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................... 4,595 4,826 6,864
Write-off of acquired in-process research and development costs............. -- -- 12,152
Deferred tax provision...................................................... 876 (338) (3,625)
Provision for doubtful accounts............................................. 727 87 214
Changes in operating assets and liabilities:
Accounts receivable....................................................... (2,120) (436) (7,292)
Income taxes receivable/payable........................................... (315) 1,097 973
Prepaid expenses.......................................................... (377) (234) (1,505)
Accounts payable.......................................................... (645) (853) 215
Accrued salaries, benefits and other liabilities.......................... (811) (771) (816)
Deferred revenue.......................................................... 322 40 (1,714)
Minority interest......................................................... (90) 3 75
------- ------- --------
Net cash provided by operating activities.............................. 2,374 4,442 3,136
------- ------- --------
Cash flows from investing activities:
Purchases of furniture and equipment........................................... (2,000) (1,568) (3,145)
Cost of acquisitions, net of cash acquired..................................... (148) -- (35,271)
Computer software costs purchased or capitalized............................... (2,236) (2,603) (6,151)
Other intangible assets purchased or capitalized............................... (1,103) (779) (716)
Purchases of short-term investments............................................ -- -- (69,312)
Sales of short-term investments................................................ -- -- 46,077
Payments on note receivable.................................................... -- 108 1,551
Other.......................................................................... -- (40) 104
------- ------- --------
Net cash used in investing activities..................................... (5,487) (4,882) (66,863)
------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock...................................... 3,000 -- --
Proceeds from capital contributions............................................ 692 605 --
Proceeds from public offerings................................................. -- -- 66,042
Borrowings from related party.................................................. 2,925 1,400 2,915
Repayments of related party borrowings......................................... (2,779) (1,250) (513)
Repayments of note payable..................................................... -- -- (1,900)
Other borrowings............................................................... 16 -- --
Principal payments on capital leases........................................... (188) (187) (315)
------- ------- --------
Net cash provided by financing activities................................. 3,666 568 66,229
------- ------- --------
Impact of currency fluctuations on cash and cash equivalents..................... (49) (17) (8)
------- ------- --------
Increase (decrease) in cash and cash equivalents................................. 504 111 2,494
Cash and cash equivalents -- beginning of year.................................. 81 585 696
------- ------- --------
Cash and cash equivalents -- end of year........................................ $ 585 $ 696 $ 3,190
------- ------- --------
------- ------- --------
Supplemental cash flow information
-- cash paid during the year for interest..................................... $ 154 $ 137 $ 89
-- cash paid during the year for income taxes................................. $ -- $ -- $ 1,088
------- ------- --------
------- ------- --------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1993, 1994 AND 1995

(1) BACKGROUND

(a) DESCRIPTION OF BUSINESS

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

(b) PUBLIC OFFERINGS

During February 1995, the Company completed an initial public offering of
approximately 2.0 million shares of Common Stock at $14.00 per share. In August
1995, the Company completed a second public offering of approximately 2.6
million shares at $28.50 per share. The second public offering consisted of 1.5
million shares issued by the Company and approximately 1.1 million shares sold
by the Company's largest stockholder, AMBAC Inc. ("AMBAC").

On April 28, 1995, the Company acquired all of the capital stock of Datis
Corporation ("Datis") for $14,250,000 in cash. Datis provides databases and
related analyses to hospitals and hospital systems. The acquisition was
accounted for using the purchase method of accounting and resulted in increases
in current assets of $1,338,000, furniture and equipment of $1,092,000, other
assets of $25,000, software of $233,000 and other intangible assets of
$16,503,000; offset by increases in current liabilities of $4,671,000 and long
term liabilities of $270,000. Substantially all of the other intangible assets
recorded in connection with this acquisition relate to goodwill. The goodwill is
being amortized over its estimated useful life of 20 years. The estimate of the
amortization period is based on the nature of the products and markets of Datis
and the historical rate of change in the products and markets. Funding for the
acquisition was provided from the proceeds of the Company's initial public
offering.

During November 1995, the Company acquired an additional 36% interest in
CHKS Limited ("CHKS"). As a result of this acquisition, CHKS became a
wholly-owned subsidiary of the Company. The Company issued notes payable to the
former shareholders in the amount of $2,795,000. The purchase agreement also
provides for an additional payment to the former shareholders in the event that
certain operational performance targets are met by CHKS during 1996. This
acquisition was accounted for using the purchase method of accounting and
resulted in additional goodwill of $2,709,000. The goodwill is being amortized
over its estimated useful life of 15 years. The estimate of the amortization
period is based on the nature of the products and markets of CHKS and the
historical rate of change in the products and markets.

On December 15, 1995, the Company acquired the assets constituting the
CHAMP unit of William M. Mercer, Incorporated for $17,500,000 in cash. The CHAMP
unit provides data base and analytical reporting services to large employers to
assist them in the management of their health care costs. The acquisition was
accounted for using the purchase method of accounting and resulted in an
increase in software of $859,000 and other intangible assets of $4,489,000. The
other intangible assets consist of trade names of $1,266,000, assembled
workforce of $1,102,000, customer base of $595,000 and goodwill of $1,526,000.
These assets are being amortized on a straight-line basis over 12 years. The
lives of these assets were determined by an independent appraiser based on,
among other things, employee turnover, historical customer retention rates and
the historical rate of change in the products and markets. At the date of the
acquisition, the Company recorded a non-recurring charge of $12,152,000 relating
to in-process research and development costs which were acquired in this
acquisition.

F-7

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

These costs related to the development of a client server based system to
process and deliver health care data and analysis tools to CHAMP customers. The
amount of the non-recurring charge was equal to the estimated current fair
value, based on the risk adjusted cash flows (at a discount rate of 20%, which
included cost of capital of 18% and an incremental risk premium of 2%), of
specifically identified technologies for which technological feasibility had not
yet been established pursuant to Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," and for which future alternative uses did not exist.
Consideration of technological feasibility for purposes of this calculation was
done on a basis consistent with that normally utilized by the Company (See Note
2(d)). This charge is recorded as an operating expense on the accompanying
consolidated statement of operations for the year ended December 31, 1995.
Funding for this acquisition was provided from the proceeds of the Company's
public offerings.

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

Unaudited pro forma combined results of the operations of the Company for
the years ended December 31, 1995 and 1994 are presented below and have been
prepared assuming that the acquisitions discussed above had been made as of
January 1, 1994.

<TABLE>
<CAPTION>
1994 1995
------- -------
(UNAUDITED)
<S> <C> <C>
Revenue............................................................................ $47,156 $57,389
Net income (loss).................................................................. $(1,844) $ 3,355
Net income (loss) per share........................................................ $ (0.33) $ 0.42
</TABLE>

The pro forma results include the historical accounts of the Company and
the acquired entities adjusted to reflect the effects of the depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the assets acquired, additional interest expense
related to notes payable issued in connection with certain acquisitions, the
reversal of the non-recurring write-off of acquired in-process research and
development costs recorded in connection with the CHAMP acquisition and the
related income tax effects. The pro forma results are not necessarily indicative
of actual results which might have occurred had the operations and management of
the Company and the acquired entities been combined in 1994 and 1995.

(d) DIVESTITURE

Effective January 1, 1994, the Company sold certain of its software product
lines at their approximate book value to a company formed by a group of the
Company's former employees. These product lines generated revenues of
approximately $3.0 million during the year ended December 31, 1993. In
connection with the sale, the Company received a note in the amount of
$1,659,000 and also purchased a 49% equity interest in the new entity for
$120,000. During 1995, the Company received payment in full on the balance
outstanding on the note and sold the equity interest back to the entity for
$139,000, representing the original investment of $120,000 plus interest for the
period the equity interest was held.

F-8

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION

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

(b) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents consist of highly liquid securities with original
maturities of three months or less at the date acquired by the Company. At
December 31, 1995, the Company's short-term investments, which are classified as
available for sale securities portfolio, consist of the following:

<TABLE>
<CAPTION>
FAIR VALUE COST
------------ ------------
<S> <C> <C>
Auction Market Preferred Stock........................................... $ 7,000,000 $ 7,000,000
Variable Rate Debentures................................................. 5,500,000 5,500,000
Municipal Bonds.......................................................... 10,780,000 10,736,000
------------ ------------
Total.................................................................. $ 23,280,000 $ 23,236,000
------------ ------------
------------ ------------
</TABLE>

The portfolio is carried at fair value in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." All securities mature within one year. Gross
unrealized gains and losses were $44,000 and $0, respectively, and are included
as a separate component of stockholders' equity. Realized gains and losses are
recorded using the specific identification basis to determine costs. During
1995, proceeds from sales of the securities totalled $46,677,000, gross realized
gains totalled $2,000 and gross realized losses totalled $0.

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

(d) COMPUTER SOFTWARE COSTS

Computer software costs include the cost of internally developed software
and the fair market value assigned to computer software obtained in purchase
transactions. Costs for internally developed software are capitalized in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
These costs relate primarily to the building of production systems and extending
existing applications to new markets or platforms using existing technologies
and programming methods. The Company capitalizes only those costs incurred after
a detailed program design or, in the absence of such, a working prototype has
been developed. The Company generally develops its applications in connection
with customer contracts and includes the related costs as a component of
operating expenses in the period incurred. The Company capitalized or purchased
a total of $2,236,000, $2,603,000 and $7,260,000 of computer software costs in
1993, 1994 and 1995, respectively, including $1,109,000 in 1995 related to
business acquisitions.

Capitalized costs are amortized, beginning with market availability, over
the economic useful life of the product. Typically, this life is five years. The
annual amortization expense is the greater of the amount computed using (a) the
ratio that current gross revenues for a product bears to the total of current
and anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported. Amortization expense for computer software was
$1,540,000,

F-9

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$1,456,000 and $2,048,000 during 1993, 1994 and 1995, respectively. Accumulated
amortization for computer software was $4,462,000 and $6,510,000 at December 31,
1994 and 1995, respectively.

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

(e) REVENUE RECOGNITION

Revenue from license fees for access to the Company's data bases is
recognized when access to the data base is made available to the customer.
Revenue from custom system or data base development and implementation contracts
is recognized on a percentage of completion basis using the cost to cost method.
On a quarterly basis, the Company assesses whether the current estimate of total
contract costs for each of these contracts indicates a loss is expected and
accrues any such losses on the entire contract in that quarter. Where the
Company has contracted to provide both access to a Company data base and
development of a custom data base, the contract value is segmented into its
discrete elements according to their relative values, and revenue is recognized
separately on each element in accordance with the above.

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

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

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

During 1993 and 1994, one customer accounted for 12% of the Company's
revenue. At December 31, 1994, receivables from that customer represented 12% of
the Company's trade accounts receivable. Consistent with Company policy, no
collateral or other security was held with respect to such trade accounts
receivable. During 1995, no single customer accounted for 10% or more of the
Company's revenue or trade accounts receivable.

(f) FOREIGN CURRENCY TRANSLATION

The assets and liabilities of CHKS are translated at year-end exchange
rates, while revenue and expenses are translated at rates prevailing during the
period. Accordingly, translation adjustments that arise due to fluctuations in
exchange rates are excluded from operations and are reported as a separate
component of stockholders' equity.

(g) INCOME TAXES

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

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
and the cumulative effect of this change as of that date is reported in the
consolidated statement of operations for 1993.

F-10

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(h) EARNINGS PER SHARE

Earnings per share has been calculated based upon the weighted average
number of shares outstanding and using the treasury stock method for outstanding
stock options. The number of shares used in this calculation has been adjusted
to reflect a one-for-three reverse stock split and the conversion of Class A and
Class B common stock into a single class of common stock (see note 10). For
1994, the fair market value per share for the purpose of the calculation of the
weighted average shares outstanding was assumed to be $11.00, which was the
mid-point of the initial public offering price range.

(i) USE OF ESTIMATES

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

(j) RECLASSIFICATIONS

Certain amounts for 1993 and 1994 have been reclassified to conform to the
presentation for 1995.

(3) FURNITURE AND EQUIPMENT

Furniture and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Computer equipment.......................................................... $ 5,225,000 $ 8,629,000
Office furniture and equipment.............................................. 887,000 1,398,000
Other....................................................................... 164,000 392,000
----------- -----------
6,276,000 10,419,000
Less accumulated depreciation............................................... 2,380,000 3,843,000
----------- -----------
$ 3,896,000 $ 6,576,000
----------- -----------
----------- -----------
</TABLE>

(4) OTHER INTANGIBLE ASSETS

Other intangible assets at December 31, 1994 consist of the following:

<TABLE>
<CAPTION>
CAPITALIZED ACCUMULATED CARRYING
COST AMORTIZATION VALUE
----------- ----------- ------------
<S> <C> <C> <C>
Data bases................................................. $ 5,326,000 $2,749,000 $ 2,577,000
CPHA license............................................... 8,073,000 1,286,000 6,787,000
Prepaid CPHA royalties..................................... 5,958,000 949,000 5,009,000
Goodwill................................................... 4,934,000 1,202,000 3,732,000
Other...................................................... 1,938,000 1,018,000 920,000
----------- ----------- ------------
$26,229,000 $7,204,000 $ 19,025,000
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

Other intangible assets at December 31, 1995 consist of the following:

F-11

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
CAPITALIZED ACCUMULATED CARRYING
COST AMORTIZATION VALUE
----------- ----------- ------------
<S> <C> <C> <C>
Data bases................................................. $ 5,888,000 $3,711,000 $ 2,177,000
CPHA license............................................... 8,073,000 1,761,000 6,312,000
Prepaid CPHA royalties..................................... 5,958,000 1,300,000 4,658,000
Goodwill................................................... 27,531,000 2,231,000 25,300,000
Other...................................................... 3,976,000 85,000 3,891,000
----------- ----------- ------------
$51,426,000 $9,088,000 $ 42,338,000
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

Data bases consist of the fair market value of various data bases acquired
through acquisitions, the cost of acquiring data and internal development costs
(direct labor and related overhead) incurred in standardizing data for use in
internally developed data bases. These assets are being amortized on a
straight-line basis over their estimated useful lives of five years.
Amortization expense for data bases was approximately $849,000, $839,000 and
$962,000 during 1993, 1994 and 1995, respectively.

During 1992, the Company acquired an exclusive license to access and sell
the data bases and certain other assets of the Commission on Professional and
Hospital Activities ("CPHA"). This license was recorded at its estimated fair
value of $8,073,000 at the date of acquisition and is being amortized on a
straight-line basis over 17 years. The amortization period was determined to be
the estimated economic life cycle of the licensed properties, as corroborated by
an independent appraisal, and reflected the remainder of the existing term of
the license at the date of acquisition plus one renewal term provided under the
terms of the agreement.

Under the terms of the license, the Company paid royalties to CPHA based on
revenues earned utilizing the licensed assets. Subsequent to the acquisition,
the Company and CPHA entered into a new license agreement. Under the terms of
the new agreement, the Company paid $5,958,000 to CPHA in lieu of future royalty
obligations. The payment is recorded as prepaid CPHA royalties and is being
amortized on a straight-line basis over 17 years, consistent with the estimated
economic life of the licensed properties.

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

Other intangibles consist of noncompetition agreements and identifiable
intangible assets obtained through acquisitions. The noncompetition agreements
are amortized over their 1 to 2 year terms. Certain of the noncompetition
agreements are with the original stockholders of the acquired company who are
still employed by the Company or AMBAC as of December 31, 1995. Amortization of
these agreements, which are valued at $684,000, will commence when the
stockholders are no longer employees of AMBAC or the Company. The acquired
identifiable intangible assets consist of trade names, assembled workforce,
customer base and methodologies. The trade names, assembled workforce and
customer base were obtained through the CHAMP acquisition, and are being
amortized over 12 years. The lives of these assets were determined by an
independent appraiser based on factors such as going concern value, employee
turnover and historical customer retention rates. The methodologies are being
amortized over their estimated useful lives of 5 years.

F-12

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) ACCRUED SALARIES, BENEFITS AND OTHER LIABILITIES

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

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Accrued salaries............................................................ $ 602,000 $ 844,000
Accrued benefits............................................................ 284,000 304,000
Accrued vacation............................................................ 418,000 562,000
Other....................................................................... 1,217,000 2,512,000
----------- -----------
$ 2,521,000 $ 4,222,000
----------- -----------
----------- -----------
</TABLE>

(6) LEASES

The Company leases certain of its equipment under capital leases. These
leases require monthly lease payments plus related sales taxes and maintenance
agreement payments and are capitalized using interest rates from 6.7% to 16.3%.
The equipment is recorded in the accompanying balance sheets as follows at
December 31:

<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Equipment....................................................................... $ 666,000 $ 859,000
Less: Accumulated amortization.................................................. 564,000 685,000
--------- ---------
Net...................................................................... $ 102,000 $ 174,000
--------- ---------
--------- ---------
</TABLE>

At December 31, 1995, future minimum obligations under the leases totaled
$186,000, including $12,000 representing interest.

The Company leases office space and certain equipment under operating
leases. Rent expense for these leases was $1,312,000, $1,527,000 and $2,286,000
during 1993, 1994 and 1995, respectively. The minimum rental commitments under
noncancelable operating leases as of December 31, 1995, are as follows:

<TABLE>
<S> <C>
Year Ending December 31:
1996..................................................................................... $ 2,937,000
1997..................................................................................... 2,429,000
1998..................................................................................... 1,909,000
1999..................................................................................... 1,618,000
2000..................................................................................... 1,049,000
Thereafter............................................................................... 1,794,000
------------
Total minimum payments required................................................... $ 11,736,000
------------
------------
</TABLE>

(7) SAVINGS INCENTIVE PLAN

The Company maintains the HCIA Inc. Savings Incentive Plan, a profit
sharing plan qualified under Section 401(a) of the Internal Revenue Code. All
employees of the Company who have completed one year of service are eligible to
participate in the Plan. Subject to certain limitations on individual
contributions and allocations and Company deductions, the Plan allows
participants to defer up to 15% of their pay on a pre-tax basis and up to 10% of
their pay on an after-tax basis. The Company also makes matching contributions
equal to 50% of the amount a participant defers up to 4% of the participant's
pay. The Plan also provides for discretionary contributions by the Company. All
participants are fully vested in all of their accounts in the Plan. The
Company's contributions to the Plan during 1993, 1994 and 1995 were
approximately $155,000, $167,000, and $194,000, respectively.

F-13

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) INCOME TAXES

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

<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- -----------
<S> <C> <C> <C>
Federal and state:
Current..................................................... $(514,000) $1,097,000 $ 2,071,000
Deferred.................................................... 876,000 (338,000) (3,625,000)
--------- ---------- -----------
Total income tax expense (benefit)..................... $ 362,000 $ 759,000 $(1,554,000)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>

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

<TABLE>
<CAPTION>
1993 1994 1995
--------------- --------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
--------- ---- -------- ---- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense (benefit)
at statutory rate................................. $ 251,000 35.0% $623,000 35.0% $(1,346,000) (34.0)%
Goodwill amortization............................... 100,000 14.0 44,000 2.5 187,000 4.7
Tax-exempt interest................................. -- -- -- -- (199,000) (5.0)
State tax net of federal benefit.................... -- -- 93,000 5.2 (221,000) (5.6)
Other, net.......................................... 11,000 1.5 (1,000) -- 25,000 .6
--------- ---- -------- ---- ----------- -----
$ 362,000 50.5% $759,000 42.7% $(1,554,000) (39.3)%
--------- ---- -------- ---- ----------- -----
--------- ---- -------- ---- ----------- -----
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December 31,
1994 and 1995, are presented below:

<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Deferred tax assets:
Operating accruals......................................................... $ 247,000 $ 403,000
Cost of acquired in-process research and development....................... -- 4,941,000
--------- -----------
Gross deferred tax assets............................................... 247,000 5,344,000
Valuation allowance..................................................... -- --
--------- -----------
Net deferred tax assets................................................. 247,000 5,344,000
Deferred tax liabilities:
Capitalized acquisitions costs............................................. $ 274,000 $ 352,000
Capitalized royalty payments............................................... 171,000 183,000
Capitalized software....................................................... 337,000 1,719,000
--------- -----------
Total deferred tax liabilities.......................................... 782,000 2,254,000
--------- -----------
Net deferred tax asset (liability)...................................... $(535,000) $ 3,090,000
--------- -----------
--------- -----------
</TABLE>

The valuation allowance for deferred tax assets as of January 1, 1994 and
December 31, 1994 and 1995 was $0. Therefore, there was no net change in the
valuation allowance for 1994 and 1995.

(9) LINE OF CREDIT

The Company has entered into a line of credit agreement with a bank which
allows for maximum borrowings of $4,000,000. The line of credit is secured by
accounts receivable and bears interest at the bank's prime rate

F-14

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

plus 0.25% (8.75% as of December 31, 1995) and expires on January 2, 1997. The
Company also pays a commitment fee on the average daily unused portion of the
line of credit at a rate of 0.25% per annum. As of December 31, 1995 there had
been no borrowings under the line of credit.

(10) STOCKHOLDERS' EQUITY

(a) CAPITAL AMENDMENT

Effective February 14, 1995, the Company filed an amendment to its articles
of incorporation which effected: (i) a one-for-three reverse stock split; (ii)
the conversion of the Class A and Class B common stock into a single class of
common stock; and (iii) the authorization of a total of 15,000,000 shares of
common stock and 500,000 shares of preferred stock, each having a par value of
$.01 per share. All references to common stock and stock options in these
financial statements have been adjusted to reflect the one-for-three reverse
stock split as if it had occurred prior to January 1, 1993.

(b) COMMON AND PREFERRED STOCK

The preferred stock may be issued from time to time by the board of
directors as shares of one or more series. The description of the shares of each
series of preferred stock is established by the board of directors prior to the
issuance of the series of shares.

During 1993, the Company issued 30,000 shares of Series B, 6% cumulative
preferred stock to AMBAC Indemnity Corporation ("AIC").

During 1994, the Company issued 2,378,672 shares of common stock to AIC in
exchange for the 225,621 shares of preferred stock then outstanding.

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

At December 31, 1994 and 1995, the Company had outstanding stock options as
follows:

<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Stock options outstanding pursuant to:
HCIA Stock Option Plan.......................................................... -- 169,933
Directors Option Plan........................................................... -- 22,500
Other options................................................................... 374,226 507,800
-------- --------
Total stock options outstanding................................................. 374,226 700,233
-------- --------
-------- --------
</TABLE>

The HCIA Stock Option Plan provides that up to 450,000 options may be
issued to employees of the Company. Options granted to date under this plan vest
over a period of three or four years. The Directors Option Plan provides that
100,000 options may be issued to outside directors of the Company. Options
granted to date under this plan vest over a period of two years. The Company has
also issued non-plan options which generally vest over periods of two or three
years. In February 1995, the Company issued a non-plan option to its chief
executive officer which was fully vested on the date of grant. All stock options
issued by the Company have been granted with exercise prices equal to or greater
than the estimated fair market value of the common stock on the date of grant;
accordingly, the Company has recorded no compensation expense related to such
grants. Stock option transactions are summarized as follows:

F-15

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- ------------
<S> <C> <C> <C>
Options outstanding -- beginning of period....................... 169,163 164,997 374,226
Granted.......................................................... -- 217,563 357,433
Exercised........................................................ -- -- (6,427)
Cancelled........................................................ (4,166) (8,334) (24,999)
------- ------- ------------
Options outstanding -- end of period............................. 164,997 374,226 700,233
------- ------- ------------
------- ------- ------------
Option price or price ranges during period:
Granted.......................................................... $ -- $10.50 $14.00-26.25
Exercised........................................................ $ -- $ -- $10.50
Options exercisable at end of period............................. -- -- 186,876
------- ------- ------------
------- ------- ------------
</TABLE>

(11) RELATED PARTY TRANSACTIONS

In January 1993 and 1994, the Company executed credit agreements with
AMBAC. The credit agreement entered into in January 1994 replaced the prior
agreement and extended a revolving line of credit of $2.5 million (subject to
certain borrowing base limitations) at a rate based upon the prime rate of
Citibank, N.A. in New York, New York. The Company was also required to pay AMBAC
a commitment fee on the average daily unused portion of the line of credit at a
rate of 0.25% per annum. The Company utilized approximately $1.9 million of the
proceeds from its initial public offering to repay the outstanding borrowings
under the credit agreement. The credit agreement was terminated in May 1995.

Until August 1995, the Company maintained its business insurance, including
property, general liability, automobile, workers' compensation and fidelity and
fiduciary coverage (including officers' and directors' liability insurance)
through AMBAC, which purchased insurance coverage for the Company. The Company
was charged its pro rata share of premiums. The amounts of premiums paid to
AMBAC by the Company were $90,000, $72,000 and $89,000 for policy years 1993,
1994 and 1995, respectively.

AIC purchases information services from the Company. Such purchases totaled
$262,000, $288,000 and $250,000 during 1993, 1994 and 1995, respectively.

(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, trade accounts
receivable, other current assets, accounts payable, accrued expenses and capital
lease obligations approximates fair value because of the short-term maturity of
these instruments. The fair value of short-term investments is estimated based
on quoted market prices for these or similar investments. The Company has notes
receivable from and notes payable to individuals relating to certain of its
business acquisitions. It is not practicable to estimate the fair value of these
notes since they are not traded, no quoted values are readily available for
similar financial instruments and the Company believes it is not cost-effective
to have valuations performed. However, management believes that there has been
no permanent impairment in the value of such notes.

(13) NEW FINANCIAL ACCOUNTING STANDARDS

In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123"), was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation expense
in the income statement, or the pro forma effect on net income and earnings per
share of such compensation expense to be disclosed in the notes to the Company's
consolidated financial statements commencing with the Company's 1996 fiscal
year. The Company expects to adopt SFAS No. 123 on a disclosure basis only. As
such, implementation of SFAS No. 123 is not expected to impact the Company's
consolidated financial statements.

F-16

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of " ("SFAS No. 121"), was issued. This Statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles which are to be
disposed. Implementation of SFAS No. 121 is not expected to have a material
impact on the Company's consolidated financial statements.

(14) SUBSEQUENT EVENTS (UNAUDITED)

In May 1996, the Company acquired all of the outstanding capital stock of
Response Healthcare Information Management, Inc. ("Response") for approximately
$6,200,000 in cash. Response specializes in capturing and analyzing
point-of-care, patient-centered data relating to disease-specific outcomes
measurement, member/patient satisfaction and functional status, as well as the
development of Internet applications. Response's primary customers include
managed care organizations and pharmaceutical companies. At the date of the
acquisition, the Company recorded a non-recurring charge of $4,372,000 relating
to acquired in-process research and development costs.

On August 9, 1996, the Company acquired LBA Health Care Management, Inc.
("LBA") through the acquisition of all of the capital stock of its parent
company, HealthVISION, Inc., for approximately $130,000,000, $100,000,000 of
which is payable in cash and $30,000,000 of which is payable by the delivery of
492,961 shares of common stock of the Company. The Company utilized a
$100,000,000 bank credit facility to fund the cash portion of the purchase
price, which the Company intends to repay with the net proceeds of an offering
of its common stock soon after the date of acquisition. LBA is a provider of
health care information products and services that combine data collection,
benchmarking and decision support tools to identify and quantify cost reduction
and quality improvement opportunities in clinical settings.

F-17

<PAGE>
HCIA INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND JUNE 30, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
DEC. 31, JUNE 30,
1995 1996
-------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 3,190 $ 6,387
Short-term investments................................................................. 23,280 19,752
Trade accounts receivable, net of allowance for doubtful accounts of
$868 in 1996 and $454 in 1995....................................................... 16,623 24,531
Prepaid expenses and other current assets.............................................. 2,236 3,167
-------- -----------
Total current assets.............................................................. 45,329 53,837

Furniture and equipment, net............................................................. 6,576 7,554
Computer software costs, net............................................................. 11,012 15,086
Other intangible assets, net............................................................. 42,338 43,012
Deferred tax asset, net.................................................................. 3,090 3,697
Other.................................................................................... 56 868
-------- -----------
Total assets...................................................................... $108,401 $ 124,054
-------- -----------
-------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 732 $ 1,211
Accrued salaries, benefits and other liabilities....................................... 4,222 4,959
Capital lease obligations.............................................................. 174 116
Notes payable.......................................................................... 2,265 2,160
Income taxes payable................................................................... 1,098 1,413
Deferred revenue....................................................................... 1,167 2,007
-------- -----------
Total current liabilities......................................................... 9,658 11,866
Notes payable............................................................................ 699 --
-------- -----------
Total liabilities................................................................. 10,357 11,866
-------- -----------

Stockholders' equity:
Preferred stock -- $.01 par value; authorized 500,000; no shares
issued and outstanding in 1995 and 1996................................................
Common stock -- $.01 par value; 15,000,000 shares authorized; issued
and outstanding 9,274,387 as of June 30, 1996 and 8,955,932 as of
December 31, 1996...................................................................... 90 92
Additional paid-in capital............................................................... 102,882 116,141
Accumulated deficit...................................................................... (4,953) (3,989)
Cumulative unrealized (depreciation)/appreciation of short-term investments.............. 44 (32)
Cumulative effect of currency translation adjustment..................................... (19) (24)
-------- -----------
98,044 112,188
-------- -----------
Total liabilities and stockholders' equity............................................... $108,401 $ 124,054
-------- -----------
-------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-18

<PAGE>
HCIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revenue..................................................................................... $21,005 $30,718
Salaries, wages and benefits................................................................ 10,163 13,558
Other operating expenses.................................................................... 5,536 6,816
Depreciation................................................................................ 655 1,090
Amortization................................................................................ 2,305 3,716
Write-off of acquired in-process research and development costs............................. -- 4,372
------- -------
Operating income....................................................................... 2,346 1,166
Interest income............................................................................. 417 566
Interest expense............................................................................ (39) (142)
------- -------
Income before income taxes and minority interest in income of consolidated
subsidiaries.......................................................................... 2,724 1,590
Provision for income taxes.................................................................. (1,189) (626)
Minority interest in income of consolidated subsidiaries.................................... (28) --
------- -------
Net income............................................................................. $ 1,507 $ 964
------- -------
------- -------
Net income per share........................................................................ $ 0.21 $ 0.10
------- -------
------- -------
Shares used in per share calculation........................................................ 7,173 9,549
------- -------
------- -------
</TABLE>

See accompanying notes to consolidated financial statements.

F-19

<PAGE>
HCIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEAR ENDED DECEMBER 31, 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
CUMULATIVE
UNREALIZED CUMULATIVE
APPRECIATION/ EFFECT OF
ADDITIONAL (DEPRECIATION) OF CURRENCY TOTAL
COMMON PAID-IN ACCUMULATED SHORT-TERM TRANSLATION STOCKHOLDERS'
STOCK CAPITAL DEFICIT INVESTMENTS ADJUSTMENT EQUITY
------ ---------- ----------- ----------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994............ $ 54 $ 36,876 $(2,548) $ -- $(11) $ 34,371
------ ---------- ----------- ----- ----- -------------
Sale of common stock to the
public....................... 36 66,006 -- -- -- 66,042
Net loss....................... -- -- (2,405) -- -- (2,405)
Effect of currency translation
adjustment................... -- -- -- -- (8) (8)
Unrealized appreciation of
short-term investments....... -- -- -- 44 -- 44
------ ---------- ----------- ----- ----- -------------
BALANCE AT
DECEMBER 31, 1995............ 90 102,882 (4,953) 44 (19) 98,044
------ ---------- ----------- ----- ----- -------------
Exercise of stock options...... -- 503 -- -- -- 503
Sale of common stock to the
public....................... 2 12,756 -- -- -- 12,758
Net income..................... -- -- 964 -- -- 964
Effect of currency translation
adjustment................... -- -- -- -- (5) (5)
Unrealized (depreciation) of
short-term investments....... -- -- -- (76) -- (76)
------ ---------- ----------- ----- ----- -------------
BALANCE AT JUNE 30, 1996
(unaudited).................. $ 92 $ 116,141 $(3,989) $ (32) $(24) $ 112,188
------ ---------- ----------- ----- ----- -------------
------ ---------- ----------- ----- ----- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-20

<PAGE>
HCIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................... $ 1,507 $ 964
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 2,960 4,806
Write-off of acquired in-process research and development costs....................... -- 4,372
Deferred tax provision................................................................ -- (386)
Changes in operating assets and liabilities:
Accounts receivable................................................................. (2,206) (6,767)
Income taxes payable................................................................ 1,109 315
Prepaid expenses.................................................................... (308) (485)
Accounts payable.................................................................... 19 336
Accrued salaries, benefits and other liabilities.................................... (811) (110)
Deferred revenue.................................................................... (10) 629
Minority interest................................................................... 29 --
-------- --------
Net cash provided by operating activities........................................ 2,289 3,674
-------- --------
Cash flows from investing activities:
Purchases of furniture and equipment..................................................... (1,650) (2,369)
Cost of acquisitions, net of cash acquired............................................... (14,976) (6,782)
Computer software purchased or capitalized............................................... (2,684) (5,517)
Other intangible assets purchased or capitalized......................................... (453) (820)
Purchases of short-term investments...................................................... -- (45,329)
Proceeds from disposals of short-term investments........................................ -- 48,781
Other.................................................................................... (28) (812)
-------- --------
Net cash used in investing activities............................................ (19,791) (12,848)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options.................................................. -- 503
Proceeds from public offerings........................................................... 25,675 12,758
Borrowing from related party............................................................. 600 --
Repayments of notes payable.............................................................. (71) (804)
Repayments of related party borrowings................................................... (1,900) --
Principal payments on capital leases..................................................... (147) (81)
-------- --------
Net cash provided by (used in) financing activities.............................. 24,157 12,376
-------- --------
Impact of currency fluctuations on cash and cash equivalents............................... (4) (5)
-------- --------
Increase in cash and cash equivalents...................................................... 6,651 3,197
Cash and cash equivalents -- beginning of period........................................... 696 3,190
-------- --------
Cash and cash equivalents -- end of period................................................. $ 7,347 $ 6,387
-------- --------
-------- --------
Supplemental cash flow information -- cash paid during period for interest................. $ 79 $ 72
-------- --------
-------- --------
-- cash paid during period for income taxes............. $ -- $ 699
-------- --------
-------- --------
</TABLE>

See accompanying notes to consolidated financial statements.

F-21

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996
(UNAUDITED)

(1) BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of the Company have
been prepared in accordance with generally accepted accounting principles. In
the opinion of management, these statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position, results of operations, changes in stockholders'
equity and cash flows for the periods presented. The results of operations for
the six-month period ended June 30, 1996 may not be indicative of the results
that may be expected for the full year ending December 31, 1996. These financial
statements and notes should be read in conjunction with the financial statements
and notes included in the audited consolidated financial statements of the
Company for the year ended December 31, 1995 appearing elsewhere herein.

(2) CASH EQUIVALENTS

As of June 30, 1996, cash equivalents consist of highly liquid securities
with original maturities of three months or less at the date acquired by the
Company. The Company's short term investments consist of preferred stocks,
variable rate debenture bonds and municipal bonds.

F-22

<PAGE>
REPORT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS
LBA HEALTH CARE MANAGEMENT, INC.

We have audited the accompanying combined balance sheet of LBA Health Care
Management, Inc. and Healthcare Data Source, Inc. (collectively, the
"Predecessor Business") as of December 31, 1994, the combined statements of
operations and retained earnings, and cash flows for the Predecessor Business
for each of the years ended December 31, 1993 and 1994 and for the period from
January 1, 1995 through September 27, 1995, the balance sheet of LBA Health Care
Management, Inc. as of December 31, 1995, and the statements of operations and
retained earnings, and cash flows of LBA Health Care Management, Inc. for the
period from September 28, 1995 through December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of LBA Health Care
Management, Inc. and Healthcare Data Source, Inc. at December 31, 1994 and 1995,
the combined results of their operations and retained earnings, and their cash
flows for each of the years ended December 31, 1993, 1994 and for the period
from January 1, 1995 through September 27, 1995, and the financial position of
LBA Health Care Management, Inc. at December 31, 1995, and the results of its
operations and retained earnings, and its cash flows for the period from
September 28, 1995 through December 31, 1995 in conformity with generally
accepted accounting principles.

ERNST & YOUNG LLP

January 12, 1996, except Note 8
as to which the date is
July 30, 1996

F-23

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

BALANCE SHEETS
PREDECESSOR BUSINESS COMBINED BALANCE SHEET

<TABLE>
<CAPTION>
PREDECESSOR LBA HEALTH CARE
BUSINESS MANAGEMENT, INC.
------------ ----------------
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 232,181 $ 1,824,734
Accounts receivable............................................................ 1,689,854 2,018,297
Prepaid expenses and other current assets...................................... 162,148 197,643
------------ ----------------
Total current assets............................................................. 2,084,183 4,040,674

Deferred tax asset............................................................... -- 2,150,823
Building, equipment and furniture, net........................................... 865,864 1,012,501
Loan fees and closing costs, net................................................. -- 841,875
Intangibles, net................................................................. -- 44,033,921
------------ ----------------
Total assets..................................................................... $2,950,047 $ 52,079,794
------------ ----------------
------------ ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................... $ 10,017 $ 329,581
Accrued compensation and related liabilities................................... 854,814 210,165
Other accrued liabilities...................................................... -- 200,000
Customer advances.............................................................. 79,172 --
Accrued interest............................................................... -- 789,011
Deferred revenue............................................................... 261,834 --
Income taxes payable........................................................... -- 837,309
Current portion of long-term debt.............................................. 183,034 5,121,369
------------ ----------------
Total current liabilities........................................................ 1,388,871 7,487,435

Long-term debt, less current portion............................................. 136,736 30,984,065
Parent company payable........................................................... -- 15,978,181

Commitments and contingencies

STOCKHOLDERS' EQUITY:
LBA Health Care Management, Inc. common stock, $.01 par value; 100 shares
authorized, 100 shares issued and outstanding in 1995....................... -- 1
LBA common stock, no par value; 1,000,000 shares authorized, 650 shares issued
and outstanding in 1994..................................................... 129,766 --
HDS common stock, $1.00 par value; 10,000 shares authorized, issued and
outstanding in 1994......................................................... 10,000 --
Additional paid-in capital..................................................... 240,000 --
Treasury stock................................................................. (543,090) --
Retained earnings.............................................................. 1,587,764 (2,369,888)
------------ ----------------
Total stockholders' equity....................................................... 1,424,440 (2,369,887)
------------ ----------------
Total liabilities and stockholders' equity....................................... $2,950,047 $ 52,079,794
------------ ----------------
------------ ----------------
</TABLE>

See accompanying notes.

F-24

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
PREDECESSOR BUSINESS COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
LBA HEALTH CARE
PREDECESSOR BUSINESS MANAGEMENT, INC.
--------------------------------------------- ------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1995 SEPTEMBER 28, 1995
YEARS ENDED DECEMBER 31, THROUGH THROUGH
-------------------------- SEPTEMBER 27, DECEMBER 31,
1993 1994 1995 1995
----------- ----------- --------------- ------------------
<S> <C> <C> <C> <C>
Revenue....................................... $11,108,428 $12,470,708 $10,163,707 $ 6,453,677
Cost of revenue............................... 2,919,235 3,918,616 3,453,789 3,616,469
----------- ----------- --------------- ------------------
Gross profit.................................. 8,189,193 8,552,092 6,709,918 2,837,208

Operating expenses:
Product development......................... 487,250 450,944 420,512 49,846
Sales and marketing......................... 6,231,602 5,734,456 5,462,776 759,261
General and administrative.................. 1,280,222 1,453,120 1,247,578 3,285,856
Write-off of in-process technology.......... -- -- -- 1,580,000
----------- ----------- --------------- ------------------
Total operating expenses...................... 7,999,074 7,638,520 7,130,866 5,674,963
----------- ----------- --------------- ------------------
Operating income (loss)....................... 190,119 913,572 (420,948) (2,837,755)

Other income (expense):
Interest expense............................ (45,404) (35,834) (16,230) (854,181)
Interest income............................. 7,827 11,683 11,092 8,534
----------- ----------- --------------- ------------------
Total other income (expense).................. (37,577) (24,151) (5,138) (845,647)
----------- ----------- --------------- ------------------
Income (loss) before income taxes............. 152,542 889,421 (426,086) (3,683,402)
Benefit for income taxes...................... -- -- -- (1,313,514)
----------- ----------- --------------- ------------------
Net income (loss)............................. 152,542 889,421 (426,086) (2,369,888)
Beginning retained earnings................... 545,801 698,343 1,587,764 --
----------- ----------- --------------- ------------------
Ending retained earnings
(accumulated deficit)....................... $ 698,343 $ 1,587,764 $ 1,161,678 $ (2,369,888)
----------- ----------- --------------- ------------------
----------- ----------- --------------- ------------------
</TABLE>

See accompanying notes.

F-25

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

STATEMENTS OF CASH FLOWS
PREDECESSOR BUSINESS COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
LBA HEALTH CARE
PREDECESSOR BUSINESS MANAGEMENT, INC.
------------------------------------------- ------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1995 SEPTEMBER 28, 1995
YEARS ENDED DECEMBER 31, THROUGH THROUGH
------------------------ SEPTEMBER 27, DECEMBER 31,
1993 1994 1995 1995
--------- --------- --------------- ------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................. $ 152,542 $ 889,421 $ (426,086) $ (2,369,888)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 142,569 248,652 254,146 166,474
Amortization of intangibles...................... -- -- -- 4,813,997
Write-off of in-process technology............... -- -- -- 1,580,000
Deferred tax assets.............................. -- -- -- (2,150,823)
Changes in operating assets and liabilities:
Accounts receivable............................ 17,376 (841,353) 40,442 (368,885)
Prepaid expenses and other assets.............. 30,743 (130,399) (12,588) (22,907)
Accounts payable............................... (47,876) (3,041) (4,496) 323,873
Accrued compensation and related liabilities... 332,922 192,074 (682,140) 37,491
Other accrued liabilities...................... -- -- -- 200,000
Customer advances.............................. -- 79,172 64,805 (143,977)
Accrued interest............................... -- -- -- 789,011
Deferred revenue............................... (358,839) 101,733 1,494,374 (1,756,208)
Income taxes payable........................... -- -- -- 837,309
--------- --------- --------------- ------------------
Net cash provided by operating activities.......... 269,437 536,259 728,457 1,935,467
INVESTING ACTIVITIES
Purchases of building, equipment and furniture..... (203,300) (483,565) (163,259) (278,168)
Acquisition of LBA Health Care Management, Inc. and
Healthcare Data Source, Inc., less cash and cash
equivalents of $397,517.......................... -- -- -- (39,802,483)
--------- --------- --------------- ------------------
Net cash used in investing activities.............. (203,300) (483,565) (163,259) (40,080,651)
FINANCING ACTIVITIES
Proceeds from acquisition debt, net of loan fees... -- -- -- 35,000,000
Proceeds from sale of parent company stock in
relation to acquisition.......................... -- -- -- 5,000,000
Principal payments on debt......................... (189,086) (130,999) (192,183) (30,082)
Issuance of common stock in formation of HDS....... -- 250,000 -- --
--------- --------- --------------- ------------------
Net cash (used in) provided by financing
activities....................................... (189,086) 119,001 (192,183) 39,969,918
--------- --------- --------------- ------------------
Net (decrease) increase in cash.................... (122,949) 171,695 373,015 1,824,734
Cash at beginning of period........................ 183,435 60,486 232,181 --
--------- --------- --------------- ------------------
Cash at end of period.............................. $ 60,486 $ 232,181 $ 605,196 $ 1,824,734
--------- --------- --------------- ------------------
--------- --------- --------------- ------------------
Supplemental schedule of non-cash investing and
financing activities:
Issuance of parent company stock in relation to
acquisition, net of capital contribution....... $ -- $ -- $ -- $ 10,978,181
--------- --------- --------------- ------------------
--------- --------- --------------- ------------------
Cash paid for interest........................... $ 45,404 $ 35,834 $ 16,230 $ 65,170
--------- --------- --------------- ------------------
--------- --------- --------------- ------------------
Equipment and furniture obtained through capital
lease financing................................ $ 35,501 $ 57,318 $ 52,538 $ 147,455
--------- --------- --------------- ------------------
--------- --------- --------------- ------------------
</TABLE>

See accompanying notes.

F-26

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND 1994

1. THE COMPANY, ORGANIZATION AND BASIS OF PRESENTATION

On September 27, 1995, LBA Health Care Management, Inc. (the "Company")
acquired substantially all of the business, assets, and liabilities of LBA
Health Care Management, Inc. and Healthcare Data Source, Inc. (collectively, the
"Predecessor Business") pursuant to the terms of the Purchase Agreement dated
September 25, 1995 between HealthVISION, Inc., the parent of the Company, and
the Predecessor Business. The Company is now a wholly-owned subsidiary of
HealthVISION, Inc. The Company provides consulting and marketing services to
health care providers.

The aggregate purchase price (including closing costs) of the Predecessor
Business was $51,178,182. The acquisition was financed through $5,000,000 in
cash, the issuance of debt aggregating $35,000,000, and the issuance of
$10,978,182 of HealthVISION, Inc.'s, the parent company's, stock. The business
acquisition was accounted for by the purchase method and the results of
operations of the Predecessor Business are included in the Company's financial
statements beginning September 28, 1995. The allocation of the purchase price
was as follows:

<TABLE>
<S> <C>
Total purchase price............................................................. $51,178,182
Fair market value of net tangible assets acquired................................ (808,389)
-----------
Excess purchase price over fair market value of net tangible assets acquired
("excess purchase price")...................................................... $50,369,793
-----------
-----------
Allocation of excess purchase price:
Goodwill......................................................................... $19,079,793
Covenant-not-to-compete.......................................................... 13,700,000
Value enhancements............................................................... 9,310,000
Assembled work force............................................................. 3,000,000
Backlog.......................................................................... 3,700,000
In-process technology............................................................ 1,580,000
-----------
$50,369,793
-----------
-----------
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

Revenue is recognized ratably over the estimated time to complete a
contract which is six to twelve months in duration.

The Company has offered Value Enhancement systems to health care providers
throughout the United States. As part of the Value Enhancement Programs, the
Company has guaranteed that each customer will achieve cost savings. In the
event such cost savings are not achieved, the Company may be subject to claims
related to such guarantees. The Company or its predecessor did not incur any
such claims during the periods ended December 31, 1993, 1994 and 1995. No
reserves are maintained for any potential future claims.

ACCOUNTS RECEIVABLE

Receivable balances represent amounts due primarily from hospitals in the
United States for consulting work performed. The Company performs ongoing credit
evaluations of these companies and generally does not require collateral.

F-27

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
UNBILLED RECEIVABLES

Unbilled receivables represent recoverable costs and accrued profit related
to contracts on which revenue has been recognized, but billings have not been
presented to the customer.

INTANGIBLES

Intangibles reflect the allocation of excess purchase price resulting from
the acquisition of the Predecessor Business. Amortization is based upon the
periods of expected economic benefit which are as follows: goodwill -- 20 years,
covenants-not-to-compete -- 3 years, value enhancements -- 2.5 years,
backlog -- 1 year, and assembled workforce -- 3 years.

Acquired technology which is in process, has not reached technological
feasibility, and has no alternative future use is written-off in the period in
which it is acquired. The write-off of in-process technology was $1,580,000 for
the period September 28, 1995 through December 31, 1995.

Intangibles consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1995
------------------- -----------
<S> <C> <C>
Goodwill............................................................ $ -- $19,079,793
Covenant-not-to-compete............................................. -- 13,700,000
Value enhancements.................................................. -- 9,310,000
Assembled work force................................................ -- 3,000,000
Backlog............................................................. -- 3,700,000
------------------- -----------
-- 48,789,793
Less accumulated amortization....................................... -- (4,755,872)
------------------- -----------
Intangibles, net.................................................... $ -- $44,033,921
------------------- -----------
------------------- -----------
</TABLE>

Amortization has been expensed in the accompanying statements of operations
as cost of revenue of $1,911,033 and general and administrative of $2,844,839.

The Company performs evaluations as of each balance sheet date assessing
the recoverability and amortization of intangibles by determining whether the
intangibles can be recovered through the estimated undiscounted cash flows of
the businesses acquired over the remaining amortization period. The Company
considers external factors relating to each acquired business, including
technological advances, competition, regulatory developments and trends of the
businesses and other pertinent factors in making its assessment. The Company
does not believe there are currently any factors that would require an
adjustment to the carrying value of its intangibles or their remaining lives as
of December 31, 1995.

BUILDING, EQUIPMENT AND FURNITURE

Building, equipment and furniture are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets which are as follows:

<TABLE>
<S> <C>
Building.......................................................... 30 years
Office equipment.................................................. 4-5 years
Computer equipment................................................ 3 years
Furniture and fixtures............................................ 6 years
</TABLE>

F-28

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the 1995
presentation. Additionally, retained earnings at January 1, 1993 was restated to
properly account for a prior period adjustment in the amount of $518,940.

3. INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income
Taxes". Under Statement 109, the liability method is used to account for income
taxes. Under this method, deferred taxes and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

The Predecessor Business elected to be classified as an S corporation under
Section 1362 of the Internal Revenue Code for federal and state income tax
purposes. Accordingly, federal income taxes on any earnings were payable by the
Predecessor Business' stockholders and not the S corporations themselves; state
income taxes were immaterial and were payable by both the Predecessor Business
and its stockholders. The provision for income taxes for the years ended
December 31, 1993 and 1994 and for the period from January 1, 1995 through
September 27, 1995 were immaterial and are not separately disclosed in the
accompanying financial statements.

Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1995 are as follows:

<TABLE>
<S> <C>
Deferred tax liabilities:
Basis difference in acquired assets............................................. $ 153,532

Deferred tax assets:
Basis difference in acquired assets............................................. 2,304,355
Valuation allowance for deferred tax assets..................................... --
----------
Net deferred tax assets........................................................... $2,150,823
----------
----------
</TABLE>

F-29

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

3. INCOME TAXES -- Continued
Significant components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 28, 1995
THROUGH
DECEMBER 31, 1995
------------------
<S> <C>
Current:
Federal................................................. $ 694,354
State................................................... 142,955
------------------
Total current............................................. 837,309
Deferred:
Federal................................................. (1,783,609)
State................................................... (367,214)
------------------
Total deferred............................................ (2,150,823)
------------------
$ (1,313,514)
------------------
------------------
</TABLE>

4. BUILDING, EQUIPMENT AND FURNITURE

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Building............................................................ $ 184,022 $ --
Office equipment.................................................... 178,072 198,204
Computer equipment.................................................. 747,053 1,117,915
Furniture and fixtures.............................................. 308,955 559,380
---------- ----------
1,418,102 1,875,499
Less accumulated depreciation and amortization...................... (552,238) (862,998)
---------- ----------
Building, equipment and furniture, net.............................. $ 865,864 $1,012,501
---------- ----------
---------- ----------
</TABLE>

5. LONG-TERM DEBT

Long-term debt consists of the following at:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
-------- -----------
<S> <C> <C>
Revolving credit note payable pursuant to $25,750,000 Senior Credit Agreement with
senior bank (interest accrues at prime plus 0.50% for prime rate loans and at the
LIBOR rate plus 3.00% on $15,450,000 and 1.50% on $10,300,000); the Company's average
borrowing rate at December 31, 1995 was 8.3%; borrowings under agreement are payable
in quarterly installments of varying amounts through September 1999.................. $ -- $25,750,000
Note payable pursuant to $10,150,000 Subordinated Credit Agreement with bank (interest
accrues at the prime rate plus 0.50% for prime rate loans and at the LIBOR rate plus
1.50% for Eurodollar loans); the Company's average borrowing rate at December 31,
1995 was 7.6%; borrowings under agreement are payable in September 1999.............. -- 10,150,000
Notes payable resulting from common stock repurchases from former stockholders, bearing
interest at 8.9% per annum due in varying monthly installments plus interest through
September 1995....................................................................... 114,739 --
</TABLE>

F-30

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

5. LONG-TERM DEBT -- Continued

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
-------- -----------
<S> <C> <C>
Note payable bearing interest at 7.5% per annum payable in monthly installments plus
interest through January 2003........................................................ 93,032 --
Note payable bearing interest at 12% per annum payable in monthly installments plus
interest through November 1996....................................................... 22,557 11,256
Capital lease obligations bearing interest at rates ranging from 8 to 12% per annum
payable in varying monthly installments plus interest through September 1998......... 89,442 194,178
-------- -----------
319,770 36,105,434
Less current portion................................................................... (183,034) (5,121,369)
-------- -----------
Long-term debt......................................................................... $136,736 $30,984,065
-------- -----------
-------- -----------
</TABLE>

Future payments are due as follows for the periods ended December 31:

<TABLE>
<CAPTION>
NOTES CAPITAL LEASE
PAYABLE OBLIGATIONS
----------- -------------
<S> <C> <C>
1996........................................................ $ 5,011,256 $ 110,113
1997........................................................ 5,750,000 64,777
1998........................................................ 6,500,000 42,984
1999........................................................ 18,650,000 --
----------- -------------
Total minimum payments...................................... $35,911,256 217,874
-----------
-----------
Less amount representing interest........................... (23,696)
-------------
Present value of minimum payments........................... $ 194,178
-------------
-------------
</TABLE>

Equipment and furniture under capital leases at December 31, 1995 totaled
$329,813 ($185,067 at December 31, 1994) and is included in building, equipment
and furniture in the accompanying balance sheets. The related accumulated
amortization at December 31, 1995 totaled $87,957 ($98,544 at December 31,
1994). Amortization of assets recorded under capital leases is included in
depreciation expense.

LOAN FACILITIES

On September 27, 1995, the Company entered into a Senior Credit Agreement
by and between the Company and the senior bank. Subject to the terms and
conditions of the Senior Credit Agreement, the Company is entitled to borrow up
to $25,750,000 from the senior bank, on a revolving basis, through the maturity
date of the credit facility, which is September 1999. The Company's obligations
under the Senior Credit Agreement are secured by a security interest in favor of
the senior bank in substantially all of the assets of the Company. In addition,
HealthVISION, Inc., the parent of the Company, provided a security interest in
substantially all of its assets, including its shares of capital stock in
subsidiary and affiliated corporations, to secure the obligations of the Company
to the senior bank under the Senior Credit Agreement, and HealthVISION, Inc.
provided an unlimited guaranty in favor of the senior bank with respect to the
obligations of the Company under the Senior Credit Agreement. Similarly, another
subsidiary of HealthVISION, Inc. granted a security interest in substantially
all of its assets, including its shares of capital stock of its subsidiary and
affiliated corporations, to secure the obligations of the Company to the senior
bank under the Senior Credit Agreement, and an unlimited guaranty in favor of
the senior bank with respect to the obligations of the Company and the Senior
Credit Agreement.

F-31

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

5. LONG-TERM DEBT -- Continued
A second and subordinated credit facility in the amount of $10,150,000 was
entered into by and between the Company and a bank pursuant to a Credit
Agreement by and between the Company and a bank also dated September 27, 1995
(the "Subordinated Credit Agreement"). To secure these obligations, the Company
granted a security interest in substantially all of its assets in favor of the
bank. HealthVISION, Inc., the parent of the Company, granted a security interest
to the bank in its shares of capital stock in its subsidiaries and affiliates to
secure the obligations of the Company under the Subordinated Credit Agreement.
HealthVISION, Inc. also provided an unlimited guaranty of the Company's
obligations under the Subordinated Credit Agreement and major stockholders of
HealthVISION, Inc. provided limited guaranties in favor of the bank with respect
to the Company's obligations under the Subordinated Credit Agreement similar to
those provided for the senior bank. In addition, the bank received a $9,239,000
letter of credit bearing an interest rate of 1.5%, due quarterly, if the letter
of credit is outstanding, naming the bank as beneficiary.

The agreements contain certain restrictive covenants, including the
maintenance of certain financial ratios and limitations on additional
borrowings, mergers, acquisitions, dispositions and the payment of dividends.
The agreements also provide for additional payments of principal from excess
cash flow.

6. COMMITMENTS AND CONTINGENCIES

The Company leases substantially all of its office facilities under
noncancelable operating leases having initial terms greater than one year.
Future minimum lease payments under noncancelable operating leases are as
follows for the periods ended December 31:

Rent expense was $97,423 for the period from September 28, 1995 through
December 31, 1995 ($232,789 for the period from January 1, 1995 through
September 27, 1995 and $261,246 and $195,632 for the years ended December 31,
1994 and 1993, respectively).

The Predecessor Business maintained a $350,000 line of credit with a bank
that expires on January 20, 1996. There were no advances on the line of credit
as of December 31, 1995.

7. EMPLOYEE RETIREMENT AND SAVINGS PLAN

The Company has a qualified 401(k) savings plan (the "Plan"). Under the
Plan, 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 $18,842, $82,866, $86,512 and $81,070 for the period from
September 28, 1995 through December 31, 1995, the period from January, 1995
through September 27, 1995 and the years ended December 31, 1994 and 1993,
respectively.

8. SUBSEQUENT EVENT

On July 19, 1996, HealthVISION, Inc. entered into a definitive agreement to
sell the Company.

F-32

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS) -- PREDECESSOR BUSINESS)

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

8. SUBSEQUENT EVENT -- Continued
LEGAL PROCEEDINGS

The Company is currently a defendant to a civil complaint filed April 26,
1996, in the United States District Court of Colorado, by a former employee. The
complaint alleges that the former employee was unlawfully discharged from the
the Company. The Company believes that the suit is without merit and intends to
defend its position vigorously. While the ultimate outcome of this lawsuit can
not be determined at this time, management does not believe that this matter
will have a material adverse effect on the financial position, cash flows or
results of operations of the Company.

In connection with the purchase by HealthVISION, Inc. in September 1995 of
the assets of the predecessor of LBA, a current minority stockholder of
HealthVISION, Inc. threatened suit. The Company and certain other parties
executed an agreement on July 30, 1996, which, upon consummation of the
Company's contemplated transaction with HCIA Inc., will resolve any
disagreements between the parties as of that date and provides for a release of
all claims.

F-33

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS)-PREDECESSOR BUSINESS)

BALANCE SHEET

(UNAUDITED)

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 1,824,734 $ 1,591,344
Accounts receivable........................................................ 2,018,297 3,781,033
Prepaid expenses and other current assets.................................. 197,643 354,368
---------------- ----------------
Total current assets.................................................. 4,040,674 5,726,745
Deferred tax asset........................................................... 2,150,823 4,832,961
Equipment and furniture, net................................................. 1,012,501 1,539,189
Loan fees and closing costs, net............................................. 841,875 778,508
Intangibles, net............................................................. 44,033,921 35,902,522
---------------- ----------------
Total assets.......................................................... $ 52,079,794 $ 48,779,925
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 329,581 $ 151,828
Accrued compensation and related liabilities............................... 210,165 100,000
Other accrued liabilities.................................................. 200,000 --
Accrued interest........................................................... 789,011 --
Deferred revenue........................................................... -- --
Income taxes payable....................................................... 837,309 2,954,705
Current portion of long-term debt.......................................... 5,121,369 4,824,297
---------------- ----------------
Total current liabilities............................................. 7,487,435 8,030,830
Long-term debt, less current portion......................................... 30,984,065 28,217,680
Parent company payable....................................................... 15,978,181 15,978,181

Commitments

Stockholders' equity:
LBA Health Care Management, Inc. common stock, $.01 par value; 100 shares
authorized, 100 shares issued and outstanding in 1995 and 1996.......... 1 1
Accumulated deficit........................................................ (2,369,888) (3,446,767)
---------------- ----------------
Total stockholders' equity............................................ (2,369,887) (3,446,766)
---------------- ----------------
Total liabilities and stockholders' equity............................ 52,079,794 $ 48,779,925
---------------- ----------------
---------------- ----------------
</TABLE>

See accompanying notes.

F-34

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS)-PREDECESSOR BUSINESS)

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
PREDECESSOR BUSINESS COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(UNAUDITED)

<TABLE>
<CAPTION>
LBA HEALTH CARE
PREDECESSOR BUSINESS MANAGEMENT, INC.
---------------------- ----------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1995 JANUARY 1, 1996
THROUGH JUNE 30, 1995 THROUGH JUNE 30, 1996
---------------------- ----------------------
<S> <C> <C>
Revenue........................................................... $6,294,778 $ 14,422,205
Cost of revenue................................................... 2,447,545 8,349,869
---------------------- ----------------------
Gross profit...................................................... 3,847,233 6,072,336
Operating expenses:
Product development............................................. 121,500 19,436
Sales and marketing............................................. 2,755,930 1,218,239
General and administrative...................................... 584,219 5,045,442
---------------------- ----------------------
Total operating expenses................................... 3,461,649 6,283,117
---------------------- ----------------------
Operating income.................................................. 385,584 (210,781)
Other income (expense):
Interest expense................................................ (10,093) (1,464,957)
Interest income................................................. -- 34,117
---------------------- ----------------------
Total other income (expense)............................... (10,093) (1,430,840)
---------------------- ----------------------
Income (loss) before income taxes................................. 375,491 (1,641,621)
Benefit for income taxes.......................................... -- (564,742)
---------------------- ----------------------
Net income (loss)................................................. 375,491 (1,076,879)
Beginning retained earnings (accumulated deficit)................. 1,587,764 (2,369,888)
---------------------- ----------------------
Ending retained earnings (accumulated deficit).................... $1,963,255 $ (3,446,767)
---------------------- ----------------------
---------------------- ----------------------
</TABLE>

See accompanying notes.

F-35

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS)-PREDECESSOR BUSINESS)

STATEMENTS OF CASH FLOWS

(UNAUDITED)

<TABLE>
<CAPTION>
LBA HEALTH CARE
PREDECESSOR BUSINESS MANAGEMENT, INC.
---------------------- ----------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1995 JANUARY 1, 1996
THROUGH JUNE 30, 1995 THROUGH JUNE 30, 1996
---------------------- ----------------------
<S> <C> <C>
Operating activities
Net income (loss)................................................. $ 375,491 $ (1,076,879)
Adjustments to reconcilie net income (loss) to net cash provided
by operating activities:
Depreciation and amortization................................ 170,000 298,177
Amortization of intangibles.................................. -- 8,194,766
Gain on sale of equipment.................................... -- (25,092)
Deferred tax assets.......................................... -- (2,682,138)
Changes in operating assets and liabilities:
Accounts receivable........................................ 387,146 (1,762,736)
Prepaid expenses and other assets.......................... (8,329) (156,725)
Accounts payable........................................... 2,932 (177,753)
Accrued compensation and related liabilities............... (841,902) (110,165)
Other accrued liabilities.................................. -- (200,000)
Customer advances.......................................... (79,172) --
Accrued interest........................................... -- (789,011)
Deferred revenue........................................... 655,358 --
Income taxes payable....................................... -- 2,117,396
------------ ----------------------
Net cash provided by operating activities......................... 661,524 3,629,840

Investing activities
Purchases of equipment and furniture.............................. (124,233) (827,373)
Proceeds from sale of equipment................................... -- 27,600
------------ ----------------------
Net cash used in investing activities............................. (124,233) (799,773)

Financing activities
Principal payments on debt........................................ (57,331) (3,063,457)
------------ ----------------------
Net cash used in financing activities............................. (57,331) (3,063,457)
------------ ----------------------
Net (decrease) increase in cash................................... 479,960 (233,390)
Cash at beginning of period....................................... 232,181 1,824,734
------------ ----------------------
Cash at end of period............................................. $ 712,141 $ 1,591,344
------------ ----------------------
------------ ----------------------
Supplemental schedule of non-cash investing and financing
activities:
Cash paid for interest....................................... $ 10,093 $ 2,253,968
------------ ----------------------
------------ ----------------------
Equipment and furniture obtained through capital lease
financing.................................................. $ 28,406 $ --
------------ ----------------------
------------ ----------------------
</TABLE>

F-36

<PAGE>
LBA HEALTH CARE MANAGEMENT, INC.
(FORMERLY LBA HEALTH CARE MANAGEMENT, INC. (LBA)
AND HEALTHCARE DATA SOURCE, INC. (HDS)-PREDECESSOR BUSINESS)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1995 AND 1996

1. THE COMPANY, ORGANIZATION AND BASIS OF PRESENTATION

On September 27, 1995, LBA Health Care Management, Inc. (the "Company")
acquired substantially all of the business, assets, and liabilities of LBA
Health Care Management, Inc. and Heathcare Data Source, Inc. (collectively, the
"Predecessor Business") pursuant to the terms of the Purchase Agreement dated
September 25, 1995 between HealthVISION, Inc., the parent of the Company and the
Predecessor Business. The Company is now a wholly owned subsidiary of
HealthVISION, Inc. The Company provides consulting and marketing services to
health care providers.

The aggregate purchase price (including closing costs) of the Predecessor
Business was $51,178,182. The acquisition was financed through $5,000,000 in
cash, the issuance of debt aggregating $35,000,000, and the issuance of
$10,978,182 of HealthVISION, Inc.'s stock. The business acquisition was
accounted for by the purchase method and the results of operations of the
Predecessor Business are included in the Company's financial statements for the
six months ended June 30, 1996. The allocation of the purchase price was as
follows:

<TABLE>
<S> <C>
Total purchase price........................................................... $51,178,182
Fair market value of net tangible assets acquired.............................. (808,389)
-----------
Excess purchase price over fair market value of net tangible assets
acquired ("excess purchase price")........................................... $50,369,793
-----------
-----------

Allocation of excess purchase price:

Goodwill....................................................................... $19,079,793
Covenant-not-to-compete........................................................ 13,700,000
Value enhancements............................................................. 9,310,000
Assembled work force........................................................... 3,000,000
Backlog........................................................................ 3,700,000
In-process technology.......................................................... 1,580,000
-----------
$50,369,793
-----------
-----------
</TABLE>

2. INTERIM FINANCIAL INFORMATION

The financial information at June 30, 1996 and for the six-month periods ended
June 30, 1995 and 1996 is unaudited but includes all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the financial position at such date and of the operating
results and cash flows for such periods. The results for the interim periods are
not necessarily indicative of results expected for the entire year ended
December 31, 1996.

These interim financial statements should be read in conjunction with the
summary of significant accounting policies and notes to the financial statements
included in the Company's December 31, 1995 financial statements included
elsewhere in this Registration Statement.

3. INTANGIBLE AMORTIZATION

Amortization has been expensed in the accompanying statements of operations as
cost of revenue of $3,698,334 and general and administrative of $4,430,065.

F-37

<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma consolidated balance sheets and
statements of operations have been derived from the Company's balance sheets as
of December 31, 1995 and June 30, 1996 and the statements of operations for the
year ended December 31, 1995 and the six months ended June 30, 1996. Adjustments
have been made to such information to give effect to (i) the April 28, 1995
acquisition of all of the outstanding capital stock of Datis, (ii) the December
15, 1995 acquisition of the CHAMP unit of Mercer, (iii) the November 29, 1995
acquisition of the minority interest in CHKS, (iv) the May 14, 1996 acquisition
of all of the capital stock of Response, and (v) the August 9, 1996 acquisition
of LBA, as if such acquisitions had occurred immediately before the beginning of
the periods presented. Adjustments have also been made to give effect to the
Offering and the application of the estimated net proceeds to the Company
therefrom.

The following unaudited pro forma statement of operations is not
necessarily indicative of future results of operations of the Company or the
results which would have resulted had the operations and management of the
Company, Datis, the CHAMP unit of Mercer, the minority interest in CHKS,
Response and LBA been combined during the periods presented. In addition, the
pro forma results are not intended to be a projection of future results. The
unaudited consolidated pro forma statement of operations should be read in
conjunction with the financial statements of Datis, the CHAMP unit of Mercer and
LBA, including the notes thereto, and the consolidated financial statements of
the Company, including the notes thereto, included elsewhere herein.

F-38

<PAGE>
HCIA INC. AND SUBSIDIARIES

PRO FORMA BALANCE SHEET

AS OF DECEMBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
RESPONSE LBA
PRO FORMA PRO FORMA OFFERING PRO FORMA,
HCIA RESPONSE LBA COMBINED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents....... $ 3,190 $ 517 $ 1,824 $ 5,531 $ -- $ -- $ 5,531 $ -- $ 5,531
Short-term
investments......... 23,280 -- -- 23,280 (6,200)(11) (14,600)(17) 2,480 17,052(22) 19,532
Trade accounts
receivable.......... 16,623 482 2,018 19,123 (35)(12) -- 19,088 -- 19,088
Prepaid expenses.... 2,236 354 198 2,788 -- -- 2,788 -- 2,788
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
Total current
assets.......... 45,329 1,353 4,040 50,722 (6,235) (14,600) 29,887 17,052 57,987

Furniture and
equipment, net........ 6,576 319 1,013 7,908 -- -- 7,908 -- 7,908
Computer software
costs, net............ 11,012 -- -- 11,012 182(10) -- 11,194 -- 11,194
Other intangible
assets................ 42,338 81 44,034 86,453 463(10) 20,257(16)(19) 108,036 -- 107,173
Net deferred tax
asset................. 3,090 221 2,151 5,462 -- 18,183(18) 23,645 -- 23,645
Other................. 56 170 842 1,068 (170)(12) -- 898 -- 898
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
Total assets.... $108,401 $2,144 $52,080 $162,625 $(5,760) $ 23,840 $180,705 $ 17,052 $ 209,668
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.... $ 732 $ 82 $ 330 $ 1,144 $ -- $ -- $ 1,144 $ -- $ 1,144
Accrued salaries,
benefits and other
liabilities....... 4,222 39 1,199 5,460 584(12) -- 6,044 -- 6,044
Capital lease
obligations......... 174 26 -- 200 -- -- 200 -- 200
Notes payable....... 2,265 -- 5,122 7,387 -- 4,878(17) 12,265 (10,000)(22) 2,265
Income taxes
payable............. 1,098 -- 837 1,935 -- -- 1,935 -- 1,935
Deferred revenue.... 1,167 25 -- 1,192 -- -- 1,192 -- 1,192
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
Total current
liabilities... 9,658 172 7,488 17,318 584 4,878 22,780 (10,000) 12,780

Notes payable......... 699 250 46,963 47,912 (250)(12) 29,037(17) 76,699 (76,000)(22) 699
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
Total
liabilities..... 10,357 422 54,451 65,230 334 33,915 99,479 (86,000) 13,479
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
Stockholders' equity:
Common stock -- $.01
par value;
15,000,000 shares
authorized;
8,955,932 shares
outstanding as of
December 31,
1995.............. 90 10 -- 100 (10)(14) 5(21) 95 20(22) 115
Additional paid in
capital........... 102,882 3,119 -- 106,001 (3,119)(14) 28,710(21) 131,592 103,032(22) 234,624
Accumulated
deficit............. (4,953) (638) (2,371) (7,962) (3,734)(14) (38,790)(21) (50,486) -- (50,486)
Treasury stock...... -- (769) -- (769) 769(14) -- -- -- --
Cumulative
unrealized
depreciation...... 44 -- -- 44 -- -- 44 -- 44
Cumulative effect of
currency
translation
adjustment........ (19) -- -- (19) -- -- (19) -- (19)
-------- -------- ------- -------- ----------- ----------- --------- ----------- ----------
Total
stockholders'
equity.......... 98,044 1,722 (2,371) 97,395 (6,094) (10,075) 81,226 103,052 184,278
-------- -------- ------- -------- ----------- ----------- --------- ----------- ----------
Total
liabilities
and
stockholders'
equity........ $108,401 $2,144 $52,080 $162,625 $(5,760) $ 23,840 $180,705 $ 17,052 $ 197,757
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
-------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
</TABLE>

F-39

<PAGE>
HCIA INC. AND SUBSIDIARIES

PRO FORMA BALANCE SHEET

AS OF JUNE 30, 1996
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
LBA
PRO FORMA OFFERING PRO FORMA,
HCIA LBA COMBINED ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 6,387 $ 1,591 $ 7,978 $ -- $ 7,978 $ -- $ 7,978
Short-term investments........................ 19,752 -- 19,752 (14,600)(17) 5,152 17,052(22) 22,204
Trade accounts receivable..................... 24,531 3,781 28,312 -- 28,312 -- 28,312
Prepaid expenses.............................. 3,167 354 3,521 -- 3,521 -- 3,521
-------- ------- -------- ----------- --------- ----------- -----------
Total current assets...................... 53,837 5,726 59,563 (14,600) 44,963 17,052 217,867

Furniture and equipment, net................... 7,554 1,539 9,093 -- 9,093 -- 9,093
Computer software costs, net................... 15,086 -- 15,086 -- 15,086 -- 15,086
Other intangible assets........................ 43,012 35,903 78,915 27,943(16)(19) 106,858 -- 106,858
Net deferred tax asset......................... 3,697 4,833 8,530 15,501(18) 24,031 -- 24,031
Other.......................................... 868 779 1,647 -- 1,647 -- 1,647
-------- ------- -------- ----------- --------- ----------- -----------
Total assets.............................. $124,054 $48,780 $172,834 $ 28,844 $201,678 $ 28,100 $ 229,778
-------- ------- -------- ----------- --------- ----------- -----------
-------- ------- -------- ----------- --------- ----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 1,211 $ 152 $ 1,363 $ -- $ 1,363 $ -- $ 1,363
Accrued salaries, benefits and other
liabilities................................. 4,959 100 5,059 -- 5,059 -- 5,059
Capital lease obligations..................... 116 -- 116 -- 116 -- 116
Notes payable................................. 2,160 4,824 6,984 5,176(17) 12,160 (10,000)(22) 2,160
Income taxes payable.......................... 1,413 2,955 4,368 -- 4,368 -- 4,368
Deferred revenue.............................. 2,007 -- 2,007 -- 2,007 -- 2,007
-------- ------- -------- ----------- --------- ----------- -----------
Total current liabilities................. 11,866 8,031 19,897 5,176 25,073 (10,000) 15,073

Notes payable.................................. -- 44,196 44,196 31,804(17) 76,000 (76,000)(22) --
-------- ------- -------- ----------- --------- ----------- -----------
Total liabilities......................... 11,866 52,227 64,093 36,980 101,073 (86,000) 15,073
-------- ------- -------- ----------- --------- ----------- -----------
Stockholders' equity:
Common stock -- $.01 par value; 15,000,000
shares authorized; 11,767,350 shares
outstanding as of June 30, 1996............. 92 -- 92 5(21) 97 20(22) 117
Additional paid in capital.................... 116,141 -- 116,141 28,710(21) 144,851 103,032(22) 247,883
Accumulated deficit........................... (3,989) (3,447) (7,436) (37,714)(21) (45,150) -- (45,150)
Cumulative unrealized depreciation............ (32) -- (32) -- (32) -- (32)
Cumulative effect of currency translation
adjustment.................................. (24) -- (24) -- (24) -- (24)
-------- ------- -------- ----------- --------- ----------- -----------
Total stockholders' equity................ 112,188 (3,447) 108,741 (8,999) 99,742 103,032 202,794
-------- ------- -------- ----------- --------- ----------- -----------
Total liabilities and stockholders'
equity..................................$124,054 $48,780 $172,834 $ 27,981 $200,815 $ 17,052 $ 217,867
-------- ------- -------- ----------- --------- ----------- -----------
-------- ------- -------- ----------- --------- ----------- -----------
</TABLE>

F-40

<PAGE>

HCIA INC. AND SUBSIDIARIES

PRO FORMA STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
LBA DATIS CHAMP
PREDECESSOR PRO FORMA PRO FORMA
HCIA DATIS CHAMP RESPONSE BUSINESS LBA COMBINED ADJUSTMENTS ADJUSTMENTS
------- ------- ------ -------- ----------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... $48,015 $ 1,864 $7,189 $2,537 $10,164 $ 6,454 $76,223 $-- $ --
Salaries, wages and benefits..... 21,932 1,389 4,555 1,692 4,396 2,083 36,047 -- --
Other operating expenses......... 12,055 1,301 2,270 1,483 5,933 648 23,690 -- --
Depreciation..................... 1,619 222 -- 67 256 167 2,331 -- --
Amortization..................... 5,245 -- 70 10 -- 4,814 10,139 265(1) 523(3)
Write-off of acquired in-process
research and development
costs........................... 12,152 -- -- -- -- 1,580 13,732 -- (12,152)(4)
------- ------- ------ -------- ----------- ------- -------- ----- -----------

Operating income (loss).......... (4,988) (1,048) 294 (715) (421) (2,838) (9,716) (265) 11,629

Interest income.................. 1,290 -- -- 65 11 9 1,375 -- --
Interest expense................. (187) (27) -- -- (16) (854) (1,084) -- --
------- ------- ------ -------- ----------- ------- -------- ----- -----------

Income (loss) before income taxes
and minority interest in income
of consolidated subsidiaries.... (3,885) (1,075) 294 (650) (426) (3,683) (9,425) (265) 11,629
Benefit (provision) for income
taxes........................... 1,554 -- -- 225 -- 1,313 3,092 430(2) (4,769)(5)
Minority interest in income of
consolidated subsidiaries....... (74) -- -- -- -- -- (74) -- --
------- ------- ------ -------- ----------- ------- -------- ----- -----------
Net income (loss)................ $(2,405) $(1,075) $ 294 $ (425) $ (426) $(2,370) $(6,407) $ 165 $ 6,860
------- ------- ------ -------- ----------- ------- -------- ----- -----------
------- ------- ------ -------- ----------- ------- -------- ----- -----------

Net income (loss) per share...... $ (0.31)
-------
-------

Shares used in per share
calculation..................... 7,733
-------
-------

<CAPTION>
CHKS RESPONSE LBA
PRO FORMA PRO FORMA PRO FORMA PRO OFFERING PRO FORMA,
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.......................... $-- $-- $-- $76,223 $-- $76,223
Salaries, wages and benefits..... -- -- (4,100)(15) 31,947 -- 31,947
Other operating expenses......... -- -- -- 23,690 -- 23,690
Depreciation..................... -- -- -- 2,331 -- 2,331
Amortization..................... 181(6) 94(10) 330(16) 11,532 -- 11,532
Write-off of acquired in-process
research and development
costs........................... -- -- (1,580)(16) -- -- --
----- ----- ----------- ------- ----------- -----------
Operating income (loss).......... (181) (94) 5,350 6,723 -- 6,723
Interest income.................. -- (116)(11) (262)(17) 997 262(23) 1,259
Interest expense................. (200)(7) -- (6,677)(17) (7,961) 7,525(23) (436)
----- ----- ----------- ------- ----------- -----------
Income (loss) before income taxes
and minority interest in income
of consolidated subsidiaries.... (381) (210) (1,589) (241) 7,787 7,546
Benefit (provision) for income
taxes........................... 80(8) 46(13) 296(20) (825) (3,115)(24) (3,940)
Minority interest in income of
consolidated subsidiaries....... 74(9) -- -- -- -- --
----- ----- ----------- ------- ----------- -----------
Net income (loss)................ $(227) $ (164) $(1,293) (1,066) 4,672 $ 3,606
----- ----- ----------- ------- ----------- -----------
----- ----- ----------- ------- ----------- -----------
Net income (loss) per share...... $ 0.34
-----------
-----------
Shares used in per share
calculation..................... 10,572
-----------
-----------
</TABLE>

See accompanying notes to pro forma financial statements.

F-41

<PAGE>
HCIA INC. AND SUBSIDIARIES

PRO FORMA STATEMENT OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
RESPONSE
FOR THE
PERIOD
JAN. 1,
1996- RESPONSE LBA
MAY 15, PRO FORMA PRO FORMA OFFERING PRO FORMA,
HCIA 1996 LBA COMBINED ADJUSTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $30,718 $1,008 $14,422 $46,148 $-- $-- $46,148 $-- $46,148

Salaries, wages and
benefits............. 13,558 905 4,459 18,922 -- -- 18,922 -- 18,922
Other operating
expenses............. 6,816 691 1,681 9,188 -- -- 9,188 -- 9,188
Depreciation........... 1,090 34 298 1,422 -- -- 1,422 -- 1,422
Amortization........... 3,716 5 8,195 11,916 47(10) (5,623)(16) 6,340 -- 6,340
Write-off of acquired
in-process research
and development
costs................ 4,372 -- -- 4,372 (4,372) -- -- --
------- -------- ------- -------- ----------- ----------- --------- ----------- -----------

Operating income
(loss)............... 1,166 (627) (211) 328 4,325 5,623 10,276 -- 10,276

Interest income........ 566 14 34 614 (142)(11) (350)(17) 122 350(23) 472
Interest expense....... (142) (10) (1,465) (1,617) -- (2,298)(17) (3,915) 3,763(23) (152)
------- -------- ------- -------- ----------- ----------- --------- ----------- -----------

Income (loss) before
income taxes and
minority interest in
income of
consolidated
subsidiaries......... 1,590 (623) (1,642) (675) 4,183 2,975 6,483 4,113 10,596
Benefit (provision) for
income taxes......... (626) 218 565 157 (1,481)(13) (1,325)(20) (2,648) (1,645)(24) (4,294)
Minority interest in
income of
consolidated
subsidiaries......... -- -- -- -- -- -- -- -- --
------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
Net income (loss)...... $ 964 $ (405) $(1,077) $ (518) $ 2,703 $ 1,650 $ 3,835 $ 2,468 $ 6,302
------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
------- -------- ------- -------- ----------- ----------- --------- ----------- -----------
Net income per share... $ 0.10 $ 0.52
------- -----------
------- -----------
Shares used in per
share calculation.... 9,549 12,042
------- -----------
------- -----------
</TABLE>

See accompanying notes to pro forma financial statements.

F-42

<PAGE>
HCIA INC. AND SUBSIDIARIES

NOTES TO PRO FORMA FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND MARCH 31, 1996
(UNAUDITED)

(1) PRO FORMA ADJUSTMENTS

In preparing the accompanying pro forma financial statements, the following
adjustments have been made:

DATIS ACQUISITION

(1) Reflects the additional amortization of intangible assets recorded
as a result of the allocation of the purchase price. These intangible
assets and their lives are as follows:

<TABLE>
<S> <C> <C>
Software................................................. $ 233,000 5 years
Databases................................................ $ 17,000 5 years
Goodwill................................................. $ 16,485,000 20 years
</TABLE>

(2) Reflects the benefit of the Datis tax losses which are offset by
the taxable income of the Company.

CHAMP ACQUISITION

(3) Reflects the additional amortization of intangible assets recorded
as a result of the allocation of the purchase price. These intangible
assets and their lives are as follows:

<TABLE>
<S> <C> <C>
Software................................................. $ 859,000 5 years
Trade Name............................................... $ 1,266,000 12 years
Assembled Work Force..................................... $ 1,102,000 12 years
Customer Base............................................ $ 595,000 12 years
Goodwill................................................. $ 1,526,000 12 years
</TABLE>

(4) Reflects the reversal of the non-recurring write-off of acquired
in-process research and development costs.

(5) Reflects the tax provision related to CHAMP operations and the tax
effects of pro forma adjustments described in notes 3 and 4 above.

CHKS ACQUISITION

(6) Reflects the additional amortization of goodwill recorded as a
result of the allocation of the purchase price over a period of 15 years.

(7) Reflects the interest expense related to the notes payable issued
in connection with the purchase.

(8) Reflects the tax benefit of the pro forma adjustment described in
note 7 above.

(9) Reflects the reversal of the minority interest.

F-43

<PAGE>
(1) PRO FORMA ADJUSTMENTS -- Continued
RESPONSE ACQUISITION

(10) Reflects the impact of the allocation of the purchase price to
intangible assets and the additional amortization expense recorded as a
result of the allocation. These assets and their lives are as follows:

Software $182,000 5 years
Assembled Work Force $133,000 12 years
Customer Base $393,000 12 years
Goodwill $205,039 15 years

(11) Reflects the reduction of short-term investments and the related
interest income which would have occurred had the Response acquisition been
funded out of the Company's existing short-term investments.

(12) Reflects the reduction of certain assets to their estimated
realizable value and the recording of certain liabilities related to the
acquisition and the repayment of certain debt in accordance with the
acquisition agreement.

(13) Reflects the tax benefits of the pro forma adjustments described
in note 11 above.

(14) Reflects the elimination of historical stockholder equity.

LBA ACQUISITION

(15) To record the salaries, wages and benefits payable to certain
executives of LBA as if the compensation arrangements in effect with these
employees subsequent to the acquisition were in place at the beginning of
the period presented.

(16) Reflects the reversal of intangible assets and amortization
expense recorded on the prior basis of accounting, the write-off of
acquired in process research and development costs and the recording of
intangible assets and additional amortization of intangible assets as a
result of the allocation of the purchase price. These assets and their
lives are as follows:

Software and technology $13,435,000 6 years
Assembled Work Force $ 4,080,000 10 years
Customer Base $ 5,178,000 10 years
Goodwill $37,170,000 20 years

(17) Reflects the reduction of short-term investments, additional debt
and additional interest expense which would have resulted had the
acquisition occurred at the beginning of the period.

(18) Reflects the debt acquisition costs incurred in connection with
the debt.

(19) Reflects the value of acquired tax net operating loss
carryforwards.

(20) Reflects the tax benefits of the pro forma adjustments described
in notes 15, 16 and 17 above.

(21) Reflects the elimination of historical stockholder equity,
including a one-time charge related to acquired in-process research and
development costs of approximately $41.2 million, and the issuance of
stock in connection with the LBA acquisition.

OFFERING ADJUSTMENTS

(22) Reflects the receipt and application of the net proceeds of the
offering to the Company at the offering price of $54 1/8 per share.

(23) Reflects the reversal of interest expense and additional interest
income which would have occurred had the offering occurred at the beginning
of the periods presented.

(24) Reflects the tax benefits of the pro forma adjustments described
in note 23 above.

(2) NET INCOME PER SHARE

The number of shares used to calculate net income per share is determined
based on the weighted average number of shares outstanding using the treasury
stock method for outstanding stock options. In the columns of the statement
reflecting net income for the period, the weighted average number of shares
includes the impact of using the treasury stock method for outstanding stock
options as such stock options are dilutive to earnings per share. In the columns
reflecting a loss for the period, the impact of the outstanding stock options is
not included in the calculation of weighted average shares outstanding as such
options are antidilutive.

F-44

<PAGE>

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Price Range of Common Stock.................... 9
Dividend Policy................................ 9
Use of Proceeds................................ 10
Capitalization................................. 10
Selected Consolidated Financial Data........... 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 13
Business....................................... 20
Management..................................... 28
Principal and Selling Stockholders............. 32
Underwriting................................... 33
Legal Matters.................................. 34
Experts........................................ 34
Additional Information......................... 35
Incorporation of Certain Information by
Reference.................................... 36
Index to Financial Statements.................. F-1
</TABLE>

2,216,696 SHARES
[HCIA Logo]
COMMON STOCK

---------------------------

PROSPECTUS
---------------------------

MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY

August 13, 1996