HEALTHCARE RECOVERIES INC, S-1/A, 1997-05-19

HEALTHCARE RECOVERIES INC
S-1/A, 1997-05-19
HEALTH SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1997

REGISTRATION NO. 333-23287
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
---------------------

AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------

HEALTHCARE RECOVERIES, INC.
(Exact Name of Applicant as Specified in Charter)
---------------------

<TABLE>
<S> <C> <C>
DELAWARE 7322 61-1141758
(state or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) identification number)
</TABLE>

1400 WATTERSON TOWER
LOUISVILLE, KENTUCKY 40218
(502) 454-1340
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
---------------------
PATRICK B. MCGINNIS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1400 WATTERSON TOWER
LOUISVILLE, KENTUCKY 40218
(502) 454-1340
(Name, address, including zip code and telephone number, including area code of
agent for service)
---------------------
Copies to:

<TABLE>
<C> <C>
ROBERT W. MILLER GARY L. SELLERS
KING & SPALDING SIMPSON THACHER & BARTLETT
191 PEACHTREE STREET 425 LEXINGTON AVENUE
ATLANTA, GEORGIA 30303 NEW YORK, NEW YORK 10017
(404) 572-4600 (212) 455-2000
</TABLE>

---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of the Registration Statement.
---------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. []
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. []
-------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
--------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
====================================================================================================
PROPOSED
MAXIMUM AMOUNT OF
AGGREGATE REGISTRATION
TITLE OF CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.001 per share..................... $169,050,000 $51,227.27
====================================================================================================
</TABLE>

(1) Calculated in accordance with Rule 457(o).

(2) The Company previously paid the Registration Fee.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2

HEALTHCARE RECOVERIES, INC.
---------------------

CROSS-REFERENCE SHEET SHOWING THE LOCATION IN THE
PROSPECTUS OF CERTAIN ITEMS OF FORM S-1

<TABLE>
<CAPTION>
ITEM NO. LOCATION IN PROSPECTUS
-------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front Cover Page; Outside Back Cover
Page; Available Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal and Selling Stockholder
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................. Outside Front Cover Page; Dividend Policy;
Capitalization; Prospectus Summary;
Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Independent Public
Accountants
11. Information with Respect to the
Registrant................................. Outside Front Cover Page; Prospectus
Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Principal and Selling Stockholder; Certain
Transactions; Description of Capital Stock;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ *
</TABLE>

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

* Item is omitted because response is negative or item is inapplicable.
<PAGE> 3

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus; one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in a concurrent international offering (the
"International Prospectus"). The two prospectuses will be identical in all
respects except for the front and back cover pages.

The form of the U.S. Prospectus is included herein and the form of the
front cover page and back cover page of the International Prospectus follows the
back cover page of the U.S. Prospectus.
<PAGE> 4

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 19, 1997

PROSPECTUS
9,800,000 SHARES
[HEALTHCARE RECOVERIES, INC. LOGO]
HEALTHCARE RECOVERIES, INC.

COMMON STOCK
------------------------------

All of the shares of Common Stock, par value $.001 per share (the "Common
Stock"), of Healthcare Recoveries, Inc. ("HRI" or the "Company") offered hereby
are being sold by its sole stockholder, Medaphis Corporation ("Medaphis" or the
"Selling Stockholder"). The Company will not receive any of the proceeds from
the sale of Common Stock by the Selling Stockholder. The Company will receive
the proceeds of the sale of Common Stock to the extent the Underwriters exercise
their over-allotment option.
A total of 7,840,000 shares (the "U.S. Shares") are being offered in the
United States and Canada (the "U.S. Offering") by the U.S. Underwriters and
1,960,000 shares (the "International Shares") are being offered outside the
United States and Canada (the "International Offering") by the Managers. The
initial public offering price and the underwriting discount per share are
identical for both the U.S. Offering and the International Offering
(collectively, the "Offering").
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
of the Common Stock will be between $13.00 and $15.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Common Stock has been approved for
inclusion in the Nasdaq National Market under the symbol "HCRI", subject to
notice of issuance.
------------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------------

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>
=======================================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING SELLING PROCEEDS TO
PUBLIC DISCOUNT(1) STOCKHOLDER(2) COMPANY(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $ $
=======================================================================================================================
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the U.S.
Underwriters and the Managers (collectively the "Underwriters").
(2) Before deducting expenses payable by the Selling Stockholder, estimated at
$655,655. If the over-allotment option described below is exercised, the
Company will pay a pro-rata portion of such expenses.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,470,000 shares of Common Stock solely to cover over-allotments, if any. If
the option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------------

The U.S. Shares are offered by the several U.S. Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them and subject to
certain conditions, including the approval of certain legal matters by counsel.
The U.S. Underwriters reserve the right to withdraw, cancel or modify the U.S.
Offering and to reject orders in whole or in part. It is expected that delivery
of the U.S. Shares will be made against payment therefor on or about
, 1997, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York,
New York 10167.
------------------------------

BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.

THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 5

[FLOW CHART OF THE SUBROGATION PROCESS]

See "Business -- The Recovery Process" for a detailed description of the
HRI subrogation system.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS, OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including risk factors and
financial statements and notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus (i) assumes that
the Underwriters' overallotment option will not be exercised, (ii) has been
adjusted to give effect to a 98,000-for-1 split to occur immediately prior to
the consummation of the Offering (the "Stock Split") and (iii) assumes the
operation of the Company independently of the Selling Stockholder pursuant to
the Separation Agreement. References in this Prospectus to the "Company" and
"HRI" refer to Healthcare Recoveries, Inc., except where the context otherwise
requires.

THE COMPANY

The Company believes it is the leading independent provider of health
insurance subrogation and related recovery services for private healthcare
payors. HRI recovers the value of accident-related healthcare benefits provided
by its clients to insureds when a third-party is responsible for such healthcare
benefits. The Company offers its services on a nationwide basis to health
maintenance organizations, indemnity health insurers, self-funded employee
health plans, companies that provide claims administration services to
self-funded plans (referred to as "third-party administrators"), Blue Cross and
Blue Shield organizations and provider organized health plans. Current clients
include United HealthCare, Blue Shield of California, Healthsource, Humana,
Kaiser Permanente, Oxford Health Plans, Sears and The Prudential. The Company
had 32.6 million lives under contract (or "lives sold") from its clientele at
March 31, 1997, more than double the 15.1 million lives under contract at
December 31, 1994.

The rising costs of healthcare and price competition have contributed to
industry consolidation and an increasing trend towards outsourcing for non-core
functions, including subrogation. Based on information contained in the
Statistical Abstract of the United States 1996, the Company calculates that in
1994 there were approximately 150 million persons covered by private health
insurance under insurance policies or similar agreements in states that allow
healthcare payors to exercise subrogation and related recovery rights. The
Company estimates, based on its experience with accident-related claims, that
these 150 million insured persons (or "lives") in 1994 incurred $1.0 to $1.4
billion of medical benefits that were potentially recoverable through
subrogation. HRI believes that an increasing number of subrogation claims are
being outsourced, since companies are often able to provide specialized services
at lower costs, and at similar or higher quality, than could be achieved by the
healthcare payor.

HRI's services are provided by its highly trained employees in conjunction
with a proprietary automated recovery process. The Company's system has greatly
automated the complex recovery process from the electronic sourcing and
processing of claims data, through process guidance and assistance in
correspondence to follow-up and settlement of claims. The use of this system
enables HRI's personnel to focus on those matters requiring their expertise,
which increases their productivity and allows the Company to pursue claims which
would otherwise not be economical to recover.

Over the past three fiscal years, the Company's revenues have grown from
$16.9 million to $31.4 million, at a compound annual growth rate of
approximately 36% (reflecting actual annual growth rates during 1995 and 1996 of
approximately 33% and 40%, respectively), and its net income has grown from $1.9
million to $5.1 million, at a compound annual growth rate of approximately 65%
(reflecting actual annual growth rates during 1995 and 1996 of approximately 82%
and 49%, respectively). Lives installed and gross recoveries in process, two key
operating statistics (as defined in footnotes (3) and (4), respectively, in
"-- Summary Historical Financial and Other Data") have also grown significantly
over this period. Lives installed has grown at a compound annual growth rate of
approximately 43% (reflecting actual annual growth rates during 1995 and 1996 of
approximately 24% and 66%, respectively) and gross recoveries in process has
grown at a compound annual growth rate of approximately 37% (reflecting actual
annual growth rates during 1995 and 1996 of approximately 28% and 47%,
respectively). These compound annual growth rates may not be indicative of
future performance. The Company believes these results are driven by its (i)
process automation, (ii) highly specialized and incented labor and (iii) high
levels of customer service. HRI plans to continue to grow its business by
capitalizing on its operational strengths and increasing its revenues through
(i) the addition of lives for existing customers, (ii) broadening its customer
base, including private and public sector health plans,
3
<PAGE> 7

(iii) seeking opportunities through the identification of other businesses with
similar claim recovery opportunities and (iv) the possible acquisitions of
companies that provide claim recovery services.

HRI is a wholly-owned subsidiary of Medaphis, which is divesting its entire
interest in the Company in the Offering. Medaphis is selling HRI as part of its
restructuring plan to divest non-core businesses and is required to use the net
proceeds from the Offering to retire bank debt. In August 1995, Medaphis
acquired HRI for approximately $79.1 million in a stock-for-stock exchange.

The Company is incorporated in Delaware. The address of the Company's
principal business is 1400 Watterson Tower, Louisville, Kentucky 40218, and its
telephone number is (502) 454-1340.

THE OFFERING

Common Stock offered by the Selling Stockholder(1):

U.S. Offering...................... 7,840,000 shares
International Offering............. 1,960,000 shares

Total......................... 9,800,000 shares

Common Stock to be outstanding after
the Offering.......................... 10,000,000 shares(2)

Use of Proceeds......................... The Company will not receive any of
the proceeds from the sale of
Common Stock by the Selling
Stockholder. The Company will use
the net proceeds from the exercise
of the Underwriters' over-allotment
option, if any, for general
corporate purposes, including
capital expenditures, working
capital or possible future
acquisitions. See "Use of
Proceeds."

Nasdaq National Market Symbol........... HCRI
- ---------------

(1) The only shares of Common Stock offered by the Company are shares issuable
upon the exercise of the Underwriters' over-allotment option.
(2) Includes 200,000 shares of Common Stock (2% of shares to be outstanding
after the Offering) to be granted by the Company to certain members of the
Company's executive management as a Divestiture Bonus upon consummation of
the Offering, and excludes 550,000 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options that the Company plans
to issue to members of its executive management and to non-employee
directors exercisable at the initial offering price and 200,000 shares of
Common Stock reserved for issuance under the Company's Non-Qualified Stock
Option Plan for Eligible Employees. See "Management -- Divestiture Bonus"
and "-- Non-Qualified Stock Option Plan for Eligible Employees."
4
<PAGE> 8

SUMMARY HISTORICAL FINANCIAL AND OTHER DATA

The following table sets forth summary historical financial and other data
of the Company as of the dates and for the periods indicated, which have been
derived from, and are qualified by reference to, the Company's financial
statements and other records. See "Selected Financial Data."

<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, DECEMBER 31, YEAR ENDED DECEMBER 31, MARCH 31,
----------------- ------------ ------------------------------------- ---------------
1992 1993 1993 1993 1994 1995 1996 1996 1997
------- ------- ------------ ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Subrogation........................ $ 5,853 $10,960 $6,915 $12,860 $16,941 $22,496 $30,248 $6,676 $8,917
Other Revenues, net................ 0 0 0 0 0 0 1,171 0 0
------- ------- ------ ------- ------- ------- ------- ------ ------
Total Revenues............... 5,853 10,960 6,915 12,860 16,941 22,496 31,419 6,676 8,917
Cost of Services..................... 4,754 6,223 3,393 6,321 7,947 10,265 15,026 3,354 4,326
------- ------- ------ ------- ------- ------- ------- ------ ------
Gross Profit......................... 1,099 4,737 3,522 6,539 8,994 12,231 16,393 3,322 4,591
Support Expenses..................... 3,807 4,527 2,488 4,720 6,066 6,899 8,093 1,871 2,338(1)
------- ------- ------ ------- ------- ------- ------- ------ ------
Operating Income (Loss).............. (2,708) 210 1,034 1,819 2,928 5,332 8,300 1,451 2,253
Interest Income...................... 169 80 69 115 320 580 486 92 114
------- ------- ------ ------- ------- ------- ------- ------ ------
Income (Loss) Before Taxes........... (2,539) 290 1,103 1,934 3,248 5,912 8,786 1,543 2,367
Income Tax Expense (Benefit)......... 0 (3,008) 462 810 1,363 2,486 3,685 647 992
------- ------- ------ ------- ------- ------- ------- ------ ------
Net Income (Loss).................... $(2,539) $ 3,298 $ 641 $ 1,124 $ 1,885 $ 3,426 $ 5,101 $ 896 $1,375
======= ======= ====== ======= ======= ======= ======= ====== ======

Earnings per Common Share(2)......... $ 0.52 $ 0.09 $ 0.14
======= ====== ======
Pro Forma Earnings (Loss) per Common
and Common Equivalent Share(3)..... $ 0.23 $(0.14)
======= ======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Lives Installed (in millions)(4)............................ 14.5 18.0 29.8 25.0 31.9
Gross Recoveries in Process (in millions)(5)................ $ 284.3 $ 364.9 $ 535.0 $448.1 $568.7
Effective Fee Rate.......................................... 28.4% 28.6% 26.9% 27.4% 26.4%
Total Employees............................................. 248 300 383 342 403
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997(6)
----------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents................................... $ 53 $ 125
Working Capital............................................. 1,730 2,632
Total Assets................................................ 23,969 25,337
Total Indebtedness.......................................... 0 0
Stockholders' Equity........................................ $ 4,110 $ 5,360
</TABLE>

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

(1) The Company's financial statements for the quarter ending June 30, 1997,
will reflect a non-cash charge (not deductible for income tax purposes) in
an amount equal to $2.8 million (assuming an initial public offering price
of $14.00 per share), less an amount (determined by an independent
appraisal) to reflect a discount in the value of the shares due to their
transfer restrictions in connection with the Divestiture Bonus (2% of shares
to be outstanding after the Offering) to be granted by the Company to
certain members of the Company's management upon consummation of the
Offering. See "Management -- Divestiture Bonus."

(2) Earnings per common share were computed based on the weighted-average number
of shares outstanding during the period after giving retroactive effect to
the Stock Split. Shares used in computing earnings per common share were
9,800,000 for the year ended December 31, 1996 and the quarters ended March
31, 1996 and 1997. Earnings per common share do not give retroactive effect
to the Divestiture Bonus to be granted in connection with the Offering or
stock options on 550,000 shares to be granted to members of the Company's
executive management and to non-employee directors at the time of the
Offering.

(3) Pro forma earnings (loss) per common and common equivalent share give effect
to the pro forma adjustment to net income related to the non-cash charge of
$2.8 million ($0.28 per share) to be recognized in connection with the
Divestiture Bonus. Pro forma per share amounts for the year ended December
31, 1996 and the quarter ended March 31, 1997, assume the Divestiture Bonus
occurred on January 1, 1996 and January 1, 1997, respectively. Shares used
in computing pro forma earnings (loss) per common and common equivalent
share were determined using the treasury stock method after giving
retroactive effect to the Stock Split and assumes the 200,000 shares to be
granted in connection with the Divestiture Bonus and the stock options on
550,000 shares to be granted to members of the Company's executive
management and to non-employee directors exercisable at the initial offering
price were granted on January 1, 1996. Shares used in computing pro forma
earnings (loss) per common and common equivalent share were 10,000,000 for
the year ended December 31, 1996 and the quarter ended March 31, 1997.

(4) Lives installed represents the number of insured persons ("lives") with
respect to which the Company has (i) a contract to provide subrogation and
related recovery services and (ii) the necessary electronic data interfaces
to service such lives.

(5) Gross recoveries in process represents the total dollar amount of
potentially recoverable claims that the Company is pursuing on behalf of
clients at a certain point in time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."

(6) Because no shares will be sold by the Company in the Offering (unless the
Underwriters exercise their over-allotment option), the balance sheet data
will be unaffected by the Offering. The Company will continue to make
distributions out of net income to Medaphis for the period from January 1,
1997 through the end of the month prior to the consummation of the Offering.
As a result, the Company will have a nominal amount of unrestricted cash
upon consummation of the Offering and stockholders' equity of $4.1 million
as of the end of that month. Distributions to Medaphis subsequent to March
31, 1997 and the Divestiture Bonus affect the Company's capitalization as of
March 31, 1997. See "Dividend Policy" and "Capitalization".

5
<PAGE> 9

RISK FACTORS

Prospective investors should carefully consider the following risk factors,
in addition to the other information contained in this Prospectus, before
purchasing the shares of Common Stock. This Prospectus contains "forward-looking
statements" regarding the intent, belief or current expectations of the Company
and members of its management team. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth under Risk
Factors and in other sections of this Prospectus including Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
Company undertakes no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or
changes to future operating results over time.

REGULATORY AND POLITICAL RISKS

General. From time to time, legislation is introduced in Congress and in
various state legislatures that would materially affect the Company's business.
The most significant legislation, law and regulation, for clarity, may be
grouped in three categories: (1) legislation that would substantially limit the
ability of healthcare insurers to recover from third-parties accident-related
medical benefits incurred by injured insureds by making health insurance the
primary coverage for accidents ("Health Insurance Primacy Laws"), (2)
legislation that would substantially limit the Company's ability to receive and
utilize individual claim information from healthcare insurers ("Confidentiality
Laws") and (3) other federal and state laws. The following identify specific
risks in those three categories:

Health Insurance Primacy Laws:

Auto Choice Reform Act of 1997. On April 22, 1997, Senators McConnell,
Grams, Moynihan and Lieberman introduced the Auto Choice Reform Act of 1997.
Under this Act, in those states not opting out of its provisions, individual
drivers may choose to be covered by an auto insurance system in which healthcare
insurers, with some exceptions, would be made primarily responsible for
healthcare costs incurred by those injured in automobile accidents.
Consequently, even if the insured's injuries were caused by the negligence of
another driver, the healthcare insurer would have no rights of recovery against
the negligent party or that party's liability insurer. Revenue generated from
recoveries against automobile liability insurers represented approximately 60%
of the Company's 1996 revenues. Similar legislation was introduced, but not
enacted in the previous session of Congress. Should this or similar legislation
be enacted, it would have a material adverse effect on the Company's business,
results of operations and financial condition.

The proposed legislation asserts that (i) the costs of operating a motor
vehicle are excessive due to legal and administrative costs associated with the
processing of claims under the fault-based liability system and (ii) the costly
fault-based liability insurance system often fails to provide compensation
commensurate with loss and takes too long to pay benefits. Even if the Auto
Choice Reform Act is ultimately abandoned, these policy reasons may result in
future legislation designed to significantly alter the fault-based liability
system used in most states, eliminate recovery rights of healthcare insurers and
adversely affect the Company's business.

Clinton Administration Healthcare Proposals. In 1993, as part of its
healthcare reform proposals, the Clinton Administration proposed to require in
effect that an injured insured's healthcare insurance provider be primarily
liable for the insured's healthcare costs, for both injuries caused by a
third-party and work related injuries. Although these proposals were never
enacted into law, had they or similar rules been enacted into law, the Company's
services would have been rendered largely unnecessary and the Company's
business, results of operations and financial condition would have been
materially adversely affected. Although the Clinton Administration has abandoned
its healthcare reform proposal, there can be no guaranty that a future
administration or Congress will not propose or enact such a provision or other
regulatory scheme that would diminish or eliminate the value of the Company's
services.

6
<PAGE> 10

Certain No Fault Insurance Systems. Michigan, Pennsylvania and New Jersey
have adopted automobile "no fault" insurance systems in which the injured
party's health insurance carrier or provider is primarily responsible for
healthcare related expenses (and not the responsible party and his or her
insurer or the injured insured's automobile liability insurer). In 1994,
proponents of the California "pay-at-the-pump" bill attempted to enact, by
referendum, legislation that would have made the injured insured's healthcare
payors primarily liable for healthcare expenses for automobile accidents in
California. Although this referendum was withdrawn, there can be no assurance
that it will not be presented in a ballot initiative or as legislation in the
future. Growth in the number of states adopting similar systems could
significantly reduce the amounts otherwise recoverable by the Company in
connection with automobile injuries in such states. See "Business -- Legal and
Regulatory Environment -- Health Insurance Primacy Laws: Certain No Fault
Insurance Systems."

Confidentiality Laws:

Confidentiality Provisions of the Health Insurance Portability and
Accountability Act of 1996. Section 262 of the Health Insurance Portability and
Accountability Act of 1996 (42 U.S.C. sec. 1177) prohibits any person from
knowingly obtaining or disclosing individually identifiable health information
relating to an individual in violation of the standards relating to the
electronic transmission of healthcare information established by the Secretary
of the Department of Health and Human Services. The Secretary has not proposed
or adopted implementing regulations, but is not obligated to do so until January
1998. Depending on the provisions of the regulations when adopted, the
regulations could impair or prevent the acquisition and use by the Company of
claims and insurance information necessary to process recovery claims on behalf
of its clients. In addition to federal law, state laws and regulations governing
privacy of insurance records and related matters may significantly affect the
Company's business. State efforts to restrict the use of such records, which
clients currently provide to the Company, could impair the Company's business,
results of operations and financial condition. See "Business -- Legal and
Regulatory Environment -- Confidentiality Laws: Confidentiality Provisions of
the Health Insurance Portability and Accountability Act of 1996."

Other Federal and State Laws:

Changes in the regulation of insurance and debt collection could also
affect the Company's business. Similarly, changes in law that would bar
healthcare subrogation or impair an injured party's ability to collect insured
damages (that is, an injured person would be prevented from recovering from the
wrongdoer damages for accident-related medical benefits covered by health
insurance) could similarly adversely affect the Company's business. Existing
debt collection laws also may be amended or interpreted in a manner that could
adversely affect the Company's business. Additionally, although the Company does
not believe that it engages in the unauthorized practice of law, changes in the
law or a judicial or administrative decision defining some of the Company's
activities as the practice of law, could have a material adverse effect on the
Company's business. See "Business -- Legal and Regulatory Environment -- Other
Federal and State Laws."

DEPENDENCE ON LARGE CLIENTS

The loss of one or more of the Company's three largest clients, which
represented 25%, 12% and 9% and 32%, 9% and 10%, respectively of the Company's
revenues in 1996 and the three months ended March 31, 1997, respectively, or
other significant clients, could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business -- Client
Base." Of the revenues generated by these three clients in 1996, contracts
covering approximately 24% of the Company's revenues may be terminated by the
client on 90 to 180 days notice to the Company. The remainder of the Company's
contracts generally are terminable on 60 to 180 days notice. The Company does,
however, generally retain the right to continue recovery activities on the gross
recoveries in process of any client that terminates its relationship with the
Company.

7
<PAGE> 11

LENGTHY REVENUE CYCLE AND FLUCTUATION IN OPERATING RESULTS

The Company's operating results may fluctuate from time to time as a result
of a number of factors, including additions of new clients, cancellation of
client contracts, postponement of client decisions to enter into contracts,
delays in transmission of clients' claims data, changes in prices offered to new
clients, timing of acquisitions, introduction of new services or introduction of
new technologies to the Company's business processes. HRI expends substantial
time, effort and funds to install lives and generate active files. As a result,
HRI incurs expenses related to its revenue in advance of the time such revenue
is received which can result in fluctuations in operating results.

In particular, the volume and timing of receipt of clients' claims data
received during a fiscal quarter are difficult to forecast. The Company's
clients continuously update and modify their claims and medical encounter
processing systems, and such changes often create delays in or errors to the
transmission of claims data. Furthermore, the Company's expense levels are based
in part on expectations of future receipt of claims data and the Company has
been significantly increasing and intends to continue to increase operating
expenditures and working capital balances as it expands its operations.
Specifically, material increases in new clients and lives installed, and
consequently client claims data received, will cause the Company to increase its
operating capacity well in advance of its expectation to earn revenues from such
new clients. Operating results in any particular quarter which do not meet the
expectations of securities analysts could cause volatility in the price of the
Company's Common Stock.

LITIGATION

The Company is engaged in the business of identifying and recovering
subrogation and related claims of its clients, many of which arise in the
context of personal injury lawsuits. As such, the Company operates in a
litigation-intensive environment. The Company has, from time to time, been, and
in the future expects to be, named as a party in litigation incidental to its
business operations. To date, the Company has not been involved in any
litigation which has had a material adverse effect upon the Company, but there
can be no assurance that pending litigation or future litigation will not have a
material adverse effect on the Company's business, results of operations and
financial condition.

The Company is also party to a putative class action lawsuit that seeks
monetary damages from the Company on the basis that the Company recovered from
responsible parties the "reasonable value" of medical treatment provided by
medical providers rather than the amounts actually paid by certain healthcare
payors, in circumstances where such healthcare payors had a discounted
fee-for-service ("DFS") arrangement, capitation arrangement or other payment
arrangement that did not involve solely fee-for-service arrangements with the
medical providers. Under a typical capitation arrangement a medical provider is
paid a flat periodic fee for each patient referred by a healthcare payor and the
medical provider contractually bears the risk of the amount of services needed
by the potential patient group. Thus, there is no specific amount paid by the
healthcare payor for any service rendered by the medical provider. In addition
to monetary damages, the class action lawsuit seeks injunctive relief preventing
the Company from pursuing recoveries in excess of the amounts actually paid by
its clients regardless of the payment mechanism. Although it is the Company's
current policy not to seek recovery of the "reasonable value" of medical
treatment in DFS arrangements, the Company does collect the "reasonable value"
of medical treatment under capitation and certain other payment arrangements.
The Company's clients determine such "reasonable value" according to their
internal procedures. If this lawsuit or another lawsuit seeking relief under
similar theories were to be successful, it could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business -- Legal Proceedings."

COMPETITION

HRI competes primarily with the internal recovery operations of potential
customers and other subrogation recovery service vendors. To the Company's
knowledge, there are three smaller, but significant, independent providers of
subrogation recovery services in addition to HRI. All three independent
competitors preceded HRI's entry into the recovery industry, and no major
competitors have entered the market since that

8
<PAGE> 12

time. HRI believes that there are significant barriers to entry to the bulk of
its market, including process expertise, capital requirements necessitated by
the unusually long revenue cycle in the recovery industry, assembling and
training a qualified and productive employee base possessing appropriate
industry expertise, and an information processing system designed to aid
investigators and examiners engaged in the recovery process. However, there are
participants in the healthcare, insurance and transaction processing industries
that possess sufficient capital, and managerial and technical expertise to
develop competitive services.

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant degree upon the continued
contributions of members of the Company's senior management and other key sales,
marketing, computer systems and operations personnel, and the loss of any such
persons could have a materially adverse effect on the business of the Company.
The Company's success also depends upon its ability to attract and retain highly
qualified and skilled managerial, sales, marketing and computer software
development and operations personnel, the competition for whom is intense. There
can be no assurance that the Company will be successful in hiring or retaining
the requisite personnel, which could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
does not maintain key man insurance. The Company has employment agreements with
Patrick B. McGinnis, Chairman and Chief Executive Officer, Dennis K. Burge,
Executive Vice President -- Operations, Douglas R. Sharps, Executive Vice
President -- Finance and Administration, Chief Financial Officer and Secretary,
Bobby T. Tokuuke, Senior Vice President -- Systems, and Debra M. Murphy, Senior
Vice President -- Sales & Marketing. See "Management -- Directors and Executive
Officers" and "Management -- Employment Agreements."

PROSPECTIVE UPGRADE OF INFORMATION MANAGEMENT SYSTEM AND LOSS OF PROPRIETARY
TECHNOLOGY

The SubroSystem and Its Prospective Upgrade. Although the Company's
existing information management system (the "SubroSystem"), a key feature of the
Company's recovery process, adequately serves the Company's information
gathering and management needs, the Company plans, in three consecutive steps
over 24 to 36 months, (i) to migrate the SubroSystem from a MS-DOS based
environment to a Windows NT operating environment, (ii) to adopt a new data base
system and (iii) to adopt an object oriented programming language, such as C++.
The Company anticipates spending approximately $3.2 million on these activities,
of which $2.6 million spent on hardware and third-party software will be
capitalized. There can be no assurances that the implementation of any of the
foregoing will be entirely successful, within budget or that such implementation
will not have an adverse effect on the Company's business, results of operations
or financial condition. Furthermore, because the SubroSystem is proprietary,
industry-specific software, the absence of detailed written documentation with
respect to the SubroSystem's functioning and code structure makes the Company
dependent on existing staff, who are skilled in its operations and some of whom
participated in its design. See "Business -- The SubroSystem and Platform."

Dependence on Proprietary Software Applications. The Company's success
depends, in part, upon its proprietary technology, specifically the integrated
software programs comprising the SubroSystem. Although certain elements of the
SubroSystem are protected by federal copyright law, such protection neither
confers a monopoly on the use of subrogation recovery software systems nor
prevents competitors from developing similar systems. The SubroSystem, like all
other software programs, may be subject to a variety of replication techniques
(for example, reverse engineering, logic tracing, disassembly and decompilation)
that would produce a functionally similar software system not covered by the
Company's registered copyright. Therefore, there can be no assurance that the
Company's registered copyright on the SubroSystem will preclude or deter
circumvention by current or future competitors, with the effect that the Company
might lose any advantage conferred by the SubroSystem.

CONSOLIDATION AMONG HEALTHCARE PAYORS; PRESSURE ON MARGINS

Consolidation among healthcare payors could increase their bargaining
strength as the number of lives insured or otherwise covered by such healthcare
payors grows, which may place downward pressure on the Company's historic
margins and may create additional competition from such healthcare payors in the
form of

9
<PAGE> 13

better equipped, in-house recovery departments. Additionally, existing clients
may be lost through acquisition by non-client healthcare payors.

LIMITATION ON DIVIDENDS

From August 28, 1995, the date Medaphis acquired HRI, through April 30,
1997, the Company has paid dividends to Medaphis totaling $12.8 million,
including the distributions to Medaphis for the period from January 1, 1997
through the end of the month prior to the consummation of the Offering and, as a
result, will have a nominal amount of unrestricted cash upon such consummation.
After the Offering, however, the Company currently intends to retain earnings to
finance the growth and development of its business and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. See
"Dividend Policy." The Company's Line of Credit limits its ability to pay
dividends on its Common Stock. See "Management's Discussion and
Analysis -- Liquidity and Capital Resources."

ABILITY TO MANAGE GROWTH

The Company recently has experienced significant growth in both its
revenues and the number of its employees. This growth has resulted in an
increase in responsibilities placed upon the Company's management and has placed
added pressures on the Company's operating systems. The Company expects to
expand its management, systems development and support, marketing, sales and
customer service and to upgrade the SubroSystem, which could place a strain on
the Company's operations. Furthermore, the initial expenses associated with the
addition of new clients may be incurred prior to the recognition of any revenues
from such new clients. There can be no assurance that the Company will
successfully manage its expanding operations or implement its growth strategy;
and if the Company's management is unable to manage growth effectively, the
Company's business, operating results and financial condition could be adversely
affected.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Amended and Restated Certificate of Incorporation
and Bylaws of the Company may be deemed to have the effect of making difficult
an acquisition of control of the Company in a transaction not approved by the
Company's Board of Directors. These provisions include the ability of the
Company's board of directors to issue shares of preferred stock in one or more
series without further authorization of the Company's stockholders. Accordingly,
the Company's Board of Directors is empowered, without stockholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of Common Stock. In the event of such issuance, the preferred stock
could also be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no current intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future. These provisions may also have the effect of discouraging a
third-party from making a tender offer or otherwise attempting to obtain control
of the Company even though such a transaction might be economically beneficial
to the Company and its stockholders. See "Description of Capital Stock."
Furthermore, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law, which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time of the transaction in which the person
first becomes an "interested stockholder", unless the business combination is
approved in a prescribed manner. The application of Section 203 could have the
effect of delaying or preventing a change of control of the Company. Certain
other provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws may have the effect of delaying or preventing changes
of control or management of the Company, which could adversely affect the market
price of the Common Stock. Among these are provisions (i) requiring a classified
board of directors, (ii) prohibiting action by written consent of the
stockholders, (iii) limiting the persons able to, and the procedures for,
calling a special meeting of the stockholders and (iv) requiring certain
supermajority stockholder votes to amend certain of the foregoing provisions.
See "Description of Capital Stock."

10
<PAGE> 14

PROFESSIONAL LIABILITY AND INDEMNITY OBLIGATIONS TO CLIENTS

From time to time, the Company may be subject to claims from its clients
that it failed to provide services in accordance with its contract or that its
recovery activities have harmed the client. To date, no client has terminated
its contract with the Company based upon the failure to provide services, nor
has any client asserted that the Company has in any way damaged its business.
The Company has agreed to indemnify and hold certain of its clients harmless
from negligent acts or omissions of the Company in the performance of recovery
services. Although the Company maintains, and intends to continue maintaining
insurance covering these types of risks, there can be no assurance that such
insurance will be available at reasonable costs in the future.

DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of $13.59 per share (assuming an initial public offering
price of $14.00 per share) based on the difference between the public offering
price and the net tangible book value of the Company at March 31, 1997. See
"Dilution."

ABSENCE OF PRIOR TRADING MARKET; STOCK PRICE VOLATILITY

Prior to the Offering, there has been no prior market for the Common Stock,
and there can be no assurance that a viable public market for the Common Stock
will develop or be sustained after the Offering. The initial public offering
price is being determined through negotiations among the Company, the Selling
Stockholder, the representatives of the U.S. Underwriters and the Managers based
upon several factors and may not be an indication of the market price of the
Common Stock after the Offering. The Company believes that a variety of factors
could cause the price of the Common Stock to fluctuate, perhaps substantially,
including: announcements of developments related to the Company's business;
changes in financial estimates by securities analysts; and developments in the
Company's relationships with its customers, distributors and suppliers. In
addition, in recent years the stock price of companies has experienced extreme
price fluctuations which have often been unrelated to the operating performance
of such companies. Such fluctuations may adversely affect the market price of
the Common Stock. See "Underwriting."

USE OF PROCEEDS

All of the shares of Common Stock offered hereby are being sold by the
Selling Stockholder. The Company will not receive any of the proceeds from the
sale by the Selling Stockholder of the Common Stock offered under this
Prospectus. The Company has granted the Underwriters an option to purchase
1,470,000 shares of Common Stock solely to cover over-allotments. If the
Underwriters exercise their over-allotment option in full, the net proceeds to
the Company from the sale of the 1,470,000 shares of Common Stock offered by the
Company under this Prospectus, based on an assumed initial public offering price
of $14.00 per share and after deducting the underwriting discount and estimated
offering expenses payable by the Company, are estimated to be approximately
$19.2 million. To the extent the Company receives net proceeds from the
Offering, it expects to use such net proceeds for general corporate purposes,
including capital expenditures, working capital or possible acquisitions. From
time to time, the Company evaluates potential acquisitions of businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreements with respect to any material acquisition of other
businesses, products or technologies. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment grade securities.

DIVIDEND POLICY

The Company intends to retain earnings to fund its growth and development
of its business and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The Company has paid cash dividends to the
Selling Stockholder since the Selling Stockholder acquired the Company in August
1995 through April 30, 1997 in the aggregate amount of $12.8 million, including
the distributions to Medaphis for the period from January 1, 1997 through the
end of the month prior to the consummation of the Offering and,

11
<PAGE> 15

as a result, will have a nominal amount of unrestricted cash upon such
consummation. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such other
factors as the Board of Directors deems relevant. The Company's Line of Credit
limits its ability to pay dividends on its Common Stock. See "Management's
Discussion and Analysis -- Liquidity and Capital Resources."

DILUTION

The net tangible book value of the Company as of March 31, 1997 after
giving effect to the dividends payable to Medaphis for the period from January
1, 1997 through the end of the month prior to the consummation of the Offering
was $4.1 million, or $0.41 per share of Common Stock. The net tangible book
value per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding.
Because no shares will be sold by the Company in the Offering (unless the
Underwriters exercise their over-allotment option), the net tangible book value
of the Company will be unaffected by the Offering. Based on the difference
between the public offering price and the net tangible book value of the Company
as of March 31, 1997, purchasers of the Common Stock offered hereby will
experience an immediate dilution of $13.59 per share (assuming an initial public
offering price of $14.00 per share).

If the Underwriters' over-allotment option is exercised in full, net
tangible book value upon completion of the Offering would be $2.33 per share
(assuming an initial public offering price of $14.00 per share and after
deducting underwriting discount and estimated offering expenses payable by the
Company) and, as a result, purchasers of the Common Stock offered hereby will
experience an immediate dilution of $11.67 per share.

All of the options to be granted on the date of this Prospectus will be
granted at the initial public offering price. Accordingly, to the extent such
options are exercised the dilution to new investors will be decreased.

The Selling Stockholder acquired the Common Stock offered hereby for
approximately $79.1 million. Management of the Company receiving the Divestiture
Bonus are not paying any consideration for the Common Stock they will receive.

12
<PAGE> 16

CAPITALIZATION

The following table sets forth the cash and cash equivalents, total
liabilities and capitalization of the Company as of March 31, 1997 and on a pro
forma basis to reflect the granting of the Divestiture Bonus and distributions
to Medaphis for the period January 1, 1997 through the end of the month prior to
the consummation of the Offering. This table should be read in conjunction with
the other financial information appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------
ACTUAL PRO FORMA(1)
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and Cash Equivalents................................... $ 125 $ 125
======= =======
Current Liabilities:
Trade Accounts Payable.................................... $ 619 $ 619
Accrued Expenses.......................................... 3,225 3,225
Funds Due Clients......................................... 15,380 15,380
Distributions Payable to Medaphis......................... -- 1,250
------- -------
Total Current Liabilities......................... 19,224 20,474
Other Liabilities........................................... 753 753
------- -------
TOTAL LIABILITIES................................. 19,977 21,227
------- -------
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares
authorized; none issued................................ 0 0
Common Stock, $.001 par value; 20,000,000 shares
authorized; 9,800,000 shares and 10,000,000 shares,
issued and outstanding, respectively(2)................ 10 10
Capital-in-Excess of par value(2)......................... -- 2,800
Equity Funding from Medaphis.............................. 57 0
Retained earnings......................................... 5,293 1,300
------- -------
TOTAL STOCKHOLDERS' EQUITY........................ 5,360 4,110
------- -------
TOTAL CAPITALIZATION.............................. $ 5,360 $ 4,110
======= =======
</TABLE>

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

(1) Because no shares will be sold by the Company in the Offering (unless the
Underwriters exercise their over-allotment option), the total
capitalization will be unaffected by the Offering. The Company will
continue to make distributions out of net income to Medaphis for the period
from January 1, 1997 through the end of the month prior to the consummation
of the Offering. As a result, the Company will have a nominal amount of
unrestricted cash upon consummation of the Offering and stockholders'
equity of $4.1 million as of the end of that month. See "Dividend Policy."

(2) Pro forma amounts include 200,000 shares of Common Stock (2% of shares to be
outstanding after the Offering) granted by the Company to certain members
of the Company's executive management as a Divestiture Bonus upon
consummation of the Offering, and excludes 550,000 shares of Common Stock
reserved for issuance upon exercise of outstanding stock options that the
Company plans to issue to members of its executive management and to
non-employee directors exercisable at the initial offering price and
200,000 shares of Common Stock reserved for issuance under the Company's
Non-Qualified Stock Option Plan for Eligible Employees. See
"Management -- Divestiture Bonus" and "-- Non-Qualified Stock Option Plan
for Eligible Employees."

13
<PAGE> 17

SELECTED FINANCIAL DATA

The following table sets forth historical selected financial and other data
of the Company as of the dates and for the periods indicated, which have been
derived from, and are qualified by reference to, the Company's financial
statements and certain other records. The information set forth below should be
read in conjunction with the Company's Financial Statements and Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.

The selected historical financial data as of December 31, 1995 and 1996 and
for the years ended December 31, 1994, 1995 and 1996, have been derived from,
and are qualified by reference to, the Company's financial statements appearing
elsewhere herein, which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The selected historical financial data as of June 30,
1992 and 1993, December 31, 1993 and 1994 and March 31, 1996 and for the years
ended June 30, 1992 and 1993 and December 31, 1993 and for the six-month period
ended December 31, 1993, have been derived from the Company's financial
statements. The selected historical financial data as of March 31, 1997 and for
the three months ended March 31, 1996 and 1997 have been derived from the
unaudited financial statements of the Company, which have been prepared by
management on the same basis as the audited financial statements, and, in the
opinion of management, include all adjustments consisting of normal recurring
accruals that the Company considers necessary for a fair presentation of the
results for such periods. Such results of operations for the three months ended
March 31, 1997 are not necessarily indicative of results to be anticipated for
the entire year.

Certain revisions to allocations and estimates in the historical financial
data have been made by management for the periods during which the Company was a
subsidiary of Medaphis to present the financial position and results of
operations of the Company as an independent entity.

Although adjustments have been made to the historical financial data to
reflect an allocation of costs incurred by Medaphis on behalf of the Company,
the historical financial data does not necessarily reflect the financial
position or results of operations that would have been obtained had the Company
been operated as a separate stand-alone entity during the periods presented.

14
<PAGE> 18

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED THREE MONTHS
JUNE 30, DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------- ------------- ------------------------------------- ----------------
1992 1993 1993 1993 1994 1995 1996 1996 1997
------- ------- ------------- ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Subrogation...................... $ 5,853 $10,960 $6,915 $12,860 $16,941 $22,496 $30,248 $6,676 $8,917
Other Revenues (Net)............. 0 0 0 0 0 0 1,171 0 0
------- ------- ------ ------- ------- ------- ------- ------ ------
Total Revenues............. 5,853 10,960 6,915 12,860 16,941 22,496 31,419 6,676 8,917
Cost of Services................... 4,754 6,223 3,393 6,321 7,947 10,265 15,026 3,354 4,326
------- ------- ------ ------- ------- ------- ------- ------ ------
Gross Profit....................... 1,099 4,737 3,522 6,539 8,994 12,231 16,393 3,322 4,591
Support Expenses................... 3,807 4,527 2,488 4,720 6,066 6,899 8,093 1,871 2,338(1)
------- ------- ------ ------- ------- ------- ------- ------ ------
Operating Income (Loss)............ (2,708) 210 1,034 1,819 2,928 5,332 8,300 1,451 2,253
Interest Income.................... 169 80 69 115 320 580 486 92 114
------- ------- ------ ------- ------- ------- ------- ------ ------
Income (Loss) Before Taxes......... (2,539) 290 1,103 1,934 3,248 5,912 8,786 1,543 2,367
Income Tax Expense (Benefit)....... 0 (3,008) 462 810 1,363 2,486 3,685 647 992
------- ------- ------ ------- ------- ------- ------- ------ ------
Net Income (Loss).................. $(2,539) $ 3,298 $ 641 $ 1,124 $ 1,885 $ 3,426 $ 5,101 $ 896 $1,375
======= ======= ====== ======= ======= ======= ======= ====== ======
Earnings per Common Share(2)....... $ 0.52 $ 0.09 $ 0.14
======= ====== ======
Pro Forma Earnings (Loss) per
Common and Common Equivalent
Share(3)......................... $ 0.23 $(0.14)
======= ======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>

OTHER DATA:
Lives Installed (in millions)(4)............................ 14.5 18.0 29.8 25.0 31.9
Gross Recoveries in Process (in millions)(5)................ $ 284.3 $ 364.9 $ 535.0 $ 448.1 $ 568.7
Effective Fee Rate.......................................... 28.4% 28.6% 26.9% 27.4% 26.4%
Total Employees............................................. 248 300 383 342 403
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, MARCH 31,(6)
---------------- ------------------------------------- -----------------
1992 1993 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents...................... $1,998 $ 2,077 $ 3,320 $ 5,950 $ 0 $ 53 $ 89 $ 125
Working Capital................................ 278 285 5,972 709 1,675 1,730 2,735 2,632
Total Assets................................... 6,055 10,363 12,655 15,872 13,390 23,969 14,318 25,337
Total Indebtedness............................. 2 2 9 2 0 0 0 0
Stockholders' Equity........................... $2,884 $ 6,182 $ 7,129 $ 9,188 $ 3,274 $ 4,110 $ 4,574 $ 5,360
</TABLE>

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

(1) The Company's financial statements for the quarter ending June 30, 1997,
will reflect a non-cash charge (not deductible for income tax purposes) in
an amount equal to $2.8 million (assuming an initial public offering price
of $14.00 per share), less an amount (based on an independent appraisal) to
reflect a discount value of the shares due to their transfer restrictions in
connection with the Divestiture Bonus (2% of shares to be outstanding after
the Offering) to be granted by the Company to certain members of the
Company's management upon consummation of the Offering. See
"Management -- Divestiture Bonus."

(3) Pro forma earnings (loss) per common and common equivalent share give effect
to the pro forma adjustment to net income related to the non-cash charge of
$2.8 million ($0.28 per share) to be recognized in connection with the
Divestiture Bonus. Pro forma per share amounts for the year ended December
31, 1996 and the quarter ended March 31, 1997, assume the Divestiture Bonus
occurred on January 1, 1996 and January 1, 1997, respectively. Shares used
in computing pro forma earnings (loss) per common and common equivalent
share were determined using the treasury stock method after giving
retroactive effect to the Stock Split and assumes the 200,000 shares to be
granted in connection with the Divestiture Bonus and that stock options on
550,000 shares to be granted to members of the Company's executive
management and to non-employee directors exercisable at the initial offering
price were granted on January 1, 1996. Shares used in computing pro forma
earnings (loss) per common and common equivalent share were 10,000,000 for
the year ended December 31, 1996 and the quarter ended March 31, 1997.

15
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

HRI provides insurance subrogation and related recovery services to the
private healthcare payor industry. HRI services comprise the complete
outsourcing of the identification, investigation and recovery of
accident-related medical benefits incurred by their clients for which other
persons or entities have primary responsibility. The rights of HRI's clients to
recover the value of these medical benefits arise by law or contract, are known
generally as the right of subrogation and are generally paid from the proceeds
of liability or workers' compensation insurance.

For a typical new client, it takes three to six months from the contract
signing (when the lives are "sold") to complete the construction of electronic
data interfaces necessary for the Company to begin service; at this point, the
new client is considered "installed." During the installation period, the
Company must also hire and train quality staff necessary to provide contractual
services. After installation, HRI receives data from the client from which it
creates an inventory of gross recoveries in process.

"Gross recoveries in process" is the total dollar amount of potentially
recoverable claims that the Company is pursuing on behalf of its clients at a
certain point in time. These claims are gross figures, prior to estimates of
claim settlement and rejection. Gross recoveries in process increases when the
Company opens new files of potentially recoverable claims and decreases when
files of claims are recovered (or, after further investigation, determined to be
nonrecoverable). Historically, subrogation recoveries (the amount actually
recovered for its clients prior to the Company's fee) have been produced from
the gross recoveries in process in a generally predictable cycle, because any
group of potential recoveries that has been sufficiently large in number to
display statistically significant characteristics and that originates from a
defined time period, tended to produce recovery results that have been
comparable to other groups having similar characteristics. Although some
recoveries will be made during the first year of service, the average time to
make a recovery is 18 to 24 months, with substantially all recoveries made by
the sixth year. Gross recoveries in process for a client will range in age from
newly identified potential recoveries (which will be identified each year) to
potential recoveries that are in the late stages of the recovery process. As a
result of this cycle, approximately six years from the date of installation, the
client's annual amounts of subrogation recoveries as a percent of the client's
gross recoveries in process will be generally constant, except for variations
due to the number of installed lives for the client.

Management of the Company calculates that gross recoveries in process was
$569 million as of March 31, 1997. This information is generated by the Company
for internal management and budgeting purposes. As of December 31, 1992, the
Company had gross recoveries in process of $158 million. Through December 31,
1996, the Company has realized recoveries of $64.8 million, and there is
remaining $14 million of gross recoveries in process from the December 31, 1992
balance. However, because gross recoveries in process is based on the judgment
of Company personnel, historical performance may not be indicative of future
results and the actual amount of future subrogation revenues to be derived from
gross recoveries in process could differ significantly from historical
experience. Further, the recovery characteristics of gross recoveries in process
in future years may be different from historical experience for a variety of
reasons. See "Risk Factors."

The Company is paid a contingency fee from the amount of subrogation
recoveries it makes from gross recoveries in process on behalf of its clients.
The Company's revenues are a function of subrogation recoveries and effective
fee rates. Effective fee rates vary depending on the mix between recovery
services provided and client fee schedules. The fee schedules for each client
are separately negotiated and reflect the Company's standard fee rates, the
services to be provided and anticipated volume of services. The Company grants
volume discounts and negotiates a lower fee when it assumes gross recoveries in
process from a client because some of the recovery work will have already been
completed by the client. Since the Company records revenues only when a file is
settled and records expenses as costs are incurred, there is a lag between
expense and revenue recognition.

The Company's expenses are determined primarily by the number of employees
directly engaged in recovery activities (cost of services) and by the number of
employees engaged in a variety of support activities

16
<PAGE> 20

(support expenses). Recovery-related employees must be hired and trained in
advance of the realization of recoveries and revenues and, during times of rapid
growth, installed lives and cost of service will grow more rapidly than revenue.
The number of employees accounted for in support expenses generally grows less
rapidly than revenue due to economies of scale.

HRI was incorporated on June 30, 1988 under the laws of Delaware and
operated as an independent entity until August 28, 1995, when the Company was
acquired by Medaphis in a transaction valued at approximately $79.1 million and
accounted for as a pooling of interests. Medaphis is selling HRI as part of its
restructuring plan to divest non-core businesses and is required to use the net
proceeds from the Offering to retire bank debt. In anticipation of the sale of
Common Stock, certain revisions have been made by management in the accompanying
financial statements for the periods during which the Company was a subsidiary
of Medaphis to present the financial position, results of operations and cash
flows of the Company as an independent entity. Medaphis has allocated to the
Company costs of $56,000 and $361,000 for the period August 28, 1995 to December
31, 1995 and the year ended December 31, 1996, respectively. The Company paid
these previously allocated costs directly during the three months ended March
31, 1997. The allocation of these costs was based principally on specific
identification, the ratio of the number of Company employees to total Medaphis
employees or the ratio of total Company assets to total Medaphis assets, as
appropriate. These costs include executive salaries, employee benefits,
insurance, payroll processing and other general and administrative expenses.
Management believes that, in the aggregate, these costs reflect the fair value
of services rendered by Medaphis and that it would have incurred similar costs
as an independent company. Management does not expect a significant change in
the costs incurred by the Company as a result of operating on a stand-alone
basis, except for the nonrecurring, non-cash charge to be incurred as a result
of the Divestiture Bonus.

RESULTS OF OPERATIONS

The following tables present certain key operating indicators and results
of operations data for the Company for the periods indicated:

KEY OPERATING INDICATORS
(IN MILLIONS, EXCEPT FOR PERCENTAGES AND EMPLOYEES)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Lives Sold.............................. 15.1 24.2 30.4 26.2 32.6
Lives Installed......................... 14.5 18.0 29.8 25.0 31.9
Gross Recoveries in Process(1).......... $284.3 $364.9 $535.0 $448.1 $568.7
Subrogation Recoveries.................. $ 59.6 $ 78.7 $112.5(2) $ 24.3 $ 33.7
Effective Fee Rate...................... 28.4% 28.6% 26.9% 27.4% 26.4%
Subrogation Revenues.................... $ 16.9 $ 22.5 $ 30.2 $ 6.7 $ 8.9
Employees:
Direct Operations..................... 188 238 312 278 324
Support............................... 60 62 71 64 79
------ ------ ------ ------ ------
Total Employees............... 248 300 383 342 403
====== ====== ====== ====== ======
</TABLE>

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

(1) Gross recoveries in process represents the total dollar amount of
potentially recoverable claims that the Company is pursuing on behalf of
clients at a certain point in time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
(2) Excludes approximately $8.2 million of recoveries in connection with the
breast implant litigation settlement. See "-- Results of Operations -- 1996
Compared to 1995."

17
<PAGE> 21

STATEMENTS OF INCOME AS A PERCENTAGE OF SUBROGATION REVENUE

<TABLE>
<CAPTION>
PERCENTAGE OF SUBROGATION REVENUES
-------------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1994 1995 1996 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Subrogation Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Services..................... 46.9 45.6 49.7 50.2 48.5
Support Expenses..................... 35.8 30.7 26.8 28.0 26.2
Operating Income..................... 17.3 23.7 27.4 21.7 25.3
Income Before Income Taxes........... 19.2 26.3 29.0 23.1 26.5
Net Income........................... 11.1 15.2 16.9 13.4 15.4
</TABLE>

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996

Revenues. Total revenues for the three months ended March 31, 1997
increased 33.6% to $8.9 million from $6.7 million during the three months ended
March 31, 1996. The only component of total revenues in either period was
subrogation revenue. Growth in subrogation revenues occurred primarily because
of increased subrogation recoveries from $24.3 million for the three months
ended March 31, 1996 to $33.7 million for the three months ended March 31, 1997.
This increase in subrogation revenues was partially offset by a decline in the
effective fee rate from 27.4% to 26.4%. This decline in effective fee rate was
directly attributable to the installation of a large new client in the first
quarter of 1996 because consistent with the Company's pricing practices, such
client was granted a volume discount on its prospective business and a discount
on its existing gross recoveries in process assumed by the Company. The Company
typically negotiates a lower fee when it assumes gross recoveries in process
from a client because some of the recovery work will have already been completed
by the client. Since a larger amount of subrogation recoveries was collected in
the three months ended March 31, 1997 than the three months ended March 31, 1996
and at lower fee rates, the effective fee rate declined. The increase in total
subrogation recoveries was due primarily to growth in gross recoveries in
process, which in turn grew primarily because of an increase in the number of
lives installed. Gross recoveries in process increased 26.9% to $568.7 million
at March 31, 1997 from $448.1 million at March 31, 1996. The Company was able to
obtain subrogation recoveries at a rate of approximately 6% of average gross
recoveries in process for the three months ended March 31, 1996 and 1997. Lives
installed grew 27.6% for the three months ended March 31, 1997 to 31.9 million
as compared to 25.0 million for the three months ended March 31, 1996, primarily
as a result of the continued installation of lives from the large new client and
to a lesser extent the installation of lives from other new clients and the
installation of additional lives from existing clients.

Cost of Services. Cost of services increased to $4.3 million for the three
months ended March 31, 1997 from $3.4 million for the three months ended March
31, 1996, an increase of $0.9 million or 29.0%. As a percentage of subrogation
revenues, cost of services was 48.5% in the three months ended March 31, 1997
and 50.2% for the three months ended March 31, 1996. The decrease as a
percentage of subrogation revenues was a result of substantial growth of lives
installed in the three months ended March 31, 1996, resulting in increased
processing activities, which correspondingly led to increased staffing and
investigation costs in advance of recoveries associated with such lives. The
decline as a percentage of subrogation revenues in the three months ended March
31, 1997 resulted from increased recoveries due to the increase in gross
recoveries in process as well as productivity improvements of newly hired
production personnel.

Support Expenses. Support expenses increased 25.0% to $2.3 million for
three months ended March 31, 1997, from $1.9 million for the three months ended
March 31, 1996. As a percentage of subrogation revenues, support expenses were
26.2% for the three months ended March 31, 1997 and 28.0% for the three months
ended March 31, 1996. This decline as a percentage of subrogation revenues
resulted primarily from spreading support expenses over a larger revenue base.

18
<PAGE> 22

Interest Income. Interest income totaled $114,000 and $92,000 for the
three months ended March 31, 1997 and 1996, respectively. No interest expense
was incurred during the three months ended March 31, 1997 or 1996.

Tax. Income taxes were 41.9% of pre-tax income for the three months ended
March 31, 1997 and 1996, respectively. The effective tax rates exceeded the U.S.
statutory tax rate due to the impact of state and local taxes, nondeductible
expenses and other provisions.

1996 COMPARED TO 1995

Revenues. Total revenues for the year ended December 31, 1996 increased
39.7%, to $31.4 million. This increase is primarily attributable to a 34.5%
growth in subrogation revenues, from $22.5 million to $30.2 million, and, to a
lesser extent, $1.2 million generated from the breast implant litigation
settlement services provided on an ad hoc basis by the Company, net of expenses
incurred by the Company. The Company assisted healthcare payors in obtaining a
settlement with breast implant manufacturers, other than Dow Corning, by
calculating their aggregate medical benefit liability. Growth in subrogation
revenues occurred primarily because of increased subrogation recoveries, from
$78.7 million in 1995 to $112.5 million in 1996. This increase in subrogation
revenues was partially offset by a decline in the effective fee rate from 28.6%
to 26.9%. This decline was directly attributable to the installation of the
large new client discussed above. The increase in total subrogation recoveries
was due primarily to growth in gross recoveries in process, which in turn grew
primarily because of an increase in the number of lives installed. Gross
recoveries in process increased 46.6% to $535.0 million at December 31, 1996
from $364.9 million at December 31, 1995. The Company was also able to obtain
subrogation recoveries at a rate of approximately 6% of average gross recoveries
in process per quarter during 1995 and 1996. Lives installed grew 65.3% in 1996
to 29.8 million. The installation of the large new client during 1996 accounted
for 36.0% of the growth in lives installed, representing 6.5 million lives
installed.

Cost of Services. Cost of services increased to $15.0 million in 1996 from
$10.3 million in 1995, an increase of 46.4%. As a percentage of subrogation
revenues, cost of services were 49.7% in 1996 and 45.6% for 1995. This was a
result of substantial growth of lives installed, resulting in increased
processing activities, which correspondingly led to increased staffing and
investigation costs in advance of recoveries associated with such lives in
future years. The lower effective fee rate has also contributed to the increase
in cost of services as a percentage of subrogation revenues.

As a result of the nature of the Company's contingent fee arrangements with
its clients, the Company incurs significant current expenses in an effort to
generate revenue, a significant portion of which will be recorded in future
periods. Because relatively little revenue is earned during the first year
following the installation of new lives, unless the Company assumes
responsibility for the new client's existing gross recoveries in process, the
growth rate for lives installed exceeds the revenue growth rate.

Support Expenses. Support expenses increased to $8.1 million in 1996 from
$6.9 million in 1995, an increase of $1.2 million, primarily as a result of
additional staffing necessitated by the growth in lives installed. As a
percentage of subrogation revenue, support expenses decreased to 26.8% for 1996
from 30.7% for 1995. This decline resulted from improved economies of scale in
the support functions.

Interest Income. Interest income totaled $486,000 in 1996, compared to
$580,000 in 1995, a decrease of $94,000, as a result of reduced short-term
investment balances due to the payment of dividends to Medaphis. No interest
expense was incurred during 1996 or 1995.

Tax. Income taxes were 41.9% of pre-tax income in 1996 and 42.1% in 1995.
The effective tax rates exceeded the U.S. statutory tax rate due to the impact
of state and local taxes, nondeductible expenses and other provisions.

1995 COMPARED TO 1994

Revenues. Subrogation revenues for the year ended December 31, 1995
increased 32.8% to $22.5 million from $16.9 million for 1994. Growth in
subrogation revenues occurred primarily as a function of

19
<PAGE> 23

increased subrogation recoveries, from $59.6 million in 1994 to $78.7 million in
1995. The effective fee rate increased slightly to 28.6% from 28.4%. The
increase in 1995 subrogation recoveries was due primarily to growth in gross
recoveries in process, which increased 28.4% to $364.9 million at December 31,
1995 from $284.3 million at December 31, 1994, and obtaining subrogation
recoveries at a rate of approximately 6% of average gross recoveries in process
per quarter during 1994 and 1995. Lives installed grew 24% in 1995 to 18.0
million. Subrogation revenues grew faster than lives installed during 1995 due
to the increase in lives installed in 1994, which grew 44.4%.

Cost of Services. Cost of services increased to $10.3 million in 1995 from
$7.9 million in 1994, an increase of $2.4 million or 29.2%. The increase in cost
of services is primarily related to increased processing activities, which
resulted in additional staffing and investigation costs. As a percentage of
subrogation revenues, cost of services decreased to 45.6% in 1995 from 46.9% in
1994. The decrease is a result of lower growth in the lives installed and their
associated costs in 1995 relative to the growth in revenue for the year and
increased efficiencies by the Company.

Support Expenses. Support expenses increased to $6.9 million in 1995 from
$6.1 million in 1994, an increase of $800,000. Support expenses increased
primarily as a result of additional hiring in the fourth quarter of 1994 to
support the continued growth of the Company. As a percentage of revenues,
support expenses were 30.7% for 1995 as compared to 35.8% for 1994. This
decrease in support expenses as a percentage of revenues was attributable
principally to economies of scale in the support functions.

Interest Income. Interest income totaled $580,000 in 1995 and $320,000 in
1994, an increase of $260,000. The increase is primarily attributable to higher
yields, and increased average levels of cash, cash equivalents and marketable
securities. No interest expense was incurred during 1995 or 1994.

Tax. Income taxes were 42.1% of pre-tax income in 1995 and 42.0% in 1994.
The effective tax rates exceeded the U.S. statutory tax rate due to the impact
of state and local taxes, nondeductible expenses and other provisions. All net
operating loss carryforwards of the Company had been utilized prior to the
Company's acquisition by Medaphis.

LIQUIDITY AND CAPITAL RESOURCES

The Company's statements of cash flows for the years ended December 31,
1994, 1995 and 1996, and for the three months ended March 31, 1996 and 1997 are
summarized below:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- -------------
1994 1995 1996 1996 1997
------ ------- ------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operations...... $3,212 $ 4,681 $ 5,876 $ (4) $ 250
Net cash used in investing activities.......... (758) (1,280) (1,558) (330) (53)
Net cash provided by (used in) financing
activities................................... 176 (9,351) (4,265) 423 (125)
Net increase (decrease) in cash and cash
equivalents.................................. $2,630 $(5,950) $ 53 $ 89 $ 72
</TABLE>

Net cash provided by operations increased $1.5 million and $1.2 million in
1995 and 1996, respectively, and $254,000 for the three months ended March 31,
1997, primarily as a result of increased net income and the timing of recurring
cash receipts and disbursements related to accrued expenses and subrogation
recoveries.

Net cash used in investing activities primarily reflects the Company's
capital expenditures for ongoing facility expansion and system enhancements,
including computer hardware, to meet the requirements of the Company's growing
revenue base.

The Company anticipates that capital expenditures for the year ending
December 31, 1997 will be approximately $2.9 million, for facility expansion,
computer hardware and the planned upgrade of the subrogation system. Over the
next 24 to 36 months, the Company anticipates total expenditures for the upgrade
of approximately $3.2 million, of which $2.6 million spent on hardware and
third-party software will be capitalized. See "Business -- The SubroSystem and
Platform."

20
<PAGE> 24

The Company paid $663,000 in sales commissions for the three months ended
March 31, 1997 and anticipates future cash outlays during 1997 of approximately
$770,000 related to the payment of selling commissions to an unrelated party in
connection with the acquisition of contracts for recovery services.

Net cash used in financing activities reflects the Company's ongoing
distributions to Medaphis, subsequent to Medaphis' acquisition of the Company in
1995. The Company will continue to make dividends out of net income to Medaphis
until the end of the month prior to the date of consummation of the Offering. As
a result, the Company will have a nominal amount of unrestricted cash upon
consummation of the Offering and will have stockholders' equity of $4.1 million
as of the end of that month.

The Company and National City Bank of Kentucky have entered into an
agreement under which the bank will extend to the Company an unsecured revolving
line of credit (the "Line of Credit") for maximum borrowings of up to $10
million, effective upon the closing of the Offering. Interest on the outstanding
indebtedness will accrue at either: (1) the greater of the bank's prime rate or
the effective federal funds rate plus 0.5% (the "Base Rate") or (2) the LIBOR
plus 2.25%, at the Company's option and will be payable in arrears on a
quarterly basis for draws bearing interest at the Base Rate and on a monthly,
bimonthly or quarterly basis, at the Company's option, for draws bearing
interest at the LIBOR-based rate. The maturity date for all outstanding
indebtedness under the Line of Credit will be two years from the consummation of
the Offering. In consideration for the bank making available the Line of Credit,
the Company has agreed to pay a closing fee of $25,000 and an annual commitment
fee, payable in quarterly installments, equal to 0.25% of the unused portion of
the Line of Credit. The Line of Credit contains customary covenants, including
covenants to maintain certain minimum interest coverage and leverage ratios and
a minimum level of net worth, that may limit the Company's ability to pay
dividends.

By contract, with respect to its standard recovery services, the Company
disburses recoveries to its clients on or before the 15th day of the month
following the month in which recoveries are made. At December 31, 1995 and 1996,
HRI reported on its balance sheet, as a current asset, restricted cash of $9.5
million and $18.8 million, respectively, representing subrogation recoveries
effected by HRI for its clients during the month of December, except that
restricted cash at December 31, 1996 also included $6.4 million in recoveries
from the breast implant settlement received in November and December 1996. At
December 31, 1995 and 1996, HRI reported on its balance sheet, as a current
liability, funds due clients of $6.9 million and $15.0 million, respectively,
representing recoveries to be distributed to clients, net of the fee earned on
such recoveries.

At March 31, 1997, HRI reported on its balance sheet, as a current asset,
restricted cash of $18.7 million representing subrogation recoveries effected by
HRI for its clients during the month of March, except that restricted cash at
March 31, 1997 also included $6.1 million in recoveries from the breast implant
settlement received in November and December 1996. At March 31, 1997, HRI
reported on its balance sheet, as a current liability, funds due clients of
$15.4 million representing recoveries to be distributed to clients, net of the
fee earned on such recoveries.

The Company believes that its available cash resources, together with the
borrowings available under the Line of Credit, will be sufficient to meet its
current operating requirements and internal development initiatives.

EXTERNAL FACTORS

The business of recovering subrogation and related claims for healthcare
payors is subject to a wide variety of external factors. Prominent among these
are factors that would materially change the healthcare payment, fault-based
liability or workers' compensation systems. Because the Company's profitability
depends in large measure upon obtaining and using claims data, and the
availability of property and casualty and workers' compensation coverages as
sources of recovery, changes in laws that would limit or bar either the access
to or use of claims data or the ability of healthcare payors to recover
subrogation and related claims represent an ongoing risk to the Company.

Moreover, because the Company's revenues derive from the recovery of the
costs of medical treatment of accidents, material changes in such costs will
tend to affect the Company's revenue or its rate of revenue growth. The
healthcare industry, and particularly the business of healthcare payors, is
subject to various external factors that may have the effect of significantly
altering the costs of healthcare. The Company is unable to predict which of
these factors, if any, could have a potentially material impact on healthcare
payors and through them, the healthcare subrogation recovery industry.

21
<PAGE> 25

BUSINESS

GENERAL

The Company believes it is the leading independent provider of health
insurance subrogation and related recovery services for private healthcare
payors, based on the Company's experience and assessment of its market. HRI
recovers the value of accident-related healthcare benefits provided by its
clients to insureds when a third-party is responsible for such healthcare
benefits. The Company offers its services on a nationwide basis to health
maintenance organizations, indemnity health insurers, self-funded employee
health plans, companies that provide claims administration services to
self-funded plans (referred to as "third-party administrators"), Blue Cross and
Blue Shield organizations and provider organized health plans. Current clients
include United HealthCare, Blue Shield of California, Healthsource, Humana,
Kaiser Permanente, Oxford Health Plans, Sears and The Prudential. The Company
had 32.6 million lives under contract from its clientele at March 31, 1997, more
than double the 15.1 million lives under contract at December 31, 1994.

HRI was incorporated on June 30, 1988 under the laws of Delaware. The
Company was co-founded by its present Chief Executive Officer and was initially
funded by two venture capital investors. The Company obtained its first client
in December 1988 and became profitable in the fiscal year ended June 30, 1993.
The Company operated as an independent entity until August 28, 1995, when the
Company was acquired by Medaphis in a transaction valued at approximately $79.1
million and accounted for as a pooling of interests.

INDUSTRY

Outsourcing. The outsourcing of non-core specialized business functions
has been increasing in recent years. Outsourcing enables a client to concentrate
its resources on its core business. Because of expertise and economies of scale,
companies that provide specialized services are often able to deliver the
requisite service at lower cost and of similar or higher quality than could be
achieved by their clients.

Since the late 1980s, healthcare payors have experienced increasing (i)
price competition, (ii) regulatory complexity and related administrative
burdens, (iii) costs of healthcare claims and (iv) average age of the insured
population. These factors are driven primarily by the rapid growth of managed
care, improvements in medical technology, consumer-oriented political pressure
and an aging U.S. population. These factors drive healthcare payors to
concentrate their resources on their core business and thus provide on-going
opportunities for enterprises able to perform non-core business functions on
behalf of healthcare payors.

The recovery process is complex and, although many healthcare payors
operate recovery departments, HRI believes that these departments are not
generally as effective per insured life as the Company. HRI believes that (i)
the relatively small size of recoverable funds as a percentage of claims paid,
(ii) the need for healthcare payors to focus on core competencies and (iii) the
complexity of the recovery process and economies of scale will continue to
provide opportunities resulting in continued growth for the Company. See
"-- Competition."

Recovery Rights of Healthcare Payors. By contract and state law,
healthcare payors are generally entitled to certain rights with respect to paid
healthcare claims that may be the primary obligation of other insurance
carriers. For example, the hospitalization and related health expenses of a
person injured in an automobile accident may be paid by an HMO to which the
injured person belongs. However, the responsible party is generally liable to
the injured person for the damages arising from the injury, which damages
include lost wages, property loss, pain and suffering and medical benefits. The
responsible party usually has a liability insurance policy that will pay covered
damages, including medical benefits, upon the acceptance of the injured party's
claim. The healthcare payor actually providing or paying for the medical
benefits conferred on the injured party, in this example an HMO, may have a
variety of rights through which it is entitled to recover the value of such
medical benefits from the responsible party and the responsible party's
liability insurer.

These recovery rights include:

(i) the right of subrogation, which allows the healthcare payor to
recover accident-related medical claims directly from the
responsible party or the responsible party's insurance carrier;

22
<PAGE> 26

(ii) the right of reimbursement, which allows the healthcare payor to
recover directly from the injured party any payment received from
the responsible party or the responsible party's insurance carrier
relating to this injury;

(iii) the right of reimbursement for medical benefits provided for
work-related injuries, which are typically excluded from the
healthcare insurer's coverage; and

(iv) other recovery rights against automobile insurers and other
liability insurers arising from coordination of benefits
provisions in property and casualty insurance coverages.

Based on information contained in the Statistical Abstract of the United
States 1996, the Company calculates that in 1994 there were approximately 150
million persons covered by private health insurance under insurance policies or
similar agreements in states that allow healthcare payors to exercise
subrogation and related recovery rights and estimates that these 150 million
insured persons suffered between 20 to 24 million injuries in 1994. Based on its
experience with accident-related claims, HRI estimates that these injuries gave
rise to approximately $19 to $23 billion in medical benefits and that
approximately $1.0 to $1.4 billion of the total medical benefits resulting from
injuries and paid by healthcare payors in 1994 were potentially recoverable
through subrogation.

The industry conditions described above have contributed to the growing
need for a cost-effective provider for subrogation services. HRI believes it is
the leading independent provider of subrogation and related recovery services
for private healthcare payors. HRI believes that its success is a result of the
implementation of the following strategy.

STRATEGY

HRI's strategy is to focus on growing opportunities to provide
cost-effective and efficient outsourcing of subrogation and related recovery
services and solutions to its clients. HRI capitalizes on these opportunities
through a sophisticated operation which relies on:

- A high degree of process automation;

- Highly specialized labor;

- Comprehensive customer service that emphasizes courteous and
non-intrusive interaction with all parties; and

- Incentives to its employees at all levels of the organization.

HRI plans to continue to grow its business by servicing additional lives
for existing clients and targeting new clients. HRI plans to further grow its
business by:

- Expanding its client base to include public sector healthcare
payors;

- Applying its core abilities to other businesses with similar claims
recovery opportunities; and

- Acquiring companies which provide claims recovery services.

THE RECOVERY PROCESS

HRI uses proprietary software and various business processes to identify
those claims that exceed a client-specific threshold dollar amount and as to
which its clients may have a recovery right for the medical benefits provided to
an insured. Following the identification and investigation of those claims, HRI
proceeds to recover from the financially responsible party the value of those
covered medical benefits provided to the insured. HRI has automated this complex
processing of all raw electronic data and the electronic guidance, follow-up and
generation of correspondence. The use of an automated process enables its
specially trained personnel to focus more intently on matters requiring their
professional judgement and expertise and increases productivity. This also
allows the Company to pursue claims that would otherwise be deemed too small to
pursue economically. HRI believes that its ability to effectively recover a
broader range of claim sizes is an important competitive advantage. In addition
to automating the recovery process, the SubroSystem generates

23
<PAGE> 27

significant operations and management information which enables the Company to
employ production and quality standards in the context of providing specialized
services.

In order to obtain recoveries, HRI has to establish whether or not the
healthcare payor has a right to recover from another person or entity, determine
which medical claims exceeding the predetermined dollar threshold resulted from
accidents and take the actions needed to effect recovery. These tasks require
knowledge of the property and casualty insurance process, knowledge of
healthcare payment systems, knowledge of the law of torts, subrogation and
related legal doctrines, a skilled labor force, adequate information data bases
and information systems, investigative and negotiating skills, and careful
workflow engineering.

HRI has refined the recovery process to four major, interrelated steps: (a)
automated identification of accident related claims provided electronically by
its clients, (b) investigation of potentially recoverable claims, (c) assertion
and management of potentially recoverable claims and (d) negotiation and
settlement of claims.

Automated Identification of Accident Related Claims. The automated
selection, analysis and processing of raw claims data is handled primarily
through HRI's proprietary software, the "SubroSystem." Information regarding
diagnoses, the costs of treatment, insured demographics (names, addresses and
telephone numbers, etc.) and related claims matters are provided to HRI
electronically. The primary vehicle for the identification of injured insureds
is an automated analysis of the clients' claims data. The SubroSystem includes
several direct connections to HRI's clients' claims information systems, subject
to various security controls to limit access. HRI's trained staff, using the
SubroSystem's diagnostic tools, identifies, sorts, vets and organizes raw claims
data into usable form, essentially engaging in "data mining". This system
identifies accident-related claims and, using client-specific protocols, opens
an on-line, electronic file for such claims. After files are opened, the
SubroSystem automatically tracks the medical expenses on files, so that files
are updated as insureds undergo additional treatments related to their injuries.
Since its inception, HRI has automatically opened over 10 million of such
on-line files.

Investigation of Potentially Recoverable Claims. When a file of claims
reaches a value determined by HRI, the SubroSystem automatically generates a
series of inquiry letters, the forms of which have been approved in advance by
HRI's clients, that are sent to injured persons. HRI's well trained and
courteous customer service representatives receive in-coming phone calls from
injured insureds who typically call in response to HRI's system-generated
inquiry letters. HRI also initiates phone calls if the insured has not responded
to the inquiry letters in a reasonable period of time. Based on the Company's
historical experience, approximately 92% of the injured insureds ultimately
respond to HRI's inquiries. The customer service representatives ask a series of
questions that enable them to determine whether a claim is recoverable, based on
carefully selected investigation criteria and training. Based on the Company's
historical experience, approximately 19% of the claims investigated by customer
service representatives are classified as recoverable. Once a claim or set of
related claims in a file is identified as recoverable, the system updates the
gross recoveries in process and assigns the file to the appropriate examiner who
begins the assertion and management of recoverable claims. Since its inception,
HRI has investigated over 2 million accidents.

Assertion and Management of Potentially Recoverable Claims. Once a file of
claims is classified as recoverable, HRI staff examiners, who are required to
undergo extensive training, proceed to assert the recovery rights of HRI's
clients and track the claims' history and development. The Company requires that
all of its examiners within one year of employment either be licensed as
insurance adjusters or meet comparable accreditation standards in states where
licensure is not available. Examiners contact all necessary parties to inform
them of the existence and value of the recovery claim; these parties generally
include the liability insurer for a responsible party, the insured and, if any,
the insured's attorney in conjunction with the injury. Examiners maintain
contact with the injured party and responsible party (or insurance carrier)
until the matter is settled, which may not occur until several years after the
date of the injury. During this phase of the recovery process, approximately 20%
of the amounts initially entered into gross recoveries in process as recoverable
is rejected, in which case further activity is terminated and gross recoveries
in process is reduced.

24
<PAGE> 28

All of the work flow performed by examiners is directed and guided
step-by-step by the SubroSystem. The SubroSystem creates a paperless,
inter-connected record of correspondence and notes taken by the examiner with
respect to the on-line file. Examiners annotate the files on-line, as necessary,
to document progress, developments and status and otherwise maintain the history
of each claim. The SubroSystem provides HRI's examiners access to a library of
more than 100 standardized correspondence packets and generates them
automatically at the request of the examiner.

Negotiation and Settlement of Claims. The recovery process culminates in
the negotiation and settlement of claim files. Within the settlement guidelines
established by each client and HRI's standard operating procedures, examiners
close recoverable files and remove them from gross recoveries in process by
making recoveries or by rejecting files and terminating recovery efforts. Once a
settlement is made and recorded on the SubroSystem, cash receipts are
anticipated and monitored by the responsible examiner. Cash receipts are checked
against settlement screens and posted to the credit of the appropriate client.

Claims remain the property of HRI's clients and litigation is commenced
solely at their written direction; similarly, clients may terminate litigation
or other recovery efforts at any time for any reason. Few files require
extensive attorney involvement. HRI generally bears the cost of legal services
as part of the normal services to its clients. HRI has established what it
believes are cost-effective relationships with providers of legal services,
including its relationship with Sharps & Associates. See "Certain Transactions."

Although some recoveries will be made during the first year of service, the
average time to make a recovery is 18 to 24 months, with substantially all
recoveries made by the sixth year. The timing of recoveries is driven by the
payment cycle of property and casualty claims (which is the source of recoveries
made by the Company) and circumstances specific to each claim (e.g.,
identification of responsible party, responsiveness of responsible party,
cooperation of parties involved, factual complexity and litigation). The amount
of subrogation recoveries made by the Company on behalf of a client is generally
less than the amount of gross recoveries in process on behalf of such client for
a number of reasons, including (i) the inadequacy of insurance coverage or other
available source of funds to pay the claim, (ii) the absence of third-party
liability or (iii) the settlement of the claim for less than full value in
accordance with HRI's established policies.

Approximately 60% of HRI's recoveries on behalf of clients involves
automobile liability insurance, 20% involves premises liability insurance, 10%
involves workers' compensation insurance and 10% involves product liability or
other insurance.

MARKETING, SALES AND CLIENT SERVICE

HRI primarily markets to and contracts with healthcare payors, including
HMOs, other types of managed healthcare plans, indemnity health insurers,
self-funded employee health plans, insured healthcare plans, third-party
administrators, Blue Cross and Blue Shield organizations and provider organized
health plans. HRI employs a staff of five sales managers, a marketing manager
and four client services managers. Sales are made directly through contacts with
prospective clients, trade show presentations and employer seminars. Additional
business is also generated from existing clients, who have expanded their
business by growth or acquisitions or who have business segments not already
under contract with HRI.

Due to the nature of the business, the sales process is lengthy and
involves demonstrating to prospective clients that HRI's economies of scale,
proprietary processes and value-added services allow (i) HRI to generate and
return to the clients a greater dollar amount of recoveries than the clients'
in-house recovery department and (ii) the client to focus greater resources on
core business functions. Frequently, new customer relationships are established
through pilot programs, which have typically lasted 12 to 18 months.

Complementing the technical aspects of the recovery process, the client
support function is primarily responsible for communications with clients and
problem resolution. To facilitate strong working relationships, individual
members of the client services staff are assigned to specific clients. HRI
believes that its investment in resources to resolve a wide variety of business
issues with clients is an important factor in obtaining customers and
maintaining good business relationships. During the last three years, HRI has
lost only four

25
<PAGE> 29

clients, representing in the aggregate fewer than 220,000 lives. Only one of
these clients was lost to an independent provider of recovery services.

CLIENT BASE

The Company provides services to healthcare plans that as of March 31,
1997, covered approximately 32.6 million lives sold. HRI's clients are national
and regional healthcare payors, large third-party administrators or self-insured
corporations.

Major commercial health plan clients include the following organizations or
selected plans sponsored by or affiliated with the following:

<TABLE>
<S> <C>
Blue Shield of California Principal Mutual Life Insurance
FIRST HEALTH Company
Healthsource Principal Health Care, Inc.
Humana Inc. The Prudential Insurance Company of
Kaiser Foundation Health Plan America
(Northern California Region) NYLCARE
Oxford Health Plans, Inc. United HealthCare Corporation
</TABLE>

Major self-insured clients include:

<TABLE>
<S> <C>
Bell Atlantic Corporation NYNEX Corp.
Electronic Data Systems Corporation Sears Roebuck & Co.
</TABLE>

HRI's largest clients are United HealthCare, Kaiser Foundation Health Plan
(Northern California Region) and Humana, generating 25%, 12%, and 9%, and 32%,
9% and 10%, respectively, of HRI's revenues in 1996 and the three months ended
March 31, 1997, respectively. The loss of one or more of these accounts could
have a material adverse effect on HRI's business, results of operations and
financial condition. However, HRI's contracts provide that in the event of
termination, HRI is generally entitled to complete the recovery process on the
gross recoveries in process for that client. On March 31, 1997, HRI had gross
recoveries in process of $569 million.

HRI's revenues are earned under written contracts with its clients that
provide for contingency fees from recoveries under a variety of pricing regimes.
The pricing arrangements offered by HRI to its clients include a fixed fee
percentage, a fee percentage that declines as the number of lives covered by the
client and subject to HRI's service increases and a fee percentage that varies
with HRI's recovery performance.

HRI performs its services on a reasonable efforts basis and does not
obligate itself to deliver any specific result. These contracts are generally
terminable on 60 to 180 days' notice by either party, although in a few cases
the contracts extend over a period of years. Pursuant to the terms of its client
contracts, HRI is generally entitled to continue to make recoveries and earn its
fees on the gross recoveries in process of the client at the time of
termination.

COMPETITION

HRI competes primarily with the internal recovery departments of potential
customers and other subrogation recovery service vendors. To the Company's
knowledge, there are three smaller, but significant, independent providers of
subrogation recovery services in addition to HRI. All three independent
competitors preceded HRI's entry into the recovery industry, and no major
competitors have entered the market since that

26
<PAGE> 30

EMPLOYEES

HRI employs, and facilitates the development of, skilled knowledge-workers.
HRI maintains an extensive, in-house training program, which it believes is
attractive to employees and essential to develop the necessary industry specific
skills. All HRI employees participate in one of four incentive compensation
plans, depending upon the responsibilities of each employee. HRI employed
approximately 400 persons as of March 31, 1997.

HRI requires all employees to enter into confidentiality and trade secret
agreements which generally prohibit them from divulging confidential information
and trade secrets after they terminate employment. Employees are also required
to enter into noncompetition agreements preventing them from working for a
competitor during the first year after they terminate employment. In addition,
customers agree not to employ HRI staff during the client's contract term plus a
specified period.

HRI's employees are not represented by a union. HRI believes its relations
with its employees are good.

THE SUBROSYSTEM AND PLATFORM

HRI's existing information management system (the "SubroSystem") consists
of proprietary software programs that function as an automated data and process
management system. See "-- The Recovery Process." HRI holds a copyright
registration from the United States Copyright Office on the software.

The SubroSystem software is a character-based application that runs on
Intel-based personal computers in an MS-DOS operating environment. The personal
computers are arranged in local area networks ("LANs") that represent logical
units of work; typically one LAN will service one to four clients and up to 25
HRI employees. This architecture provides a high level of fault tolerance, since
the failure of any particular server on the network will only impact the
operations of one LAN. Historically, the system has experienced negligible
amounts of down time and HRI maintains an inventory of platform components for
redundancy. On-line data is stored on redundant devices, and on a daily basis
all on-line storage systems are copied to magnetic tapes, which are removed to a
security vault off-site. Development and maintenance of the SubroSystem is
handled entirely by HRI's systems department.

Although the SubroSystem, a key feature of the Company's recovery process,
adequately serves the Company's information gathering and management needs, the
Company plans, in three consecutive steps over 24 to 36 months, (i) to migrate
the SubroSystem from a MS-DOS based environment to a Windows NT operating
environment, (ii) to adopt a new data base system and (iii) to adopt an object
oriented programming language, such as C++. The Company has a detailed
implementation plan which contemplates a comprehensive testing of all key
elements prior to implementation of each step. The Company anticipates spending
approximately $3.2 million on these activities, of which $2.6 million spent on
hardware and third-party software will be capitalized. It is HRI's policy to
expense software development costs as incurred. See "Risk Factors -- The
Information Management System."

Quality and Management Controls. The SubroSystem controls, measures and
reports on the recovery process. From data recorded on the SubroSystem, a series
of financial reports are generated for clients that allow them to monitor HRI's
success in making recoveries and building gross recoveries in process on their
behalf. The same data are used to produce a wide array of accounting and
management information used by HRI to operate its business. HRI employs a
variety of quality control techniques to insure consistently high quality
service.

27
<PAGE> 31

LEGAL AND REGULATORY ENVIRONMENT

The healthcare industry is subject to numerous regulations which may
adversely affect HRI's business. In addition to law and regulation affecting
healthcare and insurance, changes in federal fair debt collection regulations
also may adversely affect HRI's business.

General. From time to time, legislation is introduced in Congress and in
various state legislatures which would materially affect the Company's business.
The most significant legislation, law and regulation, for clarity, may be
grouped in three categories: (1) legislation that would substantially limit the
ability of healthcare insurers to recover from third-parties accident-related
medical benefits incurred by injured insureds ("Health Insurance Primacy Laws"),
(2) legislation that would substantially limit the Company's ability to receive
and utilize individual claim information from healthcare insurers
("Confidentiality Laws") and (3) other federal and state law. The following
identify specific risks in those three categories:

Health Insurance Primacy Laws:

Certain No Fault Insurance Systems. Michigan, Pennsylvania and New Jersey
have adopted automobile "no fault" insurance systems in which the injured
party's health insurance carrier or provider is primarily responsible for
healthcare related expenses (and not the responsible party and his or her
insurer or the injured insured's automobile liability insurer). In 1994,
proponents of the California "pay-at-the-pump" bill attempted to enact by
referendum, legislation that would have made the injured insured's healthcare
payors primarily liable for healthcare expenses for automobile accidents in
California. Although this referendum was withdrawn, there can be no assurance
that it will not again be presented in a ballot initiative or as legislation in
the future. Growth in the number of states adopting similar systems could
significantly reduce the amounts otherwise recoverable by the Company in
connection with automobile injuries in such states.

28
<PAGE> 32

Confidentiality Laws:

Other Federal and State Laws:

Certain Legal Doctrines. With respect to recoverable claims, the rights of
subrogation and reimbursement may be limited in some cases by (i) the "made
whole doctrine," which may limit the healthcare provider's ability to recover
when the settlement damage award received by the injured party is inadequate to
cover the injured party's damages and (ii) the "common fund doctrine," which
permits plaintiff's attorneys to determine their compensation based on the
entire amounts covered by a damage award and may, in some cases, proportionally
diminish the amount recoverable by HRI on behalf of the healthcare payor out of
that damage award. The "made whole doctrine" and the "common fund doctrine" are
long-standing legal doctrines.

PROPERTIES

HRI leases approximately 66,345 square feet of space for its offices in
Louisville, under a lease agreement with a five-year term expiring in 2002,
where it maintains its executive offices and main operations. At its regional
operating office in Pittsburgh, HRI leases approximately 9,800 square feet,
under a lease agreement with a five-year term expiring 2001. At its Minneapolis
location, HRI leases approximately 566 square feet, under a one-year lease
subject to annual renewals until 2001. HRI believes that these facilities are
suitable and adequate for HRI's business and are otherwise properly utilized,
with sufficient room for growth. HRI has historically been able to locate new
space as its capacity increased and believes that the availability of space will
not have a material effect on its business in the future.

LEGAL PROCEEDINGS

In March 1994 a class action complaint was filed against HRI in the United
States District Court for the Northern District of West Virginia, Michael L.
DeGarmo, et al. v. Healthcare Recoveries, Inc. The plaintiffs assert that HRI's
subrogation recovery efforts on behalf of its clients violate a number of state
and federal laws, including the Fair Debt Collection Practices Act and the
Racketeer Influenced and Corrupt Organization Act (RICO). The complaint also
seeks judgment, under the federal Declaratory Judgment Act, that HRI as the
subrogation agent for various healthcare payors be limited, in recovering from
persons who caused

29
<PAGE> 33

accidents or from the healthcare payors' injured insureds, to the actual costs
of the medical treatment provided to such injured insureds by such healthcare
payors, notwithstanding provisions in the applicable healthcare policies or
agreements, which generally allow recovery by the healthcare payors of the
"reasonable value" of such treatments. The complaint alleges that HRI made
fraudulent representations to recover sums in excess of those actually expended
by the applicable healthcare payor to pay for medical treatment. Plaintiffs, and
the putative class, demand compensatory damages, treble damages under RICO,
costs and reasonable attorneys' fees. HRI believes that the class alleged by the
plaintiffs does not satisfy requirements for a class action because the
plaintiffs are not adequate representatives of the putative class and potential
claims by class members lack the commonality required for class actions due to
the number of states whose laws apply to the subrogation provisions of
applicable healthcare policies and agreements and the varying language of such
subrogation provisions. The DeGarmo case is in non-merits discovery, and no
class of plaintiffs has been certified.

This lawsuit, if successful, could prevent the Company from recovering the
"reasonable value" of medical treatment under DFS, capitation and other payment
arrangements. By the end of 1993, at the direction of certain clients, HRI had
ceased the practice of recovering on their behalf the "reasonable value" of
medical treatment provided by medical providers under DFS arrangements with
those clients. It is the Company's current policy not to recover the "reasonable
value" of medical treatment in DFS arrangements. However, HRI historically and
currently recovers the "reasonable value" of medical treatment provided under
capitation arrangements and other payment arrangements with medical providers on
behalf of those clients that compensate medical providers under these payment
mechanisms, to the extent that these benefits are related to treatment of the
injuries as to which clients have recovery rights. The Company believes that its
clients' contracts, including the contracts that provide for recovery under DFS,
capitation and other payment arrangements are enforceable under the laws of the
states potentially applicable in this case and that, as a result, this
litigation will not have a material adverse effect upon its business, results of
operation or financial condition. Nevertheless, if this lawsuit or another
lawsuit seeking relief under similar theories were to be successful, it could
have a material adverse effect on the Company's business, results of operations
and financial condition.

In March 1996 a class action complaint was filed against HRI in the 261st
Judicial District Court, Travis County, Texas, Evelyn Dickey v. Healthcare
Recoveries, Inc. The complaint alleges that HRI violated Texas law by not filing
a $10,000 bond with the Secretary of State, as required for all debt collectors.
The plaintiffs sought damages of $100 for each class member. In August 1996, the
plaintiffs filed an amended petition alleging, additionally, that HRI violated
Texas law in attempting to collect consumer debts without disclosing in any
communication to the debtors that it was collecting consumer debts. The putative
class consists of all persons contacted in Texas by HRI with respect to a
recovery. HRI believes that it is not a "debt collector" under Texas law and,
accordingly is not subject to the Texas laws listed in the complaint. The
Company filed a motion for summary judgment in the case and on May 5, 1997 the
court issued an order granting summary judgment in favor of the Company. The
plaintiffs have until June 5, 1997 to file an appeal. The Company does not
believe that this litigation will have a material adverse effect upon its
financial condition or upon results of its operations.

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<PAGE> 34

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Upon the completion of the Offering, except as noted below with respect to
Mr. McDowell and Ms. Harreld, the Directors and Executive Officers of the
Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Patrick B. McGinnis.................... 50 Chairman, Chief Executive Officer, Director
Dennis K. Burge........................ 50 Executive Vice President -- Operations
Douglas R. Sharps...................... 43 Executive Vice President -- Finance and
Administration, Chief Financial Officer and
Secretary
Kathleen K. Harreld(1)................. 45 Executive Vice President -- Business
Development
Bobby T. Tokuuke....................... 51 Senior Vice President -- Systems
Debra M. Murphy........................ 42 Senior Vice President -- Sales & Marketing
William C. Ballard, Jr................. 56 Director
Jill L. Force.......................... 44 Director
John H. Newman......................... 53 Director
Elaine J. Robinson..................... 48 Director
Chris B. Van Arsdel.................... 53 Director
David E. McDowell(1)................... 54 Director
</TABLE>

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

(1) Mr. McDowell serves in his capacity as Chief Executive Officer of Medaphis
and has agreed to resign from the board of directors of the Company
effective upon the completion of the Offering. Ms. Harreld intends to
resign upon the completion of the Offering.

PATRICK B. MCGINNIS serves as Chairman, Chief Executive Officer and a
Director of the Company. In 1988, Mr. McGinnis left Humana Inc., where he served
as Vice President -- Finance & Planning, to co-found the Company. He served as
the Company's Chief Executive Officer until August 1996, when he became
President of the Medaphis Healthcare Information Technology Company, which
provides a variety of sophisticated software solutions to healthcare enterprises
throughout the United States. He rejoined the Company in January 1997 as its
Chairman and Chief Executive Officer.

DENNIS K. BURGE serves as Executive Vice President -- Operations of the
Company. Mr. Burge joined the Company in 1991 as Vice President, Operations. He
was promoted to Senior Vice President -- Operations in October 1994. In May
1996, he joined Gottlieb Financial Services (a Medaphis subsidiary) as Chief
Operating Officer, where he served until February 1997, when he rejoined the
Company.

DOUGLAS R. SHARPS serves as Executive Vice President -- Finance and
Administration, Chief Financial Officer and Secretary. Mr. Sharps joined the
Company in January 1990 as Vice President and General Counsel. He served as
Senior Vice President -- Finance and General Counsel from October 1994 to August
1995. He is also the principal of Sharps & Associates, PSC, a law firm that
provides support to HRI and handles litigated recoveries in California,
Illinois, Kentucky and Texas.

KATHLEEN K. HARRELD serves as Executive Vice President -- Business
Development. Ms. Harreld joined the Company in August 1989 as Vice
President -- Sales and Marketing. She served as Senior Vice
President -- Operations from May 1996 to August 1996, and as President of HRI
from September 1996 until January 1997, when she assumed her present duties.

BOBBY T. TOKUUKE serves as Senior Vice President -- Systems. Mr. Tokuuke
joined the Company at its inception in 1988 and was part of the team that
developed the SubroSystem. From October 1994 he served as Vice President of
Systems and assumed his present position in April 1996.

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<PAGE> 35

DEBRA M. MURPHY serves as Senior Vice President -- Sales and Marketing. Ms.
Murphy joined the Company in 1991 as Sales and Marketing Manager. She was
promoted to Director of Sales in October 1994 and to Vice President -- Sales in
February 1996. She assumed her current responsibilities in November 1996.

WILLIAM C. BALLARD, JR. has agreed to become a Director upon the completion
of the Offering. Mr. Ballard is of counsel to the law firm, Greenebaum, Doll &
McDonald in Louisville, Kentucky. He retired in 1992 after 22 years as the Chief
Financial Officer and a director of Humana Inc. Mr. Ballard serves on the board
of directors of American Safety Razor Co., Atria Communities, Inc., a national
provider of assisted and independent living communities for the elderly, Health
Care REIT, Inc., LG&E Energy Corp., Mid-America Bancorp, United Healthcare Corp.
and Vencor, Inc., one of the nation's largest providers of health care services,
focusing on the elderly.

JILL L. FORCE has agreed to become a Director upon the completion of the
Offering. Since December 1996 Ms. Force has served as Senior Vice President,
General Counsel and Corporate Secretary of Vencor, Inc. Ms. Force has been
General Counsel of Vencor, Inc. since 1989.

JOHN H. NEWMAN has agreed to become a Director upon the completion of the
Offering. Mr. Newman has been a partner in the law firm of Brown & Wood LLP
since 1980.

ELAINE J. ROBINSON has agreed to become a Director upon the completion of
the Offering. Ms. Robinson has served as Vice President and Treasurer of
Providian Corporation since December of 1991.

CHRIS B. VAN ARSDEL has agreed to become a Director upon the completion of
the Offering. Since August 1995, Mr. Van Arsdel has served as Vice President of
Operations in EDS' Corporate Client/Server Group. From October 1989 to August
1995, Mr. Van Arsdel was Director Corporate Quality at EDS.

DAVID E. MCDOWELL has agreed to resign as a member of the Company's Board
of Directors upon the completion of the Offering. He has been Chairman and Chief
Executive Officer of Medaphis since 1996. From 1992 to 1996, Mr. McDowell was
President and Chief Operating Officer of McKesson Corporation, the world's
largest distributor of pharmaceutical and healthcare products.

The Company's Board of Directors is divided into three classes serving
staggered, three-year terms. At each annual meeting of the Company's
stockholders, successors to the class of directors whose term expires at such
meeting will be elected to serve for three-year terms and until their successors
are elected and qualified. Mr. McGinnis and Ms. Force shall serve for an initial
term of three years, Mr. Ballard and Ms. Robinson for an initial term of two
years, and Mr. Newman and Mr. Van Arsdel shall serve for an initial term of one
year.

COMMITTEES OF THE BOARD

Subsequent to the Offering, the Board of Directors will establish an Audit
Committee. The Audit Committee will be comprised solely of independent directors
and will be charged with recommending the firm to be appointed as independent
accountants to audit the Company's financial statements, discussing the scope
and results of the audit with the independent accountants, reviewing the
functions of the Company's management and independent auditors pertaining to the
Company's financial statements and performing such other related duties and
functions as are deemed appropriate by the Audit Committee and the Board of
Directors.

Also, subsequent to the Offering, the Board of Directors will establish a
Compensation Committee. The Compensation Committee will be comprised solely of
"Non-Employee Directors" as such term is used in Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
"outside directors" as such term is used in Treasury Regulation Section
1.162-27(c)(3) promulgated under the Internal Revenue Code of 1986, as amended
(the "Code"). The Compensation Committee will be responsible for reviewing
general policy matters relating to compensation and benefits of employees and
officers, determining the total compensation of the officers and directors of
the Company and administering the Company's Stock Option Plan. See
"-- Non-Qualified Stock Option Plan for Eligible Employees."

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<PAGE> 36

COMPENSATION OF DIRECTORS

Non-employee Directors of the Company, after completion of the Offering,
will receive $1,500 per board meeting attended and will receive initial grants
of 10,000 nonqualified stock options at the initial public offering price and
thereafter annual grants of 2,000 nonqualified stock options at the then current
market price of the Common Stock for their services and are reimbursed for their
reasonable expenses in attending meetings of the Board of Directors. See
"-- Directors' Stock Option Plan."

EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and each of the other most highly
compensated executive officers of the Company, whose aggregate cash and cash
equivalent compensation exceeded $100,000 (collectively, the "Named Executive
Officers"), with respect to the year ended December 31, 1996. As of August 28,
1995, HRI was a wholly-owned subsidiary of Medaphis.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION OPTIONS(#) COMPENSATION($)
- ------------------ ---- --------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Patrick B. McGinnis.......... 1996 $110,966 $ 86,093 $89,301(1) 0 $0
Chairman, Chief Executive
Officer, Director
Kathleen K. Harreld.......... 1996 120,004 54,917 3,535(2) 0 0
Executive Vice President --
Business Development
Douglas R. Sharps............ 1996 107,152 54,123 0 0 0
Executive Vice President --
Finance and
Administration, Chief
Financial Officer and
Secretary
Bobby T. Tokuuke............. 1996 92,424 15,370 3,227(3) 0 0
Senior Vice President --
Systems
Debra M. Murphy.............. 1996 83,071 17,447 1,785(4) 0 0
Senior Vice
President -- Sales &
Marketing
</TABLE>

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

(1) Includes $83,301 paid to Mr. McGinnis for his services as President of
Medaphis Healthcare Information Technology Company, a subsidiary of
Medaphis, $4,500 of matching contributions to the Medaphis Employees'
Retirement Savings Plan and $1,500 of matching contributions to the Medaphis
Deferred Compensation Plan.

(2) Includes $3,535 of matching contributions to the Medaphis Employees'
Retirement Savings Plan.
(3) Includes $2,151 of matching contributions to the Medaphis Employees'
Retirement Savings Plan and $1,076 of matching contributions to the Medaphis
Deferred Compensation Plan.
(4) Includes $1,785 of matching contributions to the Medaphis Employees'
Retirement Savings Plan.

33
<PAGE> 37

STOCK OPTION GRANTS

During the year ended December 31, 1996, Medaphis granted or repriced a
total of 183,000 stock options to the Named Executive Officers pursuant to
various Medaphis stock option plans. The following table sets forth the grants
and repricings for each Named Executive Officer during the year ended December
31, 1996.

OPTION GRANTS IN 1996
INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF POTENTIAL REALIZABLE VALUE AT
UNDERLYING TOTAL ASSUMED RATES OF STOCK PRICE
OPTIONS OPTIONS APPRECIATION FOR OPTION
GRANTED GRANTED TO EXERCISE TERM ($)/(2)
AND/OR EMPLOYEES PRICE EXPIRATION -----------------------------
NAME REPRICED(#) OF COMPANY ($/SHARE) DATE(1) 0% 5% 10%
- ---- ----------- ---------- ---------- ---------------- --- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Patrick B. McGinnis... 100,000 34.13% $ 13.25 , 1997 $0 $941,200 $2,455,380
Kathleen K. Harreld... 31,000 10.58 8.5-9.875 , 1997 0 190,392 491,242
Douglas R. Sharps..... 17,000 5.80 8.5-9.875 , 1997 0 103,030 264,589
Bobby T. Tokuuke...... 18,000 6.14 8.5-9.875 , 1997 0 111,707 288,065
Debra M. Murphy....... 17,000 5.80 8.5-9.875 , 1997 0 105,061 270,993
</TABLE>

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

(1) The initial terms of these options range from June 1, 2006 to November 19,
2007. However, under the terms of the options, vesting is accelerated to
, 1997 upon the closing of the Offering. The stock options will
expire three months or, with respect to some of the options, six months
after the closing of the Offering.

(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the Securities and Exchange Commission based on the initial
option expiration dates ranging from June 1, 2006 to November 19, 2007. The
actual value, if any, a Named Executive Officer may realize will depend on
the excess of the stock price over the exercise price on the date the
option is exercised. Effective as of April 25, 1997, the Medaphis
Compensation Committee repriced all employee stock options, including stock
options held by the Named Executive Officers, to an exercise price of
$5.375 per share.

OPTION EXERCISES AND YEAR-END HOLDINGS

During the year ended December 31, 1996, none of the Named Executive
Officers exercised stock options. The following table sets forth certain
information with respect to unexercised stock options to purchase Medaphis
common stock held by each Named Executive Officer as of December 31, 1996.

AGGREGATED OPTION EXERCISES DURING FISCAL YEAR
ENDED DECEMBER 31, 1996 AND 1996 FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL "IN-THE-MONEY" OPTIONS
YEAR-END (#) AT FISCAL YEAR-END($)/(1)
SHARES ACQUIRED VALUE ----------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Patrick B. McGinnis.... 0 $ 0 8,400 123,600 $ -0- $ -0-
Kathleen K. Harreld.... 0 0 7,594 38,391 14,912 82,555
Douglas R. Sharps...... 0 0 7,594 24,391 14,912 51,806
Bobby T. Tokuuke....... 0 0 3,497 18,299 10,970 37,299
Debra M. Murphy........ 0 0 2,698 17,199 8,649 35,608
</TABLE>

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

(1) Options are "in the money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between $11.1875 per share, the market value of
the Common Stock issuable upon exercise of the options at December 31, 1996
(as determined by the Board of Directors), and the exercise price of the
option, multiplied by the applicable number of shares underlying the
options.

34
<PAGE> 38

NON-QUALIFIED STOCK OPTION PLAN FOR ELIGIBLE EMPLOYEES

The Company has adopted the Healthcare Recoveries, Inc. Non-Qualified Stock
Option Plan for Eligible Employees (the "Plan"). The Plan provides for the award
of stock options to certain officers and key employees of the Company at the
time of the Offering. The Company has reserved 700,000 shares of Common Stock
for issuance under the Plan. At the time of the Offering, options to purchase
200,000 shares will be granted to Mr. McGinnis, options to purchase 78,750
shares will be granted to Mr. Burge, options to purchase 78,750 shares will be
granted to Mr. Sharps, options to purchase 65,000 shares will be granted to Mr.
Tokuuke, and options to purchase 65,000 shares will be granted to Ms. Murphy. In
addition, options to purchase 12,500 shares will be granted to certain other
employees of the Company at the time of the Offering. Such options shall be
exercisable at the initial public offering price and shall vest ratably over a
three year period. It is the intention of Company management to propose to the
Compensation Committee a grant of up to 200,000 additional options to managers
of the Company (not including the Named Executive Officers) as soon as practical
after the Offering at the market price on the date of grant. In accordance with
Treasury regulations, in the event the value realized upon the exercise of
options by any covered employee (the difference between the per share exercise
price and the market price on the date of exercise multiplied by the number of
options exercised) when combined with such employee's other covered compensation
in the year of exercise exceeds $1.0 million, the Company will be unable to
deduct the amount of such excess compensation.

The Plan shall be administered by the Compensation Committee of two of more
non-employee directors. Subject to the terms of the Plan, the Compensation
Committee has the authority to determine the employees to whom options or rights
may be granted, the exercise price and the number of shares subject to each
option or right and the time or times when each option shall become exercisable,
to interpret the Plan and prescribe and rescind rules and regulations consistent
with the Plan and to determine certain other provisions with respect to each
option or right.

Options granted under this Plan are generally nontransferable by the
optionee and, unless otherwise determined by the Compensation Committee, must be
exercised by the optionee during their period of employment or service with the
Company or within a specified period following termination of employment or
service. In the event of a Change of Control (as defined by the Plan), the
unexercised portion of all outstanding options under the Plan will become fully
vested and immediately exercisable and will remain exercisable until the first
anniversary of such event, after which time all outstanding options will
immediately terminate as to any portion thereof not exercised.

SUPPLEMENTAL RETIREMENT SAVINGS PLAN

The Company has adopted a non-qualified deferred compensation plan under
which certain key employees of the Company may defer up to 16% of their
compensation (reduced by the amount they could have deferred under the Company's
401(k) Plan). The Company will match employee contributions equal to the
contributions that would have been made under the Company's 401(k) Plan but for
certain tax restrictions. Participants will be entitled to receive distributions
upon termination of employment. The Company may fund all or part of its
obligations under this plan in a trust reachable by the Company's general
creditors.

ANNUAL BONUS PLAN

The Company has adopted an annual performance-based bonus plan in which the
Named Executive Officers will participate. The plan provides for cash bonuses to
its participants based on certain performance-based thresholds set forth in the
plan. The Company estimates that the maximum bonus for the Named Executive
Officers would be between 95% and 115% of their respective base annual salaries.

DIRECTORS' STOCK OPTION PLAN

The Company has adopted the Healthcare Recoveries, Inc. Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for the grant
of options to purchase Common Stock to each

35
<PAGE> 39

Director who will be a member of the Board upon the consummation of the
Offering. No Director who is an employee of the Company or any subsidiary is
eligible to participate in the Directors' Plan.

The Directors' Plan provides that each eligible Director who will be a
member of the Board of Directors will be awarded options to purchase 10,000
shares of Common Stock at an exercise price equal to the initial public offering
price per share. Thereafter, option grants under the Directors' Plan will be
made at each annual meeting of the Board of Directors, beginning in 1998 and
each subsequent annual meeting until 2002, and on such dates each eligible
Director will receive options to purchase 2,000 shares of Common Stock, for so
long as shares are available under the Director's Plan. One-third of the shares
of Common Stock covered by an option shall vest on the June 1st next following
the date of grant and on each succeeding June 1st until fully vested, provided
that the optionee must be an eligible Director of the Company on June 1st.
Subject to readjustment in accordance with the provisions of the Directors'
Plan, the total amount of Common Stock on which options may be granted to
Directors under the Directors' Plan shall not exceed in the aggregate
shares.

The Directors' Plan shall be administered by the Compensation Committee.
Subject to the terms of the Directors' Plan, the Compensation Committee has the
authority to determine the Directors to whom options or rights may be granted,
the exercise price and the number of shares subject to each option or right and
the time or times when each option shall become exercisable, to interpret the
Directors' Plan and prescribe and rescind rules and regulations consistent with
the Directors' Plan and to determine certain other provisions with respect to
each option or right. If an optionee ceases to be a non-employee Director due to
voluntary resignation as a Director, voluntary decision not to stand for
reelection or removal as a Director by the stockholders for cause, then the
unvested portion of any option shall terminate on the earlier of the option's
expiration date or the date of termination of service as a non-employee
Director. If an optionee ceases to be Director for any other reason, the
unvested portion of options shall vest on the date of termination of service and
may thereafter be exercised pursuant to their terms. The obligations of the
Company under the Directors' Plan shall be binding upon any successor to
substantially all of the Company's assets and business, and the Company has
agreed that it will make appropriate provision for the preservation of the
optionee's rights in any agreement or plan which it may enter into or adopt to
effect any such transfer of assets or ownership. The Directors' Plan, with
respect to the granting of options, shall terminate at midnight on June 31,
2002.

EMPLOYEE STOCK PURCHASE PLAN

The Company has adopted the Healthcare Recoveries Employee Stock Purchase
Plan pursuant to which eligible employees may elect to have payroll deductions
of up to 15% of their annual compensation applied to the purchase of Common
Stock at a discount to market price of approximately 15%, subject to certain
restrictions.

DIVESTITURE BONUS

In connection with the Offering, the Company has agreed to grant to certain
members of the Company's management team 200,000 shares of Common Stock,
representing 2% of the Common Stock to be outstanding after the Offering (the
"Divestiture Bonus"). Upon the consummation of the Offering, 80,000, 20,000,
20,000, 15,000, 15,000 and 36,000 of these shares will be granted to Messrs.
McGinnis, Burge, Sharps, Tokuuke, Ms. Murphy and Ms. Harreld, respectively. The
remaining 14,000 shares will be granted to other members of the HRI management
team upon the consummation of the Offering. These shares will be "restricted
securities" within the meaning of Rule 144 under the Securities Act, and each
member of the management team receiving the Divestiture Bonus has agreed with
the Company not to sell more than 50% of such member's Divestiture Bonus shares
within the first year after the consummation of the Offering. The Company's
financial statements for the quarter ending June 30, 1997, will reflect a
non-cash charge (not deductible for income tax purposes) in an amount equal to
$2.8 million (assuming an initial public offering price of $14.00 per share),
less an amount (based on an independent appraisal) to reflect a discount value
of the shares due to their transfer restrictions in connection with the
Divestiture Bonus.

36
<PAGE> 40

EMPLOYMENT AGREEMENTS

The Company and Mr. McGinnis have entered into an employment agreement
pursuant to which Mr. McGinnis will serve as Chairman and Chief Executive
Officer of the Company. The employment agreement is for a term of three years,
with automatic two year renewals, unless a notice of termination is delivered by
either party within not less than sixty (60) days prior to the end of a term or
a renewal term. Under the terms of the agreement, Mr. McGinnis will receive a
salary at an annual rate of $200,000. The Company may terminate the employment
agreement and all of its obligations thereunder if Mr. McGinnis (i) materially
breaches any term of the employment agreement, (ii) commits any act in bad faith
materially detrimental to the Company, (iii) engages in illegal or dishonest
activities or is convicted of any crime involving fraud, deceit, or moral
turpitude, or (iv) dies or becomes mentally or physically disabled and is unable
to perform his obligation under the employment agreement. The Company's
obligations under the employment agreement to pay salary, to provide for the
continued vesting of stock option awards and to provide for health insurance
benefits shall continue for the greater of the remainder of the term (or the
renewal term) or two years if the Company terminates the employment agreement
for any other reason, or if Mr. McGinnis terminates the agreement for one of the
following reasons (i) the Company materially breaches any term of the employment
agreement, (ii) the Company assigns Mr. McGinnis duties, or significantly
reduces his assigned duties, in a manner inconsistent with his position with the
Company (without his consent), (iii) the Company requires Mr. McGinnis's
relocation outside of the metropolitan Louisville, Kentucky area (without his
consent), (iv) the Company fails to obtain the assumption of the employment
agreement by any successors to the Company, or (v) a Change in Control Event (as
defined in the employment agreement) occurs, and Mr. McGinnis's employment is
terminated by Mr. McGinnis or the Company, for whatever reason, within 120 days
thereafter (in this latter event, Mr. McGinnis may also be entitled to receive a
certain Gross-Up Payment (as defined in the employment agreement)). The
employment agreement contains certain confidentiality and noncompete provisions
in favor of the Company.

The Company and Messrs. Burge, Sharps, Tokuuke, and Ms. Murphy have entered
into employment agreements, each with a term of three years. Under the terms of
the agreements, Messrs. Burge and Sharps will receive a salary at an annual rate
of $125,000, and Mr. Tokuuke and Ms. Murphy will receive a salary at an annual
rate of $110,000. The Company may terminate an employment agreement with Messrs.
Burge, Sharps, Tokuuke, and Ms. Murphy for cause in the following circumstances:
(i) material breach of any term of the employment agreement, (ii) commission of
any act in bad faith materially detrimental to the Company, (iii) engagement in
illegal or dishonest activities or conviction of any crime involving fraud,
deceit, or moral turpitude or (iv) death or mental or physical disability
resulting in an inability to perform one's obligations under the employment
agreement. Each employment agreement contains certain confidentiality and
noncompete provisions in favor of the Company.

37
<PAGE> 41

CERTAIN TRANSACTIONS

MEDAPHIS

Medaphis is selling HRI as part of its restructuring plan to divest
non-core businesses and is required to use the net proceeds of the Offering to
retire bank debt. Since August 1995, HRI has been a wholly-owned subsidiary of
Medaphis. During this period, certain corporate functions that had been
performed by HRI internally were performed by Medaphis. These functions
consisted primarily of payroll and benefits administration. See Note 1 to the
Audited Financial Statements of HRI.

In connection with the closing of the Offering, HRI and Medaphis will enter
into a Separation Agreement, negotiated at arms-length between Medaphis
management and HRI management, pursuant to which certain insurance, tax and
other administrative matters are addressed.

Messrs. McGinnis, Sharps and Tokuuke, and Ms. Harreld and Ms. Murphy
possess incentive options to purchase shares of Medaphis Common Stock that will
automatically vest, pursuant to the terms of such options, in connection with
the Offering. See "Management -- Option Exercises and Year-End Holdings."

In connection with the acquisition of HRI by Medaphis, Messrs. McGinnis,
Sharps and Tokuuke, and Ms. Harreld and Ms. Murphy received 273,456, 51,948,
43,016, 56,943 and 6,693 shares, respectively, of Medaphis common stock in
exchange for their holding of Common Stock.

Effective the date of this Prospectus, the Company and Medaphis entered
into a Separation Agreement (the "Separation Agreement") that provides for the
separation of HRI from Medaphis. The Separation Agreement provides that on the
date the Offering is consummated (i) HRI will have a nominal amount of
unrestricted cash, and will not owe any amount to Medaphis (except as discussed
below with respect to purchased goods and services, certain employee benefit
plan payments and a distribution to be made to Medaphis to reduce HRI's
stockholder's equity to $4.1 million) and (ii) Medaphis will not owe any amount
to HRI.

The Separation Agreement also provides that (i) HRI will owe (without
markup or markdown) Medaphis after the consummation of the Offering for any
goods or services purchased from or through Medaphis prior to consummation but
not paid for prior to such consummation; (ii) Medaphis will cause its bank
lenders to release in connection with the Offering the HRI guaranty of Medaphis'
bank debt, all liens on HRI's assets and the Common Stock to be sold by Medaphis
pursuant to the Offering; (iii) HRI will upon consummation of the Offering
assume responsibility for providing health insurance or coverage to former HRI
employees (and their eligible dependents) who have exercised their right under
federal law to obtain such insurance or coverage in accordance with applicable
federal law; (iv) assets and liabilities under the Medaphis "cafeteria" employee
benefit plan relating to HRI employees will be transferred to a new HRI
"cafeteria" benefit plan, together with an adjusting payment to or from HRI to
reflect any difference between plan assets and liabilities; (v) after
consummation of the Offering, Medaphis will transfer assets in the Medaphis
401(k) retirement plan that relate to HRI employees to a new HRI 401(k)
retirement plan in a manner that satisfies legal requirements for interplan
asset transfers; (vi) all stock options held by HRI employees as of the
consummation of the Offering shall, in accordance with the particular option
plan under which such options are granted, become immediately vested as of such
date and any such optionees shall be entitled to exercise their options in
accordance with the terms of the particular option agreements relating to the
granting of such options; (vii) effective as of the consummation of the
Offering, HRI must have in place certain insured and self-funded welfare benefit
plans and arrangements to cover those HRI employees who were covered by such
types of plans prior to such date; and (viii) Medaphis shall pay, in one lump
sum, the account balances under the Medaphis Executive Deferred Compensation
Plan due to those Plan participants who will be continuing employment with HRI
after consummation of the Offering.

With respect to indemnification, the Separation Agreement provides that (i)
HRI will indemnify Medaphis for federal, state and local income and other tax
liability relating to HRI for all periods ending on or prior to August 28, 1995,
the date Medaphis acquired HRI and for all periods after the consummation of the
Offering; (ii) Medaphis will indemnify HRI for federal income tax liability
relating to Medaphis or any subsidiary (including HRI), and for state and local
income and other tax liability relating to Medaphis or any subsidiary other than
HRI, from August 29, 1995, to the date of consummation of the Offering; (iii)
HRI will

38
<PAGE> 42

indemnify Medaphis from liability due to or arising out of acts or failures to
act of HRI in the periods described in clause (i); (iv) Medaphis will indemnify
HRI from liability due to or arising out of the acts or failures to act of
Medaphis or any subsidiary (other than HRI) for all periods described in (i) and
(ii); and (v) Medaphis will indemnify Messrs. Ballard, Newman and Van Arsdel and
Ms. Force and Ms. Robinson from certain liabilities arising out of the Offering,
including liabilities under the Securities Act.

Prior to the date of this Prospectus, HRI began performing for itself
certain functions previously performed for HRI by Medaphis. These functions
include such items as payroll, processing of accounts payable, employee health
plan administration and HRI's workers' compensation and other business insurance
coverages.

SHARPS & ASSOCIATES

As part of its obligations under client contracts, HRI generally pays for
the legal representation of clients, as required in the recovery process. A
portion of those payments is made in the form of a retainer to Sharps &
Associates, a law firm solely owned by Douglas R. Sharps, HRI's Executive Vice
President -- Finance and Administration, Chief Financial Officer and Secretary.
This law firm employs nine attorneys and three paralegals at its offices in
Louisville, Kentucky; Oakland, California; Chicago, Illinois; and Dallas, Texas.
HRI paid $432,159, $562,875, $748,273 and $187,731, to such related party during
the periods ended December 31, 1994, 1995, 1996 and the three months ended March
31, 1997, respectively, for legal services; HRI spent $1,314,650, $1,568,023,
$2,059,706 and $659,075 during the same periods, respectively, on other outside
legal representation related to its recovery activities. However, Mr. Sharps
receives no personal benefit from his ownership of the firm. See Note 6 to the
Company's Financial Statements.

39
<PAGE> 43

PRINCIPAL AND SELLING STOCKHOLDER

The following table sets forth certain information concerning the
beneficial ownership of the Common Stock as of March 31, 1997, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby and the grant
of the Divestiture Bonus, of (i) each person known by the Company to be the
beneficial owner of more than 5% of any class of the Common Stock; (ii) each
director of the Company; (iii) all executive officers and directors of the
Company as a group and (iv) the Selling Shareholder:

<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PERCENTAGE OF SHARES OWNED
- ------------------------ -------------------------------- --------------------------------
BEFORE OFFERING AFTER OFFERING BEFORE OFFERING AFTER OFFERING
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Medaphis Corporation(1).................... 9,800,000 0 100% 0%
Patrick B. McGinnis(2)..................... 0 80,000 0 *
Dennis K. Burge(3)......................... 0 20,000 0 *
Kathleen K. Harreld(4)..................... 0 36,000 0 *
Douglas R. Sharps(3)....................... 0 20,000 0 *
Bobby T. Tokuuke(5)........................ 0 15,000 0 *
Debra M. Murphy(5)......................... 0 15,000 0 *
David E. McDowell.......................... 0 0 0 0
All executive officers and directors as a
group (7 persons)........................ 0 186,000 0% 1.9%
</TABLE>

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

* Less than 1%.
(1) The address of Medaphis is 2700 Cumberland Parkway, Suite 300, Atlanta,
Georgia 30339.
(2) Includes 80,000 shares of Common Stock to be granted pursuant to the
Divestiture Bonus and excludes 200,000 shares of Common Stock that may be
acquired upon the exercise of stock options to be granted upon consummation
of the Offering because none of such options will be presently exercisable.
(3) Includes 20,000 shares of Common Stock to be granted pursuant to the
Divestiture Bonus and excludes 78,750 shares of Common Stock that may be
acquired upon the exercise of stock options to be granted upon consummation
of the Offering because none of such options will be presently exercisable.
(4) Includes 36,000 shares of Common Stock to be granted pursuant to the
Divestiture Bonus.
(5) Includes 15,000 shares of Common Stock to be granted pursuant to the
Divestiture Bonus and excludes 65,000 shares of Common Stock that may be
acquired upon the exercise of stock options to be granted upon the
consummation of the Offering because none of such options will be presently
exercisable.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock having a par value of $.001 per share ("Common Stock") and
2,000,000 shares of Preferred Stock, having a par value of $.001 per share
("Preferred Stock").

As of January 31, 1997, there were issued and outstanding 9,800,000 shares
of Common Stock that were held of record by one (1) stockholder. There will be
10,000,000 shares of Common Stock outstanding after giving effect to the sale of
the shares of Common Stock offered hereby and the grant of the Divestiture Bonus
and 11,470,000 shares of Common Stock outstanding if the Underwriters exercise
their entire over-allotment option. As of the date hereof, there are no shares
of Preferred Stock outstanding.

COMMON STOCK

Except as otherwise required by law or as provided by the Board of
Directors with respect to any class or series of Preferred Stock, the entire
voting power and all voting rights are vested exclusively in the Common Stock.
Each holder of shares of Common Stock is entitled to one vote for each share
outstanding in his or her name on the books of the Company.

40
<PAGE> 44

Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock, holders of
Common Stock are entitled to such dividends as may be declared by the Board of
Directors out of funds legally available therefor. The Company has no current
plans to pay dividends on its Common Stock.

In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after the distribution or payment to the
holders of shares of any series of Preferred Stock as provided by the Board of
Directors with respect to any such series of Preferred Stock, the remaining
assets of the Company available for distribution to stockholders shall be
distributed among and paid to the holders of Common Stock ratably in proportion
to the number of shares of Common Stock held by them respectively.

PREFERRED STOCK

The Board of Directors is authorized to issue shares of Preferred Stock at
any time and from time to time, in one or more series, and to fix or alter the
designations, preferences and relative participating, optional or other special
rights and qualifications, limitations or restrictions of such shares of
Preferred Stock, including without limitation of the generality of the
foregoing, dividend rights, dividend rates, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), redemption
price or prices and liquidation preferences of any wholly unissued series of
preferred shares and the number of shares constituting any of such series and
the designation thereof, or any of them; and to increase or decrease the number
of shares of a series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be decreased, the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.

One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. Furthermore, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may have
the effect of delaying or preventing a change in control of the Company,
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.

The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy consent, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management.

CERTAIN CHARTER AND BYLAW PROVISIONS

Stockholders' rights and related matters are governed by the Delaware
General Corporation Law, the Company's Certificate of Incorporation and its
Bylaws. Certain provisions of the Certificate of Incorporation and Bylaws of the
Company, which are summarized below, tend to limit stockholders' ability to
influence matters pertaining to corporate governance.

Classified Board of Directors. The Company's Board of Directors is divided
into three classes of directors serving staggered terms of three years each. See
"Management -- Directors and Executive Officers."

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<PAGE> 45

As a result, it will be more difficult to change the composition of the
Company's Board of Directors, which may discourage or make more difficult any
attempt by a person or group of persons to obtain control of the Company.

Special Meeting Call Restrictions. Under the Company's Bylaws, special
meetings of the stockholders may only be called by the Chairman of the Board, a
majority of the Board of Directors or upon the written demand of the holders of
a majority of the outstanding shares of Common Stock entitled to vote at any
such meeting. This provision makes it more difficult for stockholders to require
the Company to call a special meeting of stockholders to consider any proposed
corporate action, including any sale of the Company, which may be favored by the
stockholders.

Restrictions on Amendments to Bylaws. Under the Company's Certificate of
Incorporation, the Company's Bylaws may not be amended by the stockholders and
any contrary provision may not be adopted without the affirmative vote of at
least two-thirds of the shares entitled to vote generally in the election of
directors. This supermajority restriction makes it more difficult for the
stockholders of the Company to amend the Bylaws and thus enhances the power of
the Company's Board of Directors vis-a-vis stockholders with regard to matters
of corporate governance that are governed by the Bylaws.

Limited Action by Written Consent of Stockholders. In general, stockholder
action may only be taken at a special or annual stockholder meeting called for
such purpose or with the unanimous written consent of the stockholders. These
requirements may delay stockholder action on matters requiring stockholder
approval.

DIRECTORS' LIABILITY

The Company's Certificate of Incorporation includes provisions to eliminate
the personal liability of its directors for monetary damages resulting from
breaches of their fiduciary duty (provided that such provision does not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, violations under Section 174 of the Delaware General Corporation Law (the
"DGCL") or for any transaction from which the director derived an improper
personal benefit). The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to Section 203 of the DGCL. Section 203 may have the
effect of delaying, deferring or preventing a change of control of the Company.
In general, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the time such stockholder
became an "interested stockholder," unless (a) prior to such time the board of
directors of the corporation approved either the "business combination" or the
transaction which resulted in the stockholder becoming an "interested
stockholder," or (b) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (i) persons who are directors and
also officers and (ii) by employee stock plans, in which employee participants
do not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer, or (c) at or subsequent
to such time the "business combination" is approved by the board of directors
and authorized at the annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the "interested stockholder." A "business
combination" includes certain mergers, stock or asset sales and other
transactions resulting in a financial benefit to the "interested stockholder."
An "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is National City
Bank, Cleveland, Ohio.

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<PAGE> 46

LISTING

The Company's Common Stock has been approved for listing on the Nasdaq
National Market under the trading symbol "HCRI."

CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK

General. The following discussion concerns the material United States
federal income and estate tax consequences of the ownership and disposition of
shares of Common Stock applicable to Non-U.S. Holders of such shares of Common
Stock. In general, a "Non-U.S. Holder" is any holder other than (i) a citizen or
resident, as specifically defined for U.S. federal income and estate tax
purposes, of the United States, (ii) a corporation, partnership or any entity
treated as a corporation or partnership for U.S. federal income tax purposes
created or organized in the United States or under the laws of the United States
or of any State thereof (including the District of Columbia), (iii) an estate
the income of which is includible in gross income for United States federal
income tax purposes regardless of its source, or (iv) a trust if a court within
the United States is able to exercise primary jurisdiction over the trust's
administration and one or more United States fiduciaries have the authority to
control all the substantial decisions of such trust. The discussion is based on
current law, which is subject to change retroactively or prospectively, and is
for general information only. The discussion does not address all aspects of
United States federal income and estate taxation and does not address any
aspects of state, local or foreign tax laws. The discussion does not consider
any specific facts or circumstances that may apply to a particular Non-U.S.
Holder. Accordingly, prospective investors are urged to consult their tax
advisors regarding the current and possible future United States federal, state,
local and non-U.S. income and other tax consequences of holding and disposing of
shares of Common Stock.

Dividends. In general, dividends paid to a Non-U.S. Holder will be subject
to United States withholding tax at a 30% rate (or a lower rate as may be
specified by an applicable tax treaty) unless the dividends are (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States, or (ii) if a tax treaty applies, attributable to a United States
permanent establishment or, in the case of an individual, a fixed base in the
United States, maintained by the Non-U.S. Holder. Dividends effectively
connected with such a trade or business or, if a tax treaty applies,
attributable to such permanent establishment or a fixed base will generally not
be subject to withholding (if the Non-U.S. Holder files certain forms annually
with the payor of the dividend) but will generally be subject to United States
federal income tax on a net income basis at regular graduated individual or
corporate rates. In the case of a Non-U.S. Holder that is a corporation, such
effectively connected income also may be subject to the branch profits tax
(which is generally imposed on a foreign corporation on the deemed repatriation
from the United States of effectively connected earnings and profits) at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
The branch profits tax may not apply if the recipient is a qualified resident of
certain countries with which the United States has an income tax treaty.

To determine the applicability of a tax treaty providing for a lower rate
of withholding, dividends paid to an address in a foreign country are presumed
under current United States Treasury Regulations to be paid to a resident of
that country, unless the payor has definite knowledge that such presumption is
not warranted or an applicable tax treaty (or United States Treasury Regulations
thereunder) requires some other method for determining a Non-U.S. Holder's
residence. However, under proposed regulations, in the case of dividends (paid
after December 31, 1997 or December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-U.S. Holder generally
would be subject to United States withholding tax at a 31% rate under the backup
withholding rules described below, rather than at a 30% rate or at a reduced
rate under an income tax treaty, unless certain certification procedures (or, in
the case of payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures) are complied with, directly or
through an intermediary. Under current regulations, the Company must report
annually to the United States Internal Revenue Service (the "IRS") and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether

43
<PAGE> 47

withholding was reduced or eliminated by an applicable tax treaty. Copies of
these information returns also may be made available under the provisions of a
specific treaty or agreement with the tax authorities of the country in which
the Non-U.S. Holder resides.

A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the IRS.

Sale of Common Stock. Generally, a Non-U.S. Holder will not be subject to
United States federal income tax on any gain realized upon the sale or other
disposition of such holder's shares of Common Stock unless (i) the gain is
effectively connected with a trade or business carried on by the Non-U.S. Holder
within the United States and, if a tax treaty applies, the gain is attributable
to a permanent establishment or a fixed base maintained by the Non-U.S. Holder
in the United States; (ii) the Non-U.S. Holder is an individual who holds the
shares of Common Stock as a capital asset and is present in the United States
for 183 days or more in the taxable year of the disposition, and either (a) such
Non-U.S. Holder has a "tax home" (as specifically defined for U.S. federal
income tax purposes) in the United States (unless the gain from disposition is
attributable to an office or other fixed place of business maintained by such
non-U.S. Holder in a foreign country and a foreign tax equal to at least 10% of
such gain has been paid to a foreign country), or (b) the gain from the
disposition is attributable to an office or other fixed place of business
maintained by such Non-U.S. Holder in the United States; (iii) the Non-U.S.
Holder is subject to tax pursuant to the provisions of U.S. tax law applicable
to certain United States expatriates, or (iv) the Company is or has been during
certain periods a "U.S. real property holding corporation" for U.S. federal
income tax purposes (which the Company does not believe that it has been,
currently is or is likely to become) and, assuming that the Common Stock is
deemed for tax purposes to be "regularly traded on an established securities
market," the Non-U.S. Holder held, at any time during the five-year period
ending on the date of disposition (or such shorter period that such shares were
held), directly or indirectly, more than five percent of the Common Stock.

Estate Tax. Shares of Common Stock owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States federal estate tax purposes) of the United States at the time of death
will be includible in the individual's gross estate for United States federal
estate tax purposes, unless an applicable tax treaty provides otherwise, and may
be subject to United States federal estate tax.

Backup Withholding and Information Reporting. As a general rule, under
current United States federal income tax law, backup withholding tax (which
generally is a withholding tax imposed at the rate of 31% on certain payments to
persons that fail to furnish the information required under the U.S. information
reporting requirements) and information reporting requirements apply to the
actual and constructive payment of dividends. The United States backup
withholding tax and information reporting requirements generally, under current
regulations, will not apply to dividends paid on Common Stock to a Non-U.S.
Holder at an address outside the United States, unless the payor has knowledge
that the payee is a U.S. person. Backup withholding and information reporting
generally will apply to dividends paid to addresses inside the United States on
shares of Common Stock to beneficial owners that are not entitled to an
exemption, as discussed above and that fail to provide in the manner required
certain identifying information. However, under proposed regulations, in the
case of dividends paid after December 31, 1997, a Non-U.S. Holder generally
would be subject to backup withholding at a 31% rate, unless certain
certification procedures (or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary.

The payment of the proceeds from the disposition of shares of Common Stock
to or through the United States office of a broker will be subject to
information reporting and backup withholding unless the holder, under penalties
of perjury, certifies, among other things, its status as a Non-U.S. Holder, or
otherwise establishes an exemption. Generally, the payment of the proceeds from
the disposition of shares of Common Stock to or through a non-U.S. office of a
non-US. broker will not be subject to backup withholding and will not be subject
to information reporting. In the case of the payment of proceeds from the
disposition of shares of Common Stock to or through a non-U.S. office of a
broker that is a U.S. person or a "U.S.-related person," existing regulations
require (i) backup withholding if the broker has actual knowledge that the owner
is not a

44
<PAGE> 48

Non-U.S. Holder, and (ii) information reporting on the payment unless the broker
receives a statement from the owner, signed under penalties of perjury,
certifying, among other things, its status as a Non-U.S. Holder, or the broker
has documentary evidence in its files that the owner is a Non-U.S. Holder and
the broker has no actual knowledge to the contrary. For this purpose, a
"U.S.-related person" is (i) a "controlled foreign corporation" for United
States federal income tax purposes or (ii) a foreign person 50% or more of whose
gross income from all sources for the three-year period ending with the close of
its taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a United States trade or business. The IRS
recently proposed regulations addressing the withholding and information
reporting rules which could affect the treatment of the payment of proceeds
discussed above. Non-U.S. Holders should consult their tax advisors regarding
the application of these rules to their particular situations, the availability
of an exemption therefrom, the procedure for obtaining such an exemption, if
available, and the possible application of the proposed regulations addressing
the withholding and information reporting rules.

Backup withholding is not an additional tax. Any amounts withheld from a
payment to a Non-U.S. Holder under the backup withholding rules will be allowed
as a credit against such holder's United States federal income tax liability, if
any, provided that such holder files the required information or appropriate
claim for refund with the IRS.

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<PAGE> 49

UNDERWRITING

The underwriters of the U.S. Offering named below (the "U.S.
Underwriters"), for whom Bear, Steams & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and The Robinson-Humphrey Company, Inc. are acting as
representatives, have severally agreed with the Company, subject to the terms
and conditions of the U.S. Underwriting Agreement (the form of which has been
filed as an exhibit to the Registration Statement on Form S-1 of which this
Prospectus is a part), to purchase from the Selling Stockholder the aggregate
number of U.S. Shares set forth below:

<TABLE>
<CAPTION>
NUMBER OF
NAME OF U.S. UNDERWRITER U.S. SHARES
- ------------------------ -----------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
The Robinson-Humphrey Company, Inc..........................

----------
Total............................................. 7,840,000
==========
</TABLE>

The Managers of the concurrent International Offering named below (the
"Managers"), for whom Bear, Stearns International Limited, Donaldson, Lufkin &
Jenrette Securities Corporation and The Robinson-Humphrey Company, Inc. are
acting as lead Managers, have severally agreed with the Company, subject to the
terms and conditions of the International Underwriting Agreement (the form of
which has been filed as an exhibit to the Registration Statement on Form S-1 of
which this Prospectus is a part), to purchase from the Company the aggregate
number of International Shares set forth below:

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL
NAME OF MANAGER SHARES
- --------------- -------------
<S> <C>
Bear, Stearns International Limited.........................
Donaldson, Lufkin & Jenrette Securities Corporation.........
The Robinson-Humphrey Company, Inc..........................

----------
Total............................................. 1,960,000
==========
</TABLE>

The nature of the respective obligations of the U.S. Underwriters and the
Managers is such that all of the U.S. Shares and all of the International Shares
must be purchased if any are purchased. Those obligations are subject, however,
to various conditions, including the approval of certain matters by counsel. The
Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the Managers against certain liabilities, including liabilities
under the Securities Act, and, where such indemnification is unavailable, to
contribute to payments that the U.S. Underwriters and the Managers may be
required to make in respect of such liabilities.

The Company has been advised that the U.S. Underwriters propose to offer
the U.S. Shares in the United States and Canada and the Managers propose to
offer the International Shares outside the United States and Canada, initially
at the public offering price set forth on the cover page of this Prospectus and
to certain selected dealers at such price less a concession not to exceed $0.
per share; that the U.S. Underwriters and the Managers may allow, and such
selected dealers may reallow, a concession to certain other dealers not to

46
<PAGE> 50

exceed $0. per share; and that after the commencement of the Offering, the
public offering price and the concessions may be changed.

The Company has granted the U.S. Underwriters and the Managers options to
purchase in the aggregate up to 1,470,000 additional shares of Common Stock
solely to cover over-allotments, if any. The options may be exercised in whole
or in part at any time within 30 days after the date of this Prospectus. To the
extent the options are exercised, the U.S. Underwriters and the Managers will be
severally committed, subject to certain conditions, to purchase the additional
shares of Common Stock in proportion to their respective purchase commitments as
indicated in the preceding tables.

Pursuant to an agreement between the U.S. Underwriters and the Managers
(the "Agreement Between"), each U.S. Underwriter has agreed that, as part of the
distribution of the U.S. Shares and subject to certain exceptions, (a) it is not
purchasing any U.S. Shares for the account of anyone other than a U.S. or
Canadian Person (as defined below) and (b) it has not offered or sold, and will
not offer, sell, resell or deliver, directly or indirectly, any U.S. Shares or
distribute any prospectus relating to the U.S. Offering outside the United
States or Canada or to anyone other than a U.S. or Canadian Person or a dealer
who similarly agrees. Similarly, pursuant to the Agreement Between, each Manager
has agreed that, as part of the distribution of the International Shares and
subject to certain exceptions, (a) it is not purchasing any of the International
Shares for the account of any U.S. or Canadian Person and (b) it has not offered
or sold, and will not offer, sell, resell or deliver, directly or indirectly,
any of the International Shares or distribute any prospectus relating to the
International Offering in the United States or Canada or to any U.S. or Canadian
Person or to a dealer who does not similarly agree. As used herein, "U.S. or
Canadian Person" means any individual who is a resident or citizen of the United
States or Canada, any corporation, pension, profit sharing or other trust or any
other entity organized under or governed by the laws of the United States or
Canada or of any political subdivision thereof (other than the foreign branch of
any U.S. or Canadian Person), any estate or trust the income of which is subject
to United States or Canadian federal income taxation regardless of the source of
such income, and any United States or Canadian branch of a person other than a
U.S. or Canadian Person; "United States" means the United States of America
(including the District of Columbia), its territories, its possessions and other
areas subject to its jurisdiction; "Canada" means the provinces of Canada, its
territories, its possessions and other areas subject to its jurisdiction.

Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the Managers of such number of shares of Common Stock as may be
mutually agreed upon. The price of any shares so sold shall be the public
offering price as then in effect for the Common Stock being sold by the U.S.
Underwriters and the Managers, less an amount no greater than the selling
concession allocable to such Common Stock. To the extent that there are sales
between the U.S. Underwriters and the Managers pursuant to the Agreement
Between, the number of shares of Common Stock initially available for sale by
the U.S. Underwriters or by the Managers may be more or less than the amount
specified on the cover page of this Prospectus.

Each Manager has represented and agreed that (i) it has not offered or
sold, and, prior to the expiration of six months following the consummation of
the Offering, it will not offer or sell, any shares of Common Stock to any
person in the United Kingdom other than persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom and (iii) it has only issued or passed on, and will
only issue or pass on, in the United Kingdom any document received by it in
connection with the issue of the Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom such document may
otherwise lawfully be issued or passed on.

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<PAGE> 51

Purchasers of the International Shares offered in the International
Offering may be required to pay stamp taxes and other charges in accordance with
the laws and practices of the country of purchase in addition to the initial
public offering price set forth on the cover page hereof.

The Underwriters have informed the Company that they do not expect to
confirm sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.

The Company and its executive officers and directors have agreed that for a
period of 180 days following the Offering, without the prior written consent of
Bear, Stearns & Co. Inc., they will not, directly or indirectly, offer or agree
to sell, hypothecate, pledge or otherwise dispose of any shares of Common Stock
(or securities convertible into, exchangeable for or exercisable for or
evidencing the right to purchase shares of Common Stock).

Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations among the Company, the Selling Stockholder, the
representatives of the U.S. Underwriters and the Managers. Among the factors to
be considered in making such determination will be the Company's financial and
operating history and condition, its prospects and such prospects for the
industry in which it does business in general, the management of the Company,
prevailing equity market conditions and the demand for securities considered
comparable to those of the Company.

In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock for
their own account. The Representatives and Lead Managers may elect to reduce any
short position by exercising all or part of the over-allotment option described
above. In addition, to cover over-allotments or to stabilize the price of the
Common Stock, the Representatives and the Lead Managers may bid for, and
purchase, shares of Common Stock on the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an Underwriter or dealer
for distributing the Common Stock in the Offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of that security.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives or the Lead Managers will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company or the
Selling Stockholder prepare and file a prospectus with the securities regulatory
authorities in each province where trades of Common Stock are effected.
Accordingly, any resale of the Common Stock in Canada must be made in accordance
with applicable securities laws, which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the Common Stock.

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<PAGE> 52

REPRESENTATIONS OF PURCHASERS

Confirmations of the acceptance of offers to purchase shares of Common
Stock will be sent to Canadian residents to whom this Prospectus has been sent
and who have not withdrawn their offers to purchase prior to the issuance of
such confirmations. Each purchaser of Common Stock in Canada who receives a
purchase confirmation will be deemed to represent to the Company, the Selling
Stockholder and the dealer from whom such purchase confirmation is received that
(i) such purchaser is entitled under applicable Canadian provincial securities
laws to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, such purchaser is
purchasing as principal and not as agent, (iii) such purchaser has reviewed the
text above under "Notice to Canadian Residents -- Resale Restrictions," (iv) if
such purchaser is located in Manitoba, such purchaser is not an individual and
is purchasing for investment only and not with a view to resale or distribution,
(v) if such purchaser is located in Ontario, a dealer registered as an
international dealer in Ontario may sell shares of Common Stock to such
purchaser and (vi) if such purchaser is located in Quebec, such purchaser is a
"sophisticated purchaser" within the meaning of Section 43 of the Securities Act
(Quebec).

TAXATION

Canadian residents should consult their own legal and tax advisers with
respect to the tax consequences of an investment in the Common Stock in their
particular circumstances and with respect to the eligibility of the Common Stock
for investment by the purchaser under relevant Canadian legislation.

ENFORCEMENT OF LEGAL RIGHTS

The Company is organized under the laws of the State of Delaware. All or
substantially all of the directors and officers of the Company reside outside
Canada and substantially all of the assets of the Company are located outside
Canada. As a result, it may not be possible for Canadian investors to effect
service of process within Canada upon the Company or to enforce against the
Company in Canada judgments obtained in Canadian courts that are predicated upon
the contractual rights of action, if any, granted to certain purchasers by the
Company. It may also not be possible for investors to enforce against the
Company in the United States judgments obtained in Canadian courts.

Furthermore, although the requirement for an issuer to provide to certain
purchasers the contractual right of action for damages and/or rescission
described below is consistent with contractual considerations associated with a
private placement which constitutes a primary distribution of the issuer's
securities by the issuer, an investor may not be able to enforce a contractual
right of action for rescission against the issuer where the offer or sale of the
issuer's securities is a secondary distribution being made by a third-party such
as the sale of the Common Stock by the Selling Stockholder.

NOTICE TO ONTARIO RESIDENTS

The Common Stock offered hereby is being issued by a foreign issuer and
Ontario purchasers will not receive the contractual right of action prescribed
by Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

All the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the Company
or persons outside of Canada.

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<PAGE> 53

LANGUAGE OF DOCUMENTS

All Canadian purchasers of shares of Common Stock acknowledge that all
documents evidencing or relating in any way to the sale of such shares will be
drawn in the English language only. Tous les acheteurs canadiens d'actions
ordinaires reconnaissent par les presentes que c'est a leur volonte expresse que
tous les documents faisant foi ou se rapportant de quelque maniere a la vente
des valeurs mobilieres soient rediges en anglais seulement.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by King & Spalding, Atlanta, Georgia. King &
Spalding also advises and represents the Selling Stockholder with respect to
various matters. The Selling Stockholder will pay King & Spalding's fees and
expenses in connection with the Offering. William R. Spalding served as an
executive officer of Medaphis and, in such capacity, as a director of the
Company until his election as a partner of King & Spalding on April 11, 1997.
Certain legal matters in connection with the Common Stock offered hereby will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.

INDEPENDENT PUBLIC ACCOUNTANTS

The balance sheets as of December 31, 1995 and 1996, and the related
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in auditing and accounting. With respect to the unaudited interim
financial information as of March 31, 1997 and for the quarters ended March 31,
1996 and 1997, included in this Prospectus, the independent accountants have
reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
report included herein states that they did not audit and they do not express an
opinion on that interim financial information. Accordingly, the degree of
reliance on their report on such information should be restricted in light of
the limited nature of the review procedures applied. The accountants are not
subject to the liability provisions of Section 11 of the Securities Act of 1933
for their report on the unaudited interim financial information because that
report is not a "report" or a "part" of the registration statement prepared or
certified by the accountants within the meaning of Sections 7 and 11 of the Act.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. 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 reference to such contract or document. For further
information regarding the Company and the Common Stock offered hereby, reference
is hereby made to the Registration Statement and the exhibits and schedules
thereto which may be inspected without charge at the Commission's principal
office at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C.
20549, at the following regional offices of the Commission: Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven World
Trade Center, Suite 1300, New York, New York 10048 and the Commission web site
at (http://www.sec.gov). Copies of all or any portion of the Registration
Statement may be obtained from the

50
<PAGE> 54

Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates.

The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of the Offering, the Company will become subject to the informational
requirements of the Exchange Act. The Company will fulfill its obligations with
respect to such requirements by filing periodic reports with the Commission. In
addition, the Company will furnish its shareholders with annual reports
containing audited financial statements certified by its independent accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited summary financial information.

51
<PAGE> 55

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1995 and 1996............. F-3
Statements of Income for the Years Ended December 31, 1994,
1995 and 1996............................................. F-4
Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1994, 1995 and 1996.................... F-5
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996....................................... F-6
Notes to Financial Statements............................... F-7
Report of Independent Accountants on Interim Financial
Information............................................... F-15
Condensed Balance Sheets as of December 31, 1996 and March
31, 1997 (Unaudited)...................................... F-16
Condensed Statements of Income (Unaudited) for the quarters
ended March 31, 1996 and 1997............................. F-17
Condensed Statements of Cash Flows (Unaudited) for the
quarters ended March 31, 1996 and 1997.................... F-18
Notes to Condensed Financial Statements..................... F-19
</TABLE>

F-1
<PAGE> 56

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Healthcare Recoveries, Inc.

We have audited the accompanying balance sheets of Healthcare Recoveries,
Inc. (the "Company") as of December 31, 1995 and 1996 and the related statements
of income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these financial statements based on our audit.

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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Louisville, Kentucky
February 28, 1997, except for
Note 10 as to which the

date is May 19, 1997

F-2
<PAGE> 57

HEALTHCARE RECOVERIES, INC.

BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. -- $ 53
Restricted cash........................................... $ 9,508 18,755
Accounts receivable, less allowance for doubtful accounts
of $65 in 1995 and $100 in 1996........................ 1,296 1,926
Other current assets...................................... 364 275
------- -------
Total current assets.............................. 11,168 21,009
------- -------
Property and equipment, at cost:
Furniture and fixtures.................................... 1,210 1,713
Office equipment.......................................... 835 975
Computer equipment........................................ 2,461 3,076
Leasehold improvements.................................... 295 598
------- -------
4,801 6,362
Accumulated depreciation and amortization................. (2,984) (3,865)
------- -------
1,817 2,497
------- -------
Other assets................................................ 405 463
------- -------
Total assets...................................... $13,390 $23,969
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 290 $ 586
Accrued expenses.......................................... 2,278 3,740
Funds due clients......................................... 6,925 14,953
------- -------
Total current liabilities......................... 9,493 19,279
Other liabilities........................................... 623 580
------- -------
Total liabilities................................. 10,116 19,859
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares
authorized, no shares issued or outstanding............ -- --
Common stock, $.001 par value, 20,000,000 shares
authorized, 9,800,000 shares issued and outstanding.... 10 10
Equity funding from Medaphis Corporation.................. 4,447 182
Retained earnings (deficit)............................... (1,183) 3,918
------- -------
Total stockholders' equity........................ 3,274 4,110
------- -------
Total liabilities and stockholders' equity........ $13,390 $23,969
======= =======
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-3
<PAGE> 58

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
Subrogation............................................... $16,941 $22,496 $30,248
Other revenues............................................ -- -- 1,171
------- ------- -------
Total revenues.................................... 16,941 22,496 31,419
Cost of services............................................ 7,947 10,265 15,026
------- ------- -------
Gross profit.............................................. 8,994 12,231 16,393
Support expenses............................................ 6,066 6,899 8,093
------- ------- -------
Operating income.......................................... 2,928 5,332 8,300
Interest income............................................. 320 580 486
------- ------- -------
Income before income taxes................................ 3,248 5,912 8,786
Provision for income taxes.................................. 1,363 2,486 3,685
------- ------- -------
Net income........................................ $ 1,885 $ 3,426 $ 5,101
======= ======= =======
Earnings per common share................................... $ 0.52
=======
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-4
<PAGE> 59

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
EQUITY
FUNDING
COMMON STOCK CAPITAL IN FROM (TO) RETAINED
------------------- EXCESS OF MEDAPHIS EARNINGS
SHARES AMOUNT PAR VALUE CORPORATION (DEFICIT) TOTAL
---------- ------ ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994............ 2,417,636 $ 2 $ 19 $(5,752) $(5,731)
Net income......................... 1,885 1,885
Issuance of common stock........... 82,204 -- 185 185
Preferred stock dividends
accrued......................... (400) (400)
---------- --- -------- ------- ------- -------
Balances, December 31, 1994.......... 2,499,840 2 204 (4,267) (4,061)
Net income......................... 3,426 3,426
Issuance of common stock........... 14,467 -- 75 75
Exercise of stock options.......... 322,388 1 567 568
Preferred stock dividends
accrued......................... (342) (342)
Conversion of preferred stock...... 6,963,305 7 10,993 11,000
Medaphis recapitalization.......... (11,839) $11,839 --
Distributions to Medaphis
Corporation..................... (7,392) (7,392)
---------- --- -------- ------- ------- -------
Balances, December 31, 1995.......... 9,800,000 10 -- 4,447 (1,183) 3,274
Net income......................... 5,101 5,101
Distributions to Medaphis
Corporation..................... (4,265) (4,265)
---------- --- -------- ------- ------- -------
Balances, December 31, 1996.......... 9,800,000 $10 $ -- $ 182 $ 3,918 $ 4,110
========== === ======== ======= ======= =======
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-5
<PAGE> 60

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,885 $ 3,426 $ 5,101
Adjustment to reconcile net income to net cash provided by
(used in) operations:
Depreciation and amortization.......................... 568 695 878
Deferred income taxes.................................. 1,207 1,743 (27)
Changes in operating assets and liabilities:
Increase in restricted cash.......................... (1,578) (3,253) (9,247)
Increase in accounts receivable...................... (362) (475) (630)
(Increase) decrease in other current assets.......... (138) (19) 89
Increase in other assets............................. (259) (8) (42)
Increase (decrease) in trade accounts payable........ (68) 105 296
Increase (decrease) in accrued expenses.............. 356 (110) 1,473
Increase in funds due clients........................ 1,095 2,460 8,028
Increase (decrease) in other liabilities............. 506 117 (43)
------- ------- -------
Net cash provided by operations................... 3,212 4,681 5,876
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (758) (1,280) (1,558)
------- ------- -------
Net cash used in investing activities............. (758) (1,280) (1,558)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock.................................. 185 75 --
Payment of preferred stock dividends...................... -- (2,602) --
Exercise of stock options................................. -- 568 --
Distributions to Medaphis Corporation..................... -- (7,392) (4,265)
Other..................................................... (9) -- --
------- ------- -------
Net cash provided by (used in) financing
activities...................................... 176 (9,351) (4,265)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 2,630 (5,950) 53
Cash and cash equivalents, beginning of period.............. 3,320 5,950 --
------- ------- -------
Cash and cash equivalents, end of period.................... $ 5,950 $ -- $ 53
======= ======= =======
Income tax payments......................................... $ 154 $ 743 $ 3,712
======= ======= =======
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-6
<PAGE> 61

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Healthcare Recoveries, Inc. (the "Company") was incorporated on June 30,
1988 under the laws of the State of Delaware. The Company's services comprise
the complete outsourcing of the identification, investigation and recovery of
accident-related medical benefits incurred by its clients for which other
persons or entities have primary responsibility. The rights of the Company's
clients to recover the value of these medical benefits arise by law or contract,
are known generally as the right of subrogation, and are generally paid from the
proceeds of liability or workers' compensation insurance.

The Company operated as an independent entity until August 28, 1995 when
the Company was merged with and into a subsidiary of Medaphis Corporation
("Medaphis") in a transaction accounted for as a pooling of interests (the
"Merger"). Prior to the Merger, the Company's redeemable convertible preferred
stock was converted to common stock. As of the effective time of the Merger,
each share of the then issued and outstanding Company common stock was exchanged
for Medaphis common stock. Employee stock options of the Company outstanding at
the effective time of the Merger were also substituted with similar options on
Medaphis common stock. Subsequent to the Merger, Medaphis recapitalized the
Company effectively cancelling all but 100 shares of common stock (not adjusted
for the stock split discussed in Note 10), pledged the assets and shares as
collateral for Medaphis' bank debt, and made the Company a guarantor for
Medaphis' bank debt.

In anticipation of the Offering (as defined in Note 10), certain revisions
to allocations and estimates have been made by management in the accompanying
financial statements for the periods during which the Company was a subsidiary
of Medaphis to present the financial position, results of operations and cash
flows of the Company as an independent entity. Costs previously incurred by
Medaphis on behalf of the Company include executive salaries, employee benefits,
insurance, telecommunications, payroll processing and other general and
administrative expenses. The allocation of these costs was based principally on
specific identification, the ratio of the number of Company employees to total
Medaphis employees or the ratio of total Company assets to total Medaphis
assets, as appropriate. Total costs allocated to the Company were $56,000 and
$361,000 for the period August 28, 1995 (the date of the Merger) to December 31,
1995 and the year ended December 31, 1996, respectively. Management believes
that, in the aggregate, these costs reflect the fair value of services rendered
by Medaphis and that it would have incurred similar costs as an independent
entity.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

Cash and cash equivalents include cash, demand deposits and highly liquid
investments with an original maturity of three months or less. Carrying values
of cash and cash equivalents approximate fair value due to the short-term nature
of the instruments.

Restricted cash represents the balance in client-specific bank accounts of
amounts collected on behalf of certain clients. A portion of the balance will be
disbursed to clients in accordance with the terms of the contracts between the
Company and its clients, while the remainder will be released to the Company.

The Company's cash, cash equivalents and restricted cash have been placed
with one financial institution.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the respective assets or the terms of the leases, if shorter. Estimated useful
lives of property and equipment range from three to five years.

F-7
<PAGE> 62

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
REVENUE RECOGNITION

Subrogation revenues are generally derived from contingent fee arrangements
based on the recoveries effected by the Company on behalf of its clients.
Revenue is recognized when a fee is earned based on the settlement of a case. A
case is deemed settled when the parties agree on all material terms associated
with the settlement. Typically, a settlement is reached verbally over the
telephone, followed by a letter sent by Company personnel confirming the terms
of the settlement. Substantially all settlements are collected within 90 days of
such agreement.

OTHER REVENUES

Other revenues represent amounts associated with non-recurring subrogation
services for clients in connection with class action tort claims from the use of
breast implants.

PROVISION FOR INCOME TAXES

The provisions for income taxes have been prepared as if the Company was an
independent entity for all periods presented and in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."

STOCK-BASED COMPENSATION PLANS

The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Effective in 1996, the Company implemented the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123"). SFAS No. 123
requires that companies which elect to not account for stock-based compensation
as prescribed by that statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock compensation and
the assumptions used to determine the pro forma effects of SFAS No. 123.

EARNINGS PER COMMON SHARE

Earnings per common share were computed based on the weighted-average
number of shares outstanding during the period after giving retroactive effect
to the Stock Split (see Note 10). Shares used in computing earnings per common
share were 9,800,000 for the year ended December 31, 1996. Earnings per common
share do not give retroactive effect to the divestiture bonus to be granted in
connection with the Offering or stock options on 550,000 shares to be granted to
members of the Company's executive management and to non-employee directors at
the time of the Offering (see Note 11).

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect (a) the reported amounts of assets and liabilities,
(b) disclosure of contingent assets and liabilities at the date of the financial
statements and (c) reported amounts of revenues and expenditures during the
reporting period. Actual results could differ from those estimates.

F-8
<PAGE> 63

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. LEASES

The Company leases office space and certain equipment. Future minimum lease
payments, by year and in the aggregate, under noncancelable operating leases
with initial or remaining terms in excess of one year at December 31, 1996, are
as follows (in thousands):

<TABLE>
<S> <C>
1997........................................................ $ 869
1998........................................................ 1,004
1999........................................................ 1,024
2000........................................................ 1,066
2001........................................................ 1,037
2002 and thereafter......................................... 512
------
$5,512
======
</TABLE>

Rental expense, which includes amounts applicable to short-term leases, was
approximately $457,000, $606,000 and $806,000 for the years ended December 31,
1994, 1995 and 1996, respectively.

4. INCOME TAXES

The provisions for income taxes for the years ended December 31, 1994, 1995
and 1996, consist of the following (in thousands):

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................... $ 117 $ 557 $2,784
State and local........................................... 39 186 928
------ ------ ------
156 743 3,712
------ ------ ------
Deferred:
Federal................................................... 1,011 1,460 (22)
State and local........................................... 196 283 (5)
------ ------ ------
1,207 1,743 (27)
------ ------ ------
$1,363 $2,486 $3,685
====== ====== ======
</TABLE>

The following is a reconciliation of the effective tax rate to the federal
statutory rate for the years ended December 31, 1994, 1995 and 1996:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit........... 6.8 6.8 6.8
Other, net.................................................. 0.2 0.3 0.1
---- ---- ----
42.0% 42.1% 41.9%
==== ==== ====
</TABLE>

F-9
<PAGE> 64

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. INCOME TAXES -- (CONTINUED)

Temporary differences giving rise to net deferred tax liabilities included
in the accompanying balance sheets at December 31, 1995 and 1996, respectively,
consist of the following (in thousands):

<TABLE>
<CAPTION>
1995 1996
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Accrued bonuses...................................... $297 $386
Accounts receivable.................................. $542 $805
Accrued litigation................................... 169 325
Depreciation......................................... 17 15
Deferred rent........................................ 14 31
Other assets......................................... 14 30
Other liabilities.................................... 45 87
---- ---- ---- ----
$525 $573 $829 $850
==== ==== ==== ====
</TABLE>

5. MAJOR CLIENTS

The following table presents the percentage of total revenues contributed
by the Company's largest clients:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Client A.................................................... 16% 16% 25%
Client B.................................................... 19 14 12
Client C.................................................... 11 13 9
Client D.................................................... 11 9 9
Client E.................................................... 8 10 8
-- -- --
65% 62% 63%
== == ==
</TABLE>

No other client accounted for more than 10% of the Company's total
revenues. The loss of one or more of these clients would have a material adverse
effect on the Company's results of operations, financial position and cash
flows.

6. RELATED PARTY TRANSACTIONS

Revenues from a related party approximated 9% and 7% of total revenues for
the years ended December 31, 1994 and 1995, respectively. The party continued as
a client in 1996 but was no longer a related party due to the Merger.

The Company has entered into a contract for legal services with a
professional service corporation that is wholly-owned by one of the Company's
officers. This arrangement exists solely for the purposes of minimizing the
costs of the legal services purchased by the Company on behalf of its clients.
For the years ended December 31, 1994, 1995 and 1996, approximately $432,000,
$563,000 and $748,000, respectively, was paid to this law firm for such legal
services.

F-10
<PAGE> 65

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. EMPLOYEE BENEFIT PLANS

PENSION PLAN

The Company's employees participate in the 401(k) defined contribution
pension plan of Medaphis. Annual expense provisions are based upon the level of
employee participation as the plan requires the Company to match a certain
portion of the employees' contributions.

Total retirement plan expense was approximately $106,000, $212,000 and
$165,000, for the years ended December 31, 1994, 1995 and 1996, respectively.

OTHER

Accrued bonuses included in the accompanying balance sheets at December 31,
1995 and 1996, approximated $1.9 million and $2.7 million, respectively.

8. CONTINGENCIES

9. COMMON STOCK OPTIONS

Employee stock options of the Company outstanding at the effective time of
the Merger were substituted with similar options on Medaphis common stock. Since
the Merger, employees of the Company have participated in the Non-Qualified
Stock Option Plan and the Non-Qualified Stock Option Plan for Non-Executive
Employees (the "Stock Option Plans") of Medaphis. Granted options under the
Stock Option Plans expire 10 to 11 years after the date of grant and generally
vest over a three-to-five-year period, however, in accordance with the terms of
the Stock Option Plans, all options granted to the Company's employees will
automatically vest in connection with the Offering. Stock options granted to the
Company's employees under the Stock Option Plans do not affect the number of
shares used in determining the Company's pro forma per common and common
equivalent share amounts. The following presents information related to the
Company's employees' participation in the Stock Option Plans.

F-11
<PAGE> 66

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. COMMON STOCK OPTIONS -- (CONTINUED)

Activity related to the Stock Option Plans is summarized as follows:

<TABLE>
<CAPTION>
1994 1995 1996
------------------------- ------------------------- -------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding as
of January 1, ...... 48 $ 5.85 149 $ 8.47 220 $14.06
Granted............... 111 10.25 88 22.52 293 13.75
Exercised............. -- -- (12) 5.92 (10) 7.37
Canceled.............. (10) 15.74 (5) 19.10 (91) 28.64
--- ------- ----- ------- ----- -------
Options outstanding as
of December 31, .... 149 $ 8.47 220 $14.06 412 $10.79
=== ======= ===== ======= ===== =======
Options exercisable as
of December 31, .... 14 35 89
=== ===== =====
Weighted-average fair
value of options
granted during the
year................ $2.45 $2.23
===== =====
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE WEIGHTED- OUTSTANDING AT WEIGHTED-
DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
1996 CONTRACTUAL EXERCISE 1996 EXERCISE
RANGE OF EXERCISE PRICES (000) LIFE PRICE (000) PRICE
- ------------------------ ------------------ ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$4.48-$9.05................. 200 9.43 $ 8.33 69 $ 7.65
$9.88-$13.25................ 181 10.27 11.74 11 9.88
$15.74-$29.83............... 31 9.32 20.43 9 19.36
--- ----- ------ -- ------
$4.48-$29.83................ 412 9.79 $10.79 89 $ 9.06
=== ===== ====== == ======
</TABLE>

On October 25, 1996, Medaphis changed the exercise price of approximately
81,000 of its then outstanding stock options, which had an exercise price of
$15.00 or greater, to a new exercise price of $9.875. No other terms of these
options were changed.

The Company accounts for its stock option plans under APB No. 25. As a
result, the Company has not recognized compensation expense for stock options
granted with an exercise price equal to the quoted market price of Medaphis'
common stock on the date of grant and which vest based solely on continuation of
employment by the recipient of the option award. The Company adopted SFAS No.
123 for disclosure purposes in 1996. For SFAS No. 123 purposes, the fair value
of each option grant and stock based award has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Expected life (years)....................................... 4.0 3.8
Risk-free interest rate..................................... 6.0% 6.2%
Dividend rate............................................... 0.0% 0.0%
Expected volatility......................................... 49.4% 52.9%
</TABLE>

F-12
<PAGE> 67

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. COMMON STOCK OPTIONS -- (CONTINUED)

Had compensation cost been accounted for under the provisions of SFAS No.
123, utilizing the assumptions detailed above, the Company's net income for the
years ended December 31, 1995 and 1996 and earnings per common share for the
year ended December 31, 1996 (see Note 2) would have decreased to the following
pro forma amounts:

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Net income
As reported............................................... $3,426 $5,101
Pro forma................................................. $3,336 $4,793
Earnings per common share:
As reported............................................... $ 0.52
Pro forma................................................. $ 0.49
</TABLE>

The effects of applying SFAS No. 123 in the pro forma disclosures are not
likely to be representative of the effects on pro forma net income for future
years because variables such as option grants, option exercises, and stock price
volatility included in the disclosures may not be indicative of future activity.

10. SUBSEQUENT EVENTS -- RECAPITALIZATION

On May 16, 1997 the Company amended its Certificate of Incorporation to
authorize 2,000,000 shares of $.001 par value preferred stock and 20,000,000
shares of $.001 par value common stock of which 9,800,000 will be issued and
outstanding after a 98,000-for-1 common stock split ("Stock Split"), which the
Company declared to be effective immediately prior to the offering (the
"Offering") of the Company's Common Stock by Medaphis. The Stock Split will be
effected in the form of a stock dividend. Accordingly, all references in the
accompanying financial statements to number of shares and related per share
amounts have been stated to reflect these changes.

11. OTHER SUBSEQUENT EVENTS (UNAUDITED)

LINE OF CREDIT

On May 15, 1997 the Company entered into an agreement which provides,
effective upon the closing of the Offering, an unsecured revolving line of
credit (the "Line of Credit") for borrowings up to a maximum of $10 million. The
interest rate on outstanding indebtedness, at the Company's option, will be
either (i) the greater of the bank's prime rate or the effective Federal Funds
rate plus 0.5% or (ii) the LIBOR plus 2.25%. The maturity date for all
outstanding indebtedness under the Line of Credit will be two years from the
consummation of the Offering. The agreement contains customary covenants,
including covenants to maintain certain minimum interest coverage and leverage
ratios and a minimum level of net worth.

SEPARATION AGREEMENT WITH MEDAPHIS

Effective May , 1997, the Company and Medaphis entered into a Separation
Agreement (the "Separation Agreement") that provides for the separation of the
Company from Medaphis. The Separation Agreement provides that on the date the
Offering is consummated (i) the Company will (assuming none of the underwriters'
over-allotment option has been exercised) have a nominal amount of unrestricted
cash, and will not owe any amount to Medaphis (except as discussed below with
respect to purchased goods and services, certain employee benefit plan payments
and a dividend to be paid to Medaphis to reduce HRI's stockholders' equity to
$4,110,000) and (ii) Medaphis will not owe any amount to the Company.

The Separation Agreement also provides that (i) the Company will owe
(without markup or markdown) Medaphis after the consummation of the Offering for
any goods or services purchased from or through

F-13
<PAGE> 68

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

11. OTHER SUBSEQUENT EVENTS (UNAUDITED) -- (CONTINUED)
Medaphis prior to consummation but not paid for prior to such consummation; (ii)
Medaphis will cause its bank lenders to release in connection with the Offering
the Company's guaranty of Medaphis' bank debt, all liens on the Company's assets
and the Common Stock to be sold by Medaphis pursuant to the Offering; (iii) the
Company will upon consummation of the Offering assume responsibility for
providing health insurance or coverage to former Company employees (and their
eligible dependents) who have exercised their right under federal law to obtain
such insurance or coverage in accordance with applicable federal law; (iv)
assets and liabilities under the Medaphis "cafeteria" employee benefit plan
relating to the Company's employees will be transferred to a new Company
"cafeteria" benefit plan, together with an adjusting payment to or from the
Company to reflect any difference between plan assets and liabilities; (v) after
consummation of the Offering, Medaphis will transfer assets in the Medaphis
401(k) retirement plan that relate to the Company's employees to a new 401(k)
retirement plan in a manner that satisfies legal requirements for interplan
asset transfers; (vi) all stock options held by the Company's employees as of
the consummation of the Offering shall, in accordance with the particular option
plan under which such options are granted, become immediately vested as of such
date and any such optionees shall be entitled to exercise their options in
accordance with the terms of the particular option agreements relating to the
granting of such options; (vii) effective as of the consummation of the
Offering, the Company must have in place certain insured and self-funded welfare
benefit plans and arrangements to cover those Company employees who were covered
by such types of plans prior to such date; and (viii) Medaphis shall pay, in one
lump sum, the account balances under the Medaphis Executive Deferred
Compensation Plan due to those Plan participants who will be continuing
employment with the Company after consummation of the Offering.

With respect to indemnification, the Separation Agreement provides that (i)
the Company will indemnify Medaphis for federal, state and local income and
other tax liability relating to the Company for all periods ending on or prior
to August 28, 1995, the date of the Merger and for all periods after the
consummation of the Offering; (ii) Medaphis will indemnify the Company for
federal income tax liability relating to Medaphis or any subsidiary (including
the Company), and for state and local income and other tax liability relating to
Medaphis or any subsidiary other than the Company, from August 29, 1995, to the
date of consummation of the Offering; (iii) the Company will indemnify Medaphis
from liability due to or arising out of acts or failures to act of the Company
in the periods described in clause (i); (iv) Medaphis will indemnify the Company
from liability due to or arising out of the acts or failures to act of Medaphis
or any subsidiary (other than the Company) for all periods described in (i) and
(ii); and (v) Medaphis will indemnify the non-employee directors of the Company
from certain liabilities arising out of the Offering, including liabilities
under the Securities Act of 1933.

NON-CASH COMPENSATION CHARGE

The Company will recognize a non-recurring, non-cash compensation charge of
approximately $2.8 million (not deductible for income tax purposes), less an
amount (based on an independent appraisal) to reflect a discount in the value of
the shares due to their transfer restrictions in the quarter ending June 30,
1997 relating to a divestiture bonus comprised of 200,000 shares of the
Company's common stock to be granted by the Company to certain members of the
Company's executive management upon consummation of the Offering. The amount of
the charge approximates the fair value of the shares granted based on the
estimated offering price ($14.00 per share), less an amount (based on an
independent appraisal) to reflect a discount in the value of the shares due to
their transfer restrictions.

NON-QUALIFIED STOCK OPTION PLAN FOR ELIGIBLE EMPLOYEES

The Company plans to adopt the Healthcare Recoveries, Inc. Non-Qualified
Stock Option Plan for Eligible Employees (the "Plan"). The Plan provides for the
award of stock options to certain officers and key

F-14
<PAGE> 69

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

11. OTHER SUBSEQUENT EVENTS (UNAUDITED) -- (CONTINUED)
persons of the Company. The Company has reserved 700,000 shares under the Plan
and will grant, at the time of the Offering, options to purchase 500,000 shares
of the Company's common stock. Such options are exercisable at the initial
public offering price per share and will vest ratably over a three-year period.

DIRECTORS' STOCK OPTION PLAN

The Company plans to adopt the Healthcare Recoveries, Inc. Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for the grant
of options to purchase the Company's common stock to each Director who will be a
member of the Company's Board of Directors upon the consummation of the
Offering. No Director who is an employee of the Company or any subsidiary is
eligible to participate in the Directors' Plan.

The Company reserved and granted options on 50,000 shares of the Company's
common stock at the time of the Offering under the Directors' Plan. Such options
are exercisable at the initial public offering price. One-third of the shares of
Common Stock covered by an option shall vest on the March 1st next following the
date of grant and on each succeeding March 1st until fully vested, provided that
the optionee must be an eligible director of the Company on March 1st.

EMPLOYEE STOCK PURCHASE PLAN

STOCK OPTION PLANS

Effective April 25, 1997, Medaphis repriced all options then outstanding
under the Stock Option Plans to the market price of Medaphis common stock on
that date of $5.375.

F-15
<PAGE> 70

REPORT OF INDEPENDENT ACCOUNTANTS ON

INTERIM FINANCIAL INFORMATION

To the Board of Directors and Stockholders
Healthcare Recoveries, Inc.

We have reviewed the accompanying condensed balance sheet of Healthcare
Recoveries, Inc. (the "Company") as of March 31, 1997, and the related condensed
statements of income and cash flows for the quarters ended March 31, 1996 and
1997. These financial statements are the responsibility of the Company's
management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed financial statements for them to be
in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Louisville, Kentucky

May 19, 1997

F-16
<PAGE> 71

HEALTHCARE RECOVERIES, INC.

CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 53 $ 125
Restricted cash........................................... 18,755 18,680
Accounts receivable, less allowance for doubtful accounts
of $100 -- December 31, 1996 and $125 -- March 31,
1997................................................... 1,926 2,380
Other current assets...................................... 275 671
------- -------
Total current assets.............................. 21,009 21,856
------- -------
Property and equipment, at cost:
Furniture and fixtures.................................... 1,713 1,731
Office equipment.......................................... 975 981
Computer equipment........................................ 3,076 3,098
Leasehold improvements.................................... 598 604
------- -------
6,362 6,414
Accumulated depreciation and amortization................. (3,865) (4,109)
------- -------
2,497 2,305
------- -------
Other assets................................................ 463 1,176
------- -------
Total assets...................................... $23,969 $25,337
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 586 $ 619
Accrued expenses.......................................... 3,740 3,225
Funds due clients......................................... 14,953 15,380
------- -------
Total current liabilities......................... 19,279 19,224
Other liabilities........................................... 580 753
------- -------
Total liabilities................................. 19,859 19,977
------- -------
Contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 share
authorized, no share issued or outstanding.............
Common stock, $.001 par value, 20,000,000 authorized,
9,800,000 shares issued and outstanding................ 10 10
Equity funding from Medaphis Corporation.................. 182 57
Retained earnings......................................... 3,918 5,293
------- -------
Total stockholders' equity........................ 4,110 5,360
------- -------
Total liabilities and stockholders' equity........ $23,969 $25,337
======= =======
</TABLE>

The accompanying notes are an integral part of the condensed financial
statements

F-17
<PAGE> 72

HEALTHCARE RECOVERIES, INC.

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Subrogation revenues........................................ $6,676 $8,917
Cost of services............................................ 3,354 4,326
------ ------
Gross profit........................................... 3,322 4,591
Support expenses............................................ 1,871 2,338
------ ------
Operating income....................................... 1,451 2,253
Interest income............................................. 92 114
------ ------
Income before income taxes............................. 1,543 2,367
Provision for income taxes.................................. 647 992
------ ------
Net income........................................ $ 896 $1,375
====== ======
Earnings per common share................................... $ 0.09 $ 0.14
====== ======
</TABLE>

The accompanying notes are an integral part of the condensed financial
statements

F-18
<PAGE> 73

HEALTHCARE RECOVERIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1996 1997
----- ------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 896 $1,375
Adjustment to reconcile net income to net cash (used in)
provided by operations:
Depreciation and amortization.......................... 194 245
Deferred income taxes.................................. (165) (330)
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash............... (154) 75
Increase in accounts receivable...................... (336) (454)
Increase in other current assets..................... (176) (249)
(Increase) decrease in other assets.................. 8 (657)
Increase (decrease) in trade accounts payable........ (119) 33
Decrease in accrued expenses......................... (240) (388)
Increase in funds due clients........................ 195 427
Increase (decrease) in other liabilities............. (107) 173
----- ------
Net cash (used in) provided by operations......... (4) 250
----- ------
Cash flows from investing activities:
Purchases of property and equipment....................... (330) (53)
----- ------
Net cash used in investing activities............. (330) (53)
----- ------
Cash flows from financing activities:
Distributions from (to) Medaphis Corporation.............. 423 (125)
----- ------
Net cash provided by (used in) financing
activities....................................... 423 (125)
----- ------
Net increase in cash and cash equivalents................... 89 72
Cash and cash equivalents, beginning of period.............. -- 53
----- ------
Cash and cash equivalents, end of period.................... $ 89 $ 125
===== ======
Income tax payments......................................... $ 812 $1,326
===== ======
</TABLE>

The accompanying notes are an integral part of the condensed financial
statements

F-19
<PAGE> 74

HEALTHCARE RECOVERIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENT
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying financial statements are presented in a condensed format
and consequently do not include all of the disclosures normally required by
generally accepted accounting principles or those normally made in the Company's
financial statements. Accordingly, the reader of these financial statements may
wish to refer to the Company's audited financial statements as of and for the
year ended December 31, 1996, contained elsewhere in this Registration Statement
for further information.

The financial information has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature.

2. CONTINGENCIES

3. EARNINGS PER COMMON SHARE

Earnings per common share were computed based on the weighted-average
number of shares outstanding during the period after giving retroactive effect
to the 98,000-for-1 common stock split effective immediately prior to the
Offering. Shares used in computing earnings per common share were 9,800,000 for
the quarters ended March 31, 1996 and 1997. Earnings per common share do not
give retroactive effect to the divestiture bonus to be granted in connection
with the Offering or stock options on 550,000 shares to be granted to members of
the Company's executive management and to non-employee directors at the time of
the Offering.

4. FUTURE CHANGES IN THE PRESENTATION OF EARNINGS PER COMMON SHARE

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
128 specifies the computation, presentation, and disclosure requirements for
earnings per share and will be effective for both interim and annual periods
ending after December 15, 1997. Management of the Company cannot reasonably
determine the impact the standard will have on the Company's computation,
presentation and disclosure of earnings per share information.

F-20
<PAGE> 75

======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDER, ANY UNDERWRITER, OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANYONE 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 BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
Use of Proceeds..................... 11
Dividend Policy..................... 11
Dilution............................ 12
Capitalization...................... 13
Selected Financial Data............. 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 16
Business............................ 22
Management.......................... 31
Certain Transactions................ 38
Principal and Selling Stockholder... 40
Description of Capital Stock........ 40
Certain United States Federal Tax
Considerations for Non-U.S.
Holders of Common Stock........... 43
Underwriting........................ 46
Notice to Canadian Residents........ 48
Legal Matters....................... 50
Independent Public Accountants...... 50
Available Information............... 50
Index to Financial Statements....... F-1
</TABLE>

------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================

======================================================

9,800,000 SHARES

[HEALTHCARE RECOVERIES, INC. LOGO]

HEALTHCARE
RECOVERIES, INC.

COMMON STOCK
--------------------------

PROSPECTUS
--------------------------
BEAR, STEARNS & CO. INC.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

THE ROBINSON-HUMPHREY COMPANY, INC.
, 1997
======================================================
<PAGE> 76

SUBJECT TO COMPLETION, DATED MAY 19, 1997

PROSPECTUS
9,800,000 SHARES
[HEALTHCARE RECOVERIES, INC. LOGO]
HEALTHCARE RECOVERIES, INC.

COMMON STOCK
------------------------------

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

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------------

<TABLE>
<CAPTION>
===========================================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING SELLING PROCEEDS TO
PUBLIC DISCOUNT(1) STOCKHOLDER(2) COMPANY(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------
Total(3)................................... $ $ $ $
========================================================================================================================
</TABLE>

The International Shares are offered by the several Managers, subject to
prior sale, when, as and if delivered to and accepted by them and subject to
certain conditions, including the approval of certain legal matters by counsel.
The Managers reserve the right to withdraw, cancel or modify the International
Offering and to reject orders in whole or in part. It is expected that delivery
of the International Shares will be made against payment therefor on or about
, 1997, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York 10167.

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

BEAR, STEARNS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

THE ROBINSON-HUMPHREY COMPANY, INC.

THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 77

TABLE OF CONTENTS

======================================================

9,800,000 SHARES

[HEALTHCARE RECOVERIES, INC. LOGO]

HEALTHCARE
RECOVERIES, INC.

COMMON STOCK
--------------------------

PROSPECTUS
--------------------------
BEAR, STEARNS
INTERNATIONAL LIMITED

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

THE ROBINSON-HUMPHREY COMPANY, INC.
, 1997
======================================================
<PAGE> 78

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and NASD filing fee, all amounts are estimates.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 51,227
NASD filing fee............................................. 17,405
Nasdaq National Market Listing Fee.......................... 42,591
Accounting fees and expenses................................ 125,000
Legal fees and expenses..................................... 250,000
Blue Sky fees and expenses (including counsel fees)......... 8,000
Printing and Engraving expenses............................. 130,000
Transfer Agent and Registrar fees and expenses.............. 2,000
Miscellaneous Expenses...................................... 29,432
--------
Total............................................. $655,655
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law ("DGCL") authorizes a
court to award, or a corporation's board of directors to grant, indemnity to
directors and officers under certain circumstances for liabilities incurred in
connection with their activities in such capacities (including reimbursement for
expenses incurred). Article VII of the Company's Certificate of Incorporation
provides that no director shall be liable for monetary damages to the Registrant
or its stockholders for any breach of fiduciary duty, except to the extent
provided by applicable law (i) for any breach of the director's duty of loyalty
to the Registrant or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware General Corporate Law or (iv) for
any transaction from which such director derived an improper personal benefit.
Article IX of the Company's Certificate of Incorporation provides that the
Company will indemnify its directors and officers to the full extent permitted
by law. In addition, the Registrant is obligated, to the fullest extent
permissible by the DGCL, as it currently exists or may be amended, to indemnify
and hold harmless its directors, from and against all expense, liability and
loss reasonably incurred or suffered by such directors.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following list describes sales by the Registrant of securities in the
past three years which were not registered under the Securities Act in reliance
upon Sections 4(2), 3(b) and/or 3(a)(2) of the Securities Act. Prior to
Medaphis' acquisition of the Company in August 1995, Mr. William Ballard was
awarded options to purchase 1,200 shares (unadjusted to reflect Medaphis'
acquisition of the Company or the Stock Split) at an exercise price of $9.04 per
share of Common Stock in connection with service as a director of the Company as
of July 1, 1994, which options were exercised. These shares were converted into
shares of Medaphis Common Stock in connection with Medaphis' purchase of the
Company in August 1995. Mr. Randy Brown was awarded options to purchase 800
shares of Common at an exercise price of $9.04 per share, which options have
expired, in connection with his service as a Director of the Company.

II-1
<PAGE> 79

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Underwriting Agreements
3.1 -- Amended and Restated Certificate of Incorporation of the
Company
3.2 -- Amended and Restated Bylaws of the Company
4.1* -- Specimen Stock Certificate
4.2* -- Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan
of Eligible Employees
4.3* -- Healthcare Recoveries, Inc. Directors' Stock Option Plan
5.1 -- Opinion of King and Spalding as to the legality of the
Common Stock being registered
10.1 -- Separation Agreement between Medaphis and the Company
10.2* -- Employment Agreement between the Company and Patrick B.
McGinnis
10.3* -- Form of Employment Agreement between the Company and Douglas
R. Sharps, Dennis K. Burge, Bobby T. Tokuuke and Debra M.
Murphy
10.4 -- Divestiture Bonus Agreement
10.5 -- Supplemental Retirement Savings Plan
10.6* -- Lease between W&M Kentucky, Inc. and Healthcare Recoveries,
Inc.
10.7 -- Annual Bonus Plan
10.8 -- Credit Agreement between Healthcare Recoveries, Inc. and
National City Bank of Kentucky
15 -- Awareness letter from Coopers & Lybrand L.L.P.
23.1 -- Consent of King and Spalding (contained in Exhibit 5.1)
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3* -- Consent of William C. Ballard, Jr.
23.4* -- Consent of Jill L. Force
23.5* -- Consent of Elaine J. Robinson
23.6* -- Consent of John H. Newman
23.7* -- Consent of Chris B. Van Arsdel
24.1* -- Powers of Attorney (contained on signature page)
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>

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

* Previously filed.

(b) Financial Statement Schedules.

Not Applicable

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933, as amended (the "Act") may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

II-2
<PAGE> 80

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-3
<PAGE> 81

SIGNATURES AND POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Louisville, State of Kentucky, on May 19, 1997.

HEALTHCARE RECOVERIES, INC.

By: /s/ PATRICK B. McGINNIS
------------------------------------
Patrick B. McGinnis
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ PATRICK B. McGINNIS* Chairman, Chief Executive May 19, 1997
- ----------------------------------------------------- Officer and Director
Patrick B. McGinnis (Principal Executive Officer)

/s/ DOUGLAS R. SHARPS* Executive Vice May 19, 1997
- ----------------------------------------------------- President -- Finance and
Douglas R. Sharps Administration, Chief
Financial Officer and
Secretary
(Principal Financial Officer
and Principal Accounting
Officer)

/s/ DAVID E. McDOWELL* Director May 19, 1997
- -----------------------------------------------------
David E. McDowell

By: /s/ PATRICK B. McGINNIS
-----------------------------------------------
Patrick B. McGinnis
Attorney-in-fact
</TABLE>

II-4

<PAGE> 1

EXHIBIT 1.1

9,800,000 SHARES OF COMMON STOCK

HEALTHCARE RECOVERIES, INC.

U.S. UNDERWRITING AGREEMENT

________, 1997

BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.
as U.S. Representatives of the
several U.S. Underwriters named in
Schedule I attached hereto
c/o BEAR, STEARNS & CO. INC.
245 Park Avenue
New York, N.Y. 10167

Dear Sirs:

Medaphis Corporation ("Medaphis"), the parent of Healthcare
Recoveries, Inc. (the "Company"), (each a corporation organized and existing
under the laws of Delaware), proposes, subject to the terms and conditions
stated herein, to sell to the several U.S. underwriters named in Schedule I
hereto (the "U.S. Underwriters") an aggregate of 7,840,000 shares (the "Firm
U.S. Shares") of the Company's common stock, par value $.001 per share (the
"Common Stock") and, for the sole purpose of covering over-allotments in
connection with the sale of the Firm U.S. Shares, at the option of the U.S.
Underwriters, the Company proposes to sell up to an additional 1,176,000 shares
(the "Additional U.S. Shares") of Common Stock. The Firm U.S. Shares and any
Additional U.S. Shares purchased by the U.S. Underwriters are referred to
herein as the "U.S. Shares." The U.S. Shares are more fully described in the
Registration Statement referred to below.

It is understood that the Company and Medaphis are
concurrently entering into an agreement dated the date hereof (the
"International Underwriting Agreement") pursuant to which Medaphis proposes,
subject to the terms and conditions stated therein, to sell outside the United
States and Canada an aggregate of 1,960,000 shares of Common Stock (the "Firm
International Shares") through arrangements with certain underwriters
<PAGE> 2

outside the United States and Canada (the "Managers") for whom Bear, Stearns
International Limited, Donaldson, Lufkin & Jenrette Securities Corporation and
The Robinson-Humphrey Company, Inc. are acting as representatives and, for the
sole purpose of covering over-allotments in connection with the sale of Firm
International Shares, at the option of the Managers, the Company proposes to
sell up to an additional 294,000 shares (the "Additional International Shares")
of Common Stock. The Firm International Shares and any Additional
International Shares purchased by the Managers are referred to herein as the
"International Shares." It is understood that the Company is not obligated to
sell, and the U.S. Underwriters are not obligated to purchase, any Firm U.S.
Shares unless all of the Firm International Shares are contemporaneously
purchased by the Managers.

It is also understood and agreed to by all the parties that
the U.S. Underwriters have entered into an agreement with the Managers (the
"Agreement between U.S. Underwriters and Managers") contemplating the
coordination of certain transactions between the U.S. Underwriters and the
Managers and that, pursuant thereto and subject to the conditions set forth
therein, the U.S. Underwriters may (i) purchase from the Managers a portion of
the International Shares to be sold to the Managers pursuant to the
International Underwriting Agreement or (ii) sell to the Managers a portion of
the U.S. Shares to be sold to the U.S. Underwriters pursuant to this Agreement.
The Company also understands that any such purchases and sales between the U.S.
Underwriters and the Managers shall be governed by the Agreement between U.S.
Underwriters and the Managers and shall not be governed by the terms of this
Agreement.

The U.S. Underwriters and the Managers are collectively
referred to herein as the "Underwriters," the Firm U.S. Shares and the Firm
International Shares are collectively referred to herein as the "Firm Shares,"
the U.S. Shares and the International Shares are collectively referred to
herein as the "Shares" and the Additional U.S. Shares and the Additional
International Shares are collectively referred to as the "Additional Shares."

1. Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, the U.S. Underwriters
that:

(a) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and may have
filed an amendment or amendments thereto, on Form S-1 (No. 333-23287), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules
and Regulations of the Commission under the Act (the "Regulations"), is herein
called the "Registration Statement" and the prospectus, in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations or filed as part
of the Registration Statement at the time of effectiveness if no Rule 424(b) or
Rule 434 filing is required, is herein called the "U.S. Prospectus". The term
"U.S. preliminary prospectus" as used herein means a preliminary prospectus as
described in Rule 430 of the Regulations.

(b) At the time of the effectiveness of the
Registration Statement or the effectiveness of any post-effective amendment to
the Registration Statement, when the U.S. Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any
supplement to or amendment of the U.S. Prospectus is filed with the Commission
and the Additional Closing Date (as hereinafter respectively defined), if any,
the Registration Statement and the U.S. Prospectus and any amendments thereof
and supplements thereto complied or will comply in all material respects with
the
<PAGE> 3

applicable provisions of the Act and the Regulations and does not or will not
contain an untrue statement of a material fact and does not or will not omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein (i) in the case of the Registration Statement, not
misleading and (ii) in the case of the U.S. Prospectus, in light of the
circumstances under which they were made, not misleading. When any related
U.S. preliminary prospectus was first filed with the Commission (whether filed
as part of the registration statement for the registration of the Shares or any
amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any
amendment thereof or supplement thereto was first filed with the Commission,
such U.S. preliminary prospectus and any amendments thereof and supplements
thereto complied in all material respects with the applicable provisions of the
Act and the Regulations and did not contain an untrue statement of a material
fact and did not omit to state any material fact required to be stated therein
or necessary in order to make the statements therein in light of the
circumstances under which they were made not misleading. No representation and
warranty is made in this subsection (b), however, with respect to any
information contained in or omitted from the Registration Statement or the U.S.
Prospectus or any related U.S. preliminary prospectus or any amendment thereof
or supplement thereto in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any U.S. Underwriter
through you as herein stated expressly for use in connection with the
preparation thereof. If Rule 434 is used, the Company will comply with the
requirements of Rule 434.

(c) Insofar as statements in the U.S. Prospectus
purport to summarize the status of litigation or the provisions of laws, rules,
regulations, orders, judgments, decrees, contracts, agreements, instruments,
leases or licenses, such statements are correct in all material respects.

(d) Coopers & Lybrand L.L.P., who have certified the
financial statements and supporting schedules included in the Registration
Statement, are independent public accountants as required by the Act and the
Regulations.

(e) Subsequent to the respective dates as of which
information is given in the Registration Statement and the U.S. Prospectus,
except as set forth in the Registration Statement and the U.S. Prospectus,
there has been no material adverse change or any development involving a
prospective material adverse change in the business, prospects, properties,
operations, condition (financial or other) or results of operations of the
Company, whether or not arising from transactions in the ordinary course of
business, and since the date of the latest balance sheet presented in the
Registration Statement and the U.S. Prospectus, the Company has not incurred or
undertaken any liabilities or obligations, direct or contingent, which are
material to the Company except for liabilities or obligations which are
reflected in the Registration Statement and the U.S. Prospectus.

(f) This Agreement and the transactions contemplated
herein have been duly and validly authorized by the Company and this Agreement
has been duly and validly executed and delivered by the Company and constitutes
the valid and binding agreement of the Company, enforceable against the Company
in accordance with its terms, subject, as to enforcement, to applicable
bankruptcy, insolvency, reorganization and moratorium laws and other laws
relating to or affecting the enforcement of creditors' rights generally and to
general equitable principles and, with respect to this Agreement, except as the
enforceability of rights to indemnity and contribution under this Agreement may
be limited under applicable securities laws or the public policy underlying
such laws.

(g) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) conflict

3
<PAGE> 4

with or result in a breach of any of the terms and provisions of, or constitute
a default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company pursuant
to, any agreement, instrument, franchise, license or permit to which the
Company is a party or by which the Company or its properties or assets may be
bound or (ii) violate or conflict with any provision of the certificate of
incorporation or by-laws of the Company or any judgment, decree, order,
statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company or its
properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company or its properties or assets is required for the execution, delivery
and performance of this Agreement or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the Shares to
be issued, sold and delivered by the Company hereunder, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the U.S. Shares by the U.S. Underwriters.

(h) All of the outstanding shares of Common Stock
are duly and validly authorized and issued, fully paid and nonassessable and
were not issued and are not now in violation of or subject to any preemptive
rights. The Firm U.S. Shares and the Additional U.S. Shares, when issued,
delivered and sold in accordance with this Agreement, will be duly and validly
issued and outstanding, fully paid and nonassessable, and will not have been or
were not issued in violation of or be subject to any preemptive rights. The
Company had, at March 31, 1997, an authorized and outstanding capitalization as
set forth in the Registration Statement and the U.S. Prospectus. The Common
Stock and the Shares conform to the descriptions thereof contained in the
Registration Statement and the U.S. Prospectus.

(i) Assuming the exercise of the Underwriters'
over-allotment option, upon the issuance and delivery of the Additional U.S.
Shares and payment therefor pursuant hereto, good and valid title to such
Additional U.S. Shares, free and clear of all liens, encumbrances, equities,
claims, security interests, restrictions on transfer, shareholders' agreements,
voting trusts or other defects of title whatsoever, will pass to the several
U.S. Underwriters.

(j) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. The Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the character
or location of its properties (owned, leased or licensed) or the nature or
conduct of its business makes such qualification necessary, except for those
failures to be so qualified or in good standing which will not in the aggregate
have a material adverse effect on the Company. The Company has all requisite
power and authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits of and from all
public, regulatory or governmental agencies and bodies, to own, lease and
operate its properties and conduct its business as now being conducted and as
described in the Registration Statement and the U.S. Prospectus, except where
the failure to do so, will not, in the aggregate, have a material adverse
effect on the Company, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially burdensome
restriction not adequately disclosed in the Registration Statement and the U.S.
Prospectus. The Company has no subsidiaries.

4
<PAGE> 5

(k) Except as described in the U.S. Prospectus,
there is no litigation or governmental proceeding to which the Company is a
party or to which any property of the Company is subject or which is pending
or, to the knowledge of the Company, contemplated against the Company which
might result in any material adverse change or any development involving a
material adverse change in the business, prospects, properties, operations,
condition (financial or other) or, results of operations of the Company or
which is required to be disclosed in the Registration Statement and the U.S.
Prospectus.

(l) The Company has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.

(m) The financial statements, including the notes
thereto, and supporting schedules included in the Registration Statement and
the U.S. Prospectus present fairly the financial position of the Company as of
the dates indicated and the results of its operations for the periods
specified; except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis; and the supporting
schedules included in the Registration Statement present fairly the information
required to be stated therein.

(n) Except as described in the U.S. Prospectus, no
holder of securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration Statement
or otherwise in connection with the sale of the U.S. Shares contemplated
hereby.

(o) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.

(p) To the Company's knowledge, neither the Company
nor any employee or agent of the Company has made any payment of funds of the
Company or received or retained any funds in violation of any law, rule or
regulation, which payment, receipt or retention of funds is of a character
required to be disclosed in the U.S. Prospectus.

(q) The Company has filed all tax returns required
to be filed, which returns are complete and correct in all material respects,
and the Company is not in default in the payment of any taxes which were
payable pursuant to said returns or any assessments with respect thereto.

(r) The Company is in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined
in ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred,

5
<PAGE> 6

whether by action or by failure to act, which would cause the loss of such
qualification; and the there has been no action threatened against the Company
by the Pension Benefit Guaranty Corporation to terminate any of the Company's
pension plans.

(s) Except as described in the U.S. Prospectus, the
Company owns or possesses adequate rights to use all material patents, patent
applications, patent rights, inventions, trade secrets, know-how, proprietary
techniques, including processes and substances, trademarks, service marks,
trademark registrations, service mark registrations, trade names, copyrights
and licenses described or referred to in the U.S. Prospectus or owned or used
by it or which are necessary for the conduct of its business as described in
the U.S. Prospectus. Except as described in the U.S. Prospectus, the Company
has not received any notice of, or is aware of, any infringement of or conflict
with asserted rights of others with respect to any patents, patent
applications, patent rights, inventions, trade secrets, know-how, proprietary
techniques, including processes and substances, trademarks, service marks,
trademark registrations, service mark registrations, trade names, copyrights or
licenses which individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding might result in a material adverse
change or development involving a prospective material adverse change in the
business, prospects, properties, operations, condition (financial or other) or
results of operations of the Company.

(t) There are no contracts or other documents which
are required to be described in the U.S. Prospectus or filed as exhibits to
the Registration Statement by the Act or by the Regulations which have not been
described in the U.S. Prospectus or filed as exhibits to the Registration
Statement.

(u) The Shares have been and continue to be
designated for inclusion on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") National Market, and the Company is in
compliance with the maintenance and designation criteria applicable to Nasdaq
National Market issuers.

(v) No relationship, direct or indirect, exists
between or among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand, which is
required to be described in the U.S. Prospectus which is not so described.

(w) Since the date as of which information is given
in the U.S. Prospectus through the date hereof, and except as may otherwise be
disclosed in the U.S. Prospectus, the Company has not (i) issued or granted any
securities, (ii) entered into any transaction not in the ordinary course of
business or (iii) declared or paid any dividend on its capital stock.

(x) Each of the Company's executive officers and
directors, as have been heretofore designated by you and listed on Schedule II
attached hereto, has entered into or is subject to a lock-up agreement (the
"Lock-Up Agreements") under which such stockholder has agreed not, directly or
indirectly, to offer or agree to sell, hypothecate, pledge or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock (or securities exchangeable for, exercisable for or convertible into
Common Stock) owned by them for a period of 180 days after the date of the U.S.
Prospectus, without the prior written consent of Bear, Stearns & Co. Inc.; each
Lock-Up Agreement constitutes the legal, valid and binding obligations of the
stockholder or stockholders party thereto enforceable against each such
stockholder in accordance with its terms.

6
<PAGE> 7

2. Representations and Warranties of Medaphis. Medaphis
represents and warrants to, and agrees with, the U.S. Underwriters that:

(a) This Agreement and the transactions contemplated
herein have been duly and validly authorized by Medaphis and this Agreement has
been duly and validly executed and delivered by Medaphis and constitutes the
valid and binding agreement of Medaphis, enforceable against Medaphis in
accordance with its terms, subject, as to enforcement, to applicable
bankruptcy, insolvency, reorganization and moratorium laws and other laws
relating to or affecting the enforcement of creditors' rights generally and to
general equitable principles and, with respect to this Agreement, except as the
enforceability of rights to indemnity and contribution under this Agreement may
be limited under applicable securities laws or the public policy underlying
such laws.

(b) Immediately prior to the closing of the offering
contemplated hereby, Medaphis will have good and valid title to the Firm U.S.
Shares to be sold by it hereunder on such date, free and clear of all liens,
encumbrances, equities, claims, security interests, restrictions on transfer,
shareholders' agreements, voting trusts or other defects of title whatsoever;
and upon delivery of such Firm U.S. Shares and payment therefor pursuant
hereto, good and valid title to such Firm U.S. Shares, free and clear of all
liens, encumbrances, equities, claims, security interests, restrictions on
transfer, shareholders' agreements, voting trusts or other defects of title
whatsoever, will pass to the several U.S. Underwriters.

(c) Medaphis has full right, power and authority to
enter into this Agreement; the execution, delivery and performance of this
Agreement by Medaphis and the consummation by it of the transactions
contemplated hereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which Medaphis is a party or by which Medaphis is bound or to
which any of its property or assets is subject, nor will such actions result in
any violation of the provisions of the constituent documents of Medaphis, if
any, or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over it or its property or
assets; and, except for the registration of the U.S. Shares under the Act and
such consents, approvals, authorizations, registrations or qualifications as
may be required under applicable state securities laws in connection with the
purchase and distribution of the U.S. Shares by the U.S. Underwriters, no
consent, approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by Medaphis and the consummation by
it of the transactions contemplated hereby.

(d) Medaphis is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.

(e) To the extent that any statements or omissions
made in the Registration Statement, the U.S. preliminary prospectus, the U.S.
Prospectus or any amendment or supplement thereto are made in reliance upon and
in conformity with written information furnished to the Company by Medaphis
specifically for use therein, (i) the Registration Statement and any amendments
or supplements thereto will not, when they become effective or are filed with
the Commission, as the case may be, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (ii) the U.S.
preliminary prospectus, the U.S. Prospectus and any amendments or supplements
thereto will not, when each registration statement of which they are a part
becomes effective or is

7
<PAGE> 8

filed with the Commission, as the case may be, contain any untrue statement of
a material fact or omit to state any material fact stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; and Medaphis has no actual knowledge of facts which
lead it to believe that the Registration Statement, the U.S. preliminary
prospectus, the U.S. Prospectus or any amendments or supplements thereto will,
when they become effective or are filed with the Commission, as the case may
be, contain any untrue statement of any other material fact or omit to state
any other material fact required to be stated therein or necessary to make the
statements therein not misleading.

(f) Medaphis has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.

3. Purchase, Sale and Delivery of the Shares.

(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, Medaphis agrees to sell to the U.S. Underwriters
and the U.S. Underwriters, severally and not jointly, agree to purchase from
Medaphis, at a purchase price per share of $_______, the number of Firm U.S.
Shares set forth opposite the respective names of the U.S. Underwriters in
Schedule I hereto plus any additional number of U.S. Shares which such U.S.
Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.

(b) Payment of the purchase price for, and delivery
of certificates for, the U.S. Shares shall be made at the office of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York, or at such other
place as shall be agreed upon by you and Medaphis, at 10:00 A.M. on the third
or fourth business day (as permitted under Rule 15c6-1 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (unless postponed in
accordance with the provisions of Section 11 hereof) following the date of the
effectiveness of the Registration Statement (or, if the Company has elected to
rely upon Rule 430A of the Regulations, the third or fourth business day (as
permitted under Rule 15c6-1 under the Exchange Act) after the determination of
the initial public offering price of the U.S. Shares), or such other time not
later than ten business days after such date as shall be agreed upon by you and
Medaphis (such time and date of payment and delivery being herein called the
"Closing Date"). Payment shall be made to Medaphis by wire transfer in same
day funds, against delivery to you for the respective accounts of the U.S.
Underwriters of certificates for the U.S. Shares to be purchased by them.
Certificates for the U.S. Shares shall be registered in such name or names and
in such authorized denominations as you may request in writing at least two
full business days prior to the Closing Date. Medaphis will permit you to
examine and package such certificates for delivery at least one full business
day prior to the Closing Date.

(c) In addition, the Company hereby grants to the
U.S. Underwriters the option to purchase up to 1,176,000 Additional U.S. Shares
at the same purchase price per share to be paid by the U.S. Underwriters to
Medaphis for the Firm U.S. Shares as set forth in this Section 3, for the sole
purpose of covering over-allotments in the sale of Firm U.S. Shares by the U.S.
Underwriters. This option may be exercised at any time, in whole or in part,
on or before the thirtieth day following the date of the U.S. Prospectus, by
written notice by you to the Company. Such notice shall set forth the
aggregate number of Additional U.S. Shares as to which the option is being
exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be

8
<PAGE> 9

delivered (such date and time being herein sometimes referred to as the
"Additional Closing Date"); provided, however, that the Additional Closing Date
shall not be earlier than the Closing Date or earlier than the second full
business day after the date on which the option shall have been exercised nor
later than the eighth full business day after the date on which the option
shall have been exercised (unless such time and date are postponed in
accordance with the provisions of Section 11 hereof). Certificates for the
Additional U.S. Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least two full
business days prior to the Additional Closing Date. The Company will permit you
to examine and package such certificates for delivery at least one full
business day prior to the Additional Closing Date.

The number of Additional U.S. Shares to be sold to each U.S.
Underwriter shall be the number which bears the same ratio to the aggregate
number of Additional U.S. Shares being purchased as the number of Firm U.S.
Shares set forth opposite the name of such U.S. Underwriter in Schedule I
hereto (or such number increased as set forth in Section 11 hereof) bears to
7,840,000 shares, subject, however, to such adjustments to eliminate any
fractional shares as you in your sole discretion shall make.

Payment for the Additional U.S. Shares shall be made by wire
transfer in same day funds at the offices of Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, or such other location as may be mutually
acceptable, upon delivery of the certificates for the Additional U.S. Shares to
you for the respective accounts of the U.S. Underwriters.

4. Offering. Upon your authorization of the release of the
Firm U.S. Shares, the U.S. Underwriters propose to offer the U.S. Shares for
sale to the public upon the terms set forth in the U.S. Prospectus.

5. Covenants of the Company. The Company covenants and
agrees with the U.S. Underwriters that:

(a) If the Registration Statement has not yet been
declared effective the Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the U.S.
Prospectus is otherwise required under Rule 424(b) or Rule 434, the Company
will file the U.S. Prospectus (properly completed if Rule 430A has been used)
pursuant to Rule 424(b) or Rule 434 within the prescribed time period and will
provide evidence satisfactory to you of such timely filing. If the Company
elects to rely on Rule 434, the Company will prepare and file a term sheet that
complies with the requirements of Rule 434.

(b) The Company will notify you immediately (and, if
requested by you, will confirm such notice in writing) (i) when the
Registration Statement and any amendments thereto become effective, (ii) of any
request by the Commission for any amendment of or supplement to the
Registration Statement or the U.S. Prospectus or for any additional
information, (iii) of the mailing or the delivery to the Commission for filing
of any amendment of or supplement to the Registration Statement or the U.S.
Prospectus, (iv) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or any post-effective amendment
thereto or of the initiation, or the threatening, of any proceedings therefor,
(v) of the receipt of any comments from the Commission, and (vi) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of the U.S. Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for that purpose. If the
Commission shall propose or enter a stop order at any time, the Company will
make every reasonable effort

9
<PAGE> 10

to prevent the issuance of any such stop order and, if issued, to obtain the
lifting of such order as soon as possible. The Company will not file any
amendment to the Registration Statement or any amendment of or supplement to
the U.S. Prospectus (including the prospectus required to be filed pursuant to
Rule 424(b) or Rule 434) that differs from the prospectus on file at the time
of the effectiveness of the Registration Statement before or after the
effective date of the Registration Statement to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.

(c) If at any time when a prospectus relating to the
U.S. Shares is required to be delivered under the Act any event shall have
occurred as a result of which the U.S. Prospectus as then amended or
supplemented would, in the judgment of the U.S. Underwriters or the Company
include an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
or if it shall be necessary at any time to amend or supplement the U.S.
Prospectus or Registration Statement to comply with the Act or the Regulations,
the Company will notify you promptly and prepare and file with the Commission
an appropriate amendment or supplement (in form and substance satisfactory to
you) which will correct such statement or omission or which will effect such
compliance and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.

(d) The Company will promptly deliver to you such
reasonable number of signed copies of the Registration Statement, including
exhibits and all amendments thereto, and the Company will promptly deliver to
each of the U.S. Underwriters such number of copies of any U.S. preliminary
prospectus, the U.S. Prospectus, the Registration Statement and all amendments
of and supplements to such documents, if any, as you may reasonably request.

(e) The Company will endeavor in good faith, in
cooperation with you, at or prior to the time of effectiveness of the
Registration Statement, to qualify the U.S. Shares for offering and sale under
the securities laws relating to the offering or sale of the U.S. Shares of such
jurisdictions as you may designate and to maintain such qualification in effect
for so long as required for the distribution thereof; except that in no event
shall the Company be obligated in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process.

(f) The Company will make generally available
(within the meaning of Section 11(a) of the Act) to its security holders and to
you as soon as practicable, but not later than 45 days after the end of its
fiscal quarter in which the first anniversary date of the effective date of the
Registration Statement occurs, an earning statement (in form complying with the
provisions of Rule 158 of the Regulations) covering a period of at least twelve
consecutive months beginning after the effective date of the Registration
Statement.

(g) During the period of 180 days from the date of
the U.S. Prospectus, the Company will not, without your prior written consent,
issue, sell, offer or agree to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any Common Stock (or any
securities convertible into, exercisable for or exchangeable for Common Stock),
other than (i) the Company's sale of Additional U.S. Shares hereunder and the
Company's sale of Additional International Shares under the International
Underwriting Agreement and (ii) the Company's issuance of Common Stock and
stock options pursuant to the (a) Healthcare Recoveries, Inc. Non-Qualified
Stock Option Plan of Eligible Employees, (b) Healthcare Recoveries, Inc.
Directors' Stock Option Plan or (c) the Divestiture Bonus Agreement.

10
<PAGE> 11

(h) During a period of three years from the
effective date of the Registration Statement, the Company will furnish to you
copies of (i) all reports to its shareholders; and (ii) all reports, financial
statements and proxy or information statements filed by the Company with the
Commission or any national securities exchange.

(i) The Company will apply the proceeds received by
it, if any, from the sale of the Shares as set forth under "Use of Proceeds" in
the U.S. Prospectus.

(j) The Company will use its best efforts to cause
the Shares to be listed for inclusion on the Nasdaq National Market.

6. Covenants of Medaphis. Medaphis covenants and agrees with
the U.S. Underwriters that:

(a) If at any time when a prospectus relating to the
U.S. Shares is required to be delivered under the Act any information which
Medaphis has provided to the Company or the U.S. Underwriters becomes
incorrect, or if it shall be necessary at any time to amend or supplement any
information provided by Medaphis to the Company for inclusion in the U.S.
preliminary prospectus, U.S. Prospectus or Registration Statement to comply
with the Act or the Regulations, Medaphis will notify the Company and the U.S.
Underwriters promptly so that the Company may prepare and file with the
Commission an appropriate amendment or supplement (in form and substance
satisfactory to the U.S. Underwriters) which will correct such statement or
omission.

(b) Medaphis will deliver to the U.S.
Representatives prior to the Closing Date a properly completed and executed
United States Treasury Department Form W-9.

7. Payment of Expenses. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
Medaphis hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company and Medaphis hereunder,
including, without limitation, those in connection with (i) preparing,
printing, duplicating, filing and distributing the Registration Statement, as
originally filed and all amendments thereof (including all exhibits thereto),
any U.S. preliminary prospectus, the U.S. Prospectus and any amendments or
supplements thereto, the underwriting documents (including this Agreement, the
International Underwriting Agreement, the Master Agreement Among Underwriters
and the Supplement to Master Agreement Among Underwriters, the Master Selling
Agreement, the Agreement between U.S. Underwriters and Managers and the
Agreement Among Managers) and all other documents related to the public
offering of the Shares (including those supplied to the Underwriters in
quantities as hereinabove stated) (in each case, including, without limitation,
fees and expenses of the Company's accountants and counsel, but not
Underwriters' Counsel (as defined below)), (ii) the issuance, transfer and
delivery of the Shares to the U.S. Underwriters, including any transfer or
other taxes payable thereon, (iii) the qualification of the Shares under state
or foreign securities or Blue Sky laws, including the costs of printing and
mailing a preliminary and final "Blue Sky Survey" and the fees of counsel for
the Underwriters and such counsel's disbursements in relation thereto, (iv)
quotation of the Shares on the Nasdaq National Market, (v) filing fees of the
Commission and the National Association of Securities Dealers, Inc. (the
"NASD"), (vi) the cost of printing certificates representing the Shares, (vii)
the cost and charges of any transfer agent or registrar and (viii) travel and
lodging expenses of employees of the Company who participate in the advertising
and marketing of the Shares.

11
<PAGE> 12

8. Conditions of U.S. Underwriters' Obligations. The
obligations of the U.S. Underwriters to purchase and pay for the Firm U.S.
Shares and the Additional U.S. Shares, as provided herein, shall be subject to
the accuracy of the representations and warranties of the Company and Medaphis
herein contained, as of the date hereof and as of the Closing Date (for
purposes of this Section 8 "Closing Date" shall refer to the Closing Date for
the Firm U.S. Shares and any Additional Closing Date, if different, for the
Additional U.S. Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Simpson Thacher & Bartlett
("Underwriters' Counsel") pursuant to this Section 8 of any misstatement or
omission, to the performance by the Company of its obligations hereunder, and
to the following additional conditions:

(a) The Registration Statement shall have become
effective not later than 5:30 P.M., New York time, on the date of this
Agreement or at such later time and date as shall have been consented to in
writing by you; if the Company shall have elected to rely upon Rule 430A or
Rule 434 of the Regulations, the U.S. Prospectus shall have been filed with the
Commission in a timely fashion in accordance with Section 5(a) hereof; and, at
or prior to the Closing Date no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof shall have been
issued and no proceedings therefor shall have been initiated or threatened by
the Commission.

(b) At the Closing Date you shall have received the
opinion of King & Spalding, counsel for the Company, dated the Closing Date
addressed to the U.S. Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:

(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation. The Company is duly qualified and
in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or
licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a material
adverse effect on the Company. The Company has all requisite
corporate authority to own, lease and license its respective
properties and conduct its business as now being conducted and as
described in the Registration Statement and the U.S. Prospectus.

(ii) The Company has an authorized capital stock
as set forth in the Registration Statement and the U.S. Prospectus.
All of the outstanding shares of Common Stock are duly and validly
authorized and issued, are fully paid and nonassessable and were not
issued in violation of or subject to any preemptive rights. The U.S.
Shares to be delivered on the Closing Date have been duly and validly
authorized and, each of (A) the Firm U.S. Shares, when delivered by
Medaphis in accordance with this Agreement, and (B) the Additional
U.S. Shares, when delivered by the Company in accordance with this
Agreement, will be duly and validly issued, fully paid and
nonassessable and will not have been issued in violation of or subject
to any preemptive rights. The Common Stock and the U.S. Shares
conform to the descriptions thereof contained in the Registration
Statement and the U.S. Prospectus.

(iii) Assuming the exercise of the Underwriters'
over-allotment option, upon the issuance and delivery of the
Additional U.S.

12
<PAGE> 13

Shares and payment therefor pursuant hereto, good and valid title to
such Additional U.S. Shares, free and clear of all liens,
encumbrances, equities, claims, security interests, restrictions on
transfer, shareholders' agreements, voting trusts or other defects of
title whatsoever, will pass to the several U.S. Underwriters.

(iv) The U.S. Shares to be sold under this
Agreement to the U.S. Underwriters are duly authorized for quotation
on the Nasdaq National Market.

(v) This Agreement has been duly and validly
authorized, executed and delivered by the Company.

(vi) Assuming due execution and delivery by the
U.S. Representatives of this Agreement, this Agreement constitutes the
legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except that
enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the rights
of creditors generally and by general equitable principles and, except
as the enforceability of rights to indemnity and contribution under
this Agreement may be limited under applicable securities laws or the
public policy underlying such laws.

(vii) There is no litigation or governmental or
other action, suit, proceeding or investigation before any court or
before or by any public, regulatory or governmental agency or body
pending or to the best of such counsel's knowledge, threatened
against, or involving the properties or business of, the Company which
is of a character required to be disclosed in the Registration
Statement and the U.S. Prospectus which has not been properly
disclosed therein.

(viii) The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
hereby by the Company do not and will not (A) conflict with or result
in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company pursuant to, any agreement, instrument,
franchise, license or permit known to such counsel to which the
Company is a party or by which its properties or assets may be bound
or (B) violate or conflict with any provision of the certificate of
incorporation or by-laws of the Company, or, to the best knowledge of
such counsel, any judgment, decree, order, statute, rule or regulation
of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or its properties or assets. No
consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental, or regulatory agency or body having jurisdiction over
the Company or its properties or assets is required for the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, except for (1) such as may be
required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the U.S. Underwriters
(as to which such counsel need

13
<PAGE> 14

express no opinion) and (2) such as have been made or obtained under
the Act.

(ix) The Registration Statement and the U.S.
Prospectus and any amendments thereof or supplements thereto (other
than the financial statements and schedules and other financial data
included therein, as to which no opinion need be rendered) comply as
to form in all material respects with the requirements of the Act and
the Regulations.

(x) The Registration Statement is effective
under the Act, and, to the best knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereof has been issued and no
proceedings therefor have been initiated or threatened by the
Commission and all filings required by Rule 424(b) of the Regulations
have been made.

(xi) In addition, such opinion shall also contain
a statement that such counsel has participated in conferences with
officers and representatives of the Company, representatives of the
independent public accountants for the Company and the Underwriters at
which the contents of the U.S. Prospectus and related matters were
discussed and, no facts have come to the attention of such counsel
which would lead such counsel to believe that either the Registration
Statement at the time it became effective (including the information
deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or
any amendment thereof made prior to the Closing Date as of the date of
such amendment, contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
U.S. Prospectus as of its date (or any amendment thereof or supplement
thereto made prior to the Closing Date as of the date of such
amendment or supplement) and as of the Closing Date contained or
contains an untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading (it being understood that such counsel
need express no belief or opinion with respect to the financial
statements and schedules and other financial data included therein or
with respect to the matters set forth under the heading "Notice to
Canadian Residents").

In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; and (B) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company and certificates or other written statements of officers of departments
of various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and other public officials (including
oral statements of representatives of the Commission and correspondence and
oral statements of representatives of the Nasdaq National

14
<PAGE> 15

Market), provided that copies of any such written statements or certificates
shall be delivered to Underwriters' Counsel. The opinion of such counsel for
the Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and, in their opinion, you and they are justified
in relying thereon.

(c) At the Closing Date you shall have received the
opinion of King & Spalding, counsel for Medaphis, dated the Closing Date
addressed to the U.S. Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:

(i) This Agreement has been duly and validly
authorized, executed and delivered by Medaphis.

(ii) Assuming the due execution and delivery by
the U.S. Representatives of this Agreement, this Agreement constitutes
the legal, valid and binding obligation of Medaphis, enforceable
against Medaphis in accordance with its terms, except that
enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the rights
of creditors generally and by general equitable principles and, except
as the enforceability of rights to indemnity and contribution under
this Agreement may be limited under applicable securities laws or the
public policy underlying such laws.

(iii) The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
hereby by Medaphis do not and will not (A) conflict with or result in
a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of Medaphis pursuant to, any agreement, instrument, franchise,
license or permit known to such counsel to which it is a party or by
which its properties or assets may be bound or (B) violate or conflict
with any provision of the certificate of incorporation or by-laws of
Medaphis, or, to the best knowledge of such counsel, any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over
Medaphis or its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental, or regulatory
agency or body having jurisdiction over Medaphis or its properties or
assets is required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby,
except for (1) such as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Shares by the U.S. Underwriters (as to which such counsel need
express no opinion) and (2) such as have been made or obtained under
the Act.

(iv) The Firm U.S. Shares, when delivered by
Medaphis in accordance with this Agreement, will be fully paid and
nonassessable and will not have been issued in violation of or subject
to any preemptive rights.

(v) Immediately prior to the closing of the
offering contemplated hereby, Medaphis will have good and valid title
to the Firm U.S.

15
<PAGE> 16

Shares to be sold by it hereunder on such date, free and clear of all
liens, encumbrances, equities, claims, security interests,
restrictions on transfer, shareholders' agreements, voting trusts or
other defects of title whatsoever; and upon delivery of such Firm U.S.
Shares and payment therefor pursuant hereto, good and valid title to
such Firm U.S. Shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several U.S. Underwriters.

In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; and (B) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of
Medaphis and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of Medaphis, provided that copies of any
such statements or certificates shall be delivered to Underwriters' Counsel.
The opinion of such counsel for Medaphis shall state that the opinion of any
such other counsel is in form satisfactory to such counsel and, in their
opinion, you and they are justified in relying thereon.

(d) All proceedings taken in connection with the
sale of the Firm U.S. Shares and the Additional U.S. Shares as herein
contemplated shall be satisfactory in form and substance to you and to
Underwriters' Counsel, and the U.S. Underwriters shall have received from said
Underwriters' Counsel a favorable opinion, dated as of the Closing Date with
respect to the issuance and sale of the U.S. Shares, the Registration Statement
and the U.S. Prospectus and such other related matters as you may reasonably
require, and the Company shall have furnished to Underwriters' Counsel such
documents as they request for the purpose of enabling them to pass upon such
matters.

(e) At the Closing Date you shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of the
Company, dated the Closing Date to the effect that (i) the condition set forth
in subsection (a) of this Section 8 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing
Date the obligations of the Company to be performed hereunder on or prior
thereto have been duly performed and (iv) subsequent to the respective dates as
of which information is given in the Registration Statement and the U.S.
Prospectus, the Company has not sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or any legal or governmental proceeding, and there has not been
any material adverse change, or any development involving a material adverse
change, in the business prospects, properties, operations, condition (financial
or otherwise), or results of operations of the Company, except in each case as
described in or contemplated by the U.S. Prospectus.

(f) At the Closing Date you shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of
Medaphis, dated the Closing Date to the effect that (i) as of the date hereof
and as of the Closing Date the representations and warranties of Medaphis set
forth in Section 2 hereof are accurate

16
<PAGE> 17

and (ii) as of the Closing Date the obligations of Medaphis to be performed
hereunder on or prior thereto have been duly performed.

(g) At the time this Agreement is executed and at
the Closing Date, you shall have received a letter, from Coopers & Lybrand
L.L.P., independent public accountants for the Company, dated, respectively, as
of the date of this Agreement and as of the Closing Date addressed to the U.S.
Underwriters and in form and substance satisfactory to you, to the effect that:
(i) they are independent certified public accountants with respect to the
Company within the meaning of the Act and the Regulations and stating that the
answer to Item 10 of the Registration Statement is correct insofar as it
relates to them; (ii) stating that, in their opinion, the financial statements
and schedules of the Company included in the Registration Statement and the
U.S. Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the Act and
the applicable published rules and regulations of the Commission thereunder;
(iii) on the basis of procedures consisting of a reading of the latest
available unaudited interim financial statements of the Company, a reading of
the minutes of meetings and consents of the shareholders and board of directors
of the Company and the committees of such board subsequent to December 31,
1996, inquiries of officers and other employees of the Company who have
responsibility for financial and accounting matters of the Company with respect
to transactions and events subsequent to December 31, 1996 and other specified
procedures and inquiries to a date not more than five days prior to the date of
such letter, nothing has come to their attention that would cause them to
believe that: (A) the unaudited financial statements and schedules of the
Company presented in the Registration Statement and the U.S. Prospectus do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable published rules and regulations of
the Commission thereunder or that such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting principles;
(B) with respect to the period subsequent to December 31, 1996, there were, as
of the date of the most recent available monthly financial statements of the
Company, if any, and as of a specified date not more than five days prior to
the date of such letter, any changes in the capital stock or long-term
indebtedness of the Company or any decrease in the net current assets or
stockholders' equity of the Company, in each case as compared with the amounts
shown in the most recent balance sheet presented in the Registration Statement
and the U.S. Prospectus, except for changes or decreases which the Registration
Statement and the U.S. Prospectus disclose have occurred or may occur or which
are set forth in such letter or (C) that during the period from December 31,
1996 to the date of the most recent available monthly financial statements of
the Company, and to a specified date not more than five days prior to the date
of such letter, there was any decrease, as compared with the corresponding
period in the prior fiscal year, in total revenues, or total or per share net
income, except for decreases which the Registration Statement and the U.S.
Prospectus disclose have occurred or may occur or which are set forth in such
letter; and (iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, and other financial
information pertaining to the Company set forth in the Registration Statement
and the U.S. Prospectus, which have been specified by you prior to the date of
this Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial records of
the Company or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found
them to be in agreement.

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<PAGE> 18

(h) At the Closing Date, you shall have received
from each person who is a director or officer of the Company and each
stockholder listed named in Schedule II hereto, an agreement, or each such
person shall be subject to an agreement, to the effect that such person will
not, directly or indirectly, without the prior written consent of Bear, Stearns
& Co. Inc., offer, sell, offer or agree to sell, grant any option to purchase
or otherwise dispose (or announce any offer, sale, grant of an option to
purchase or other disposition) of any shares of Common Stock (or any securities
convertible into, exercisable for or exchangeable or exercisable for shares of
Common Stock) for a period of 180 days after the date of the Prospectus.

(i) Prior to the Closing Date the Company shall have
furnished to you such further information, certificates and documents as you
may reasonably request.

(j) At the Closing Date, the Shares shall have been
approved for quotation on the Nasdaq National Market.

(k) The NASD, upon review of the terms of the
underwriting arrangements for the public offering of the Shares, shall have
raised no objections thereto.

If any of the conditions specified in this Section 8 shall not
have been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 8 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the U.S. Underwriters hereunder may
be cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the U.S. Underwriters to purchase the Additional U.S. Shares may
be cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.

9. Indemnification.

(a) Each of the Company and Medaphis agrees to
indemnify, jointly and severally, and hold harmless each U.S. Underwriter and
each person, if any, who controls any U.S. Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all
losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but limited to attorneys' fees and any and all expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), joint or several, to which they or
any of them may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact

18
<PAGE> 19

required to be stated therein or necessary to make the statements therein not
misleading or (ii) any untrue statement or alleged untrue statement of a
material fact, in light of the circumstances under which they were made,
contained in any related U.S. preliminary prospectus or the U.S. Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; provided, however,
neither the Company nor Medaphis will be liable in any such case to the extent
but only to the extent that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company or Medaphis, as
the case may be, by or on behalf of any U.S. Underwriter through you expressly
for use therein. This indemnity agreement will be in addition to any liability
which the Company or Medaphis may otherwise have including under this
Agreement. The foregoing indemnity agreement with respect to any U.S.
preliminary prospectus shall not inure to the benefit of any U.S. Underwriter
from whom the person asserting any such losses, claims, damages or liabilities
purchased Shares (or any person who controls such U.S. Underwriter within the
meaning of Section 15 of the Act) if a copy of the U.S. Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such U.S.
Underwriter to such person, if such is required by law, at or prior to the
written confirmation of the sale of such Shares to such person and if the U.S.
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage or liability.

(b) Each U.S. Underwriter severally, and not
jointly, agrees to indemnify and hold harmless the Company and Medaphis, each
of the directors of the Company and Medaphis, each of the officers of the
Company who shall have signed the Registration Statement, and each other
person, if any, who controls the Company or Medaphis within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement for
the registration of the Shares, as originally filed or any amendment thereof or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
or (ii) any untrue statement or alleged untrue statement of a material fact, in
light of the circumstances in which they were made, contained in any related
U.S. preliminary prospectus or the U.S. Prospectus, or in any supplement
thereto or amendment thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, in each case to the extent, but only to
the extent, that any such loss, liability, claim, damage or expense arises out
of or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any U.S.
Underwriter through you expressly for use therein; provided, however, that in
no case shall any U.S. Underwriter be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
U.S. Underwriter hereunder. This indemnity will be in addition to any
liability which any U.S. Underwriter may otherwise have including under this
Agreement. The Company and

19
<PAGE> 20

Medaphis each acknowledge that the statements set forth in the last paragraph
of the cover page and in the paragraphs four, six, seven, eight and ten under
the caption "Underwriting" in the U.S. Prospectus constitute the only
information furnished in writing by or on behalf of any U.S. Underwriter
expressly for use in the registration statement relating to the Shares as
originally filed or in any amendment thereof, any related U.S. preliminary
prospectus or the U.S. Prospectus or in any amendment thereof or supplement
thereto, as the case may be.

(c) Promptly after receipt by an indemnified party
under subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify each party against
whom indemnification is to be sought in writing of the commencement thereof
(but the failure so to notify an indemnifying party shall not relieve it from
any liability which it may have under this Section 9). In case any such action
is brought against any indemnified party, and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from
such indemnified party, to assume the defense thereof with counsel satisfactory
to such indemnified party. Notwithstanding the foregoing, the indemnified
party or parties shall have the right to employ its or their own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
such indemnified party or parties unless (i) the employment of such counsel
shall have been authorized in writing by one of the indemnifying parties in
connection with the defense of such action, (ii) the indemnifying parties shall
not have employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to
those available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall
not be liable for any settlement of any claim or action effected without its
written consent; provided, however, that such consent was not unreasonably
withheld.

20
<PAGE> 21

permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 9
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and
Medaphis, on the one hand, and the U.S. Underwriters, on the other hand, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
Medaphis, on the one hand, and the U.S. Underwriters, on the other hand, shall
be deemed to be in the same proportion as (x) the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company and Medaphis and (y) the underwriting
discounts and commissions received by the U.S. Underwriters, respectively, in
each case as set forth in the table on the cover page of the U.S. Prospectus.
The relative fault of the Company and Medaphis, on the one hand, and of the
U.S. Underwriters, on the other hand, shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the U.S. Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the U.S.
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 10 were determined by pro rata allocation (even if the
U.S. Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 10, (i) in no case shall any U.S. Underwriter be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such U.S. Underwriter hereunder, and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding the provisions of this Section
10 and the preceding sentence, no U.S. Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the U.S. Shares underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages that such U.S. Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Section 10,
each person, if any, who controls a U.S. Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same
rights to contribution as such U.S. Underwriter, and each person, if any, who
controls the Company or Medaphis within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company and Medaphis
shall have the same rights to contribution as the Company and Medaphis, as the
case may be, subject in each case to clauses (i) and (ii) of this Section 10.
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties,
notify each party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 10 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.

21
<PAGE> 22

11. Default by a U.S. Underwriter.

(a) If any U.S. Underwriter or U.S. Underwriters
shall default in its or their obligation to purchase Firm U.S. Shares or
Additional U.S. Shares hereunder, and if the Firm U.S. Shares or Additional
U.S. Shares with respect to which such default relates do not (after giving
effect to arrangements, if any, made by you pursuant to subsection (b) below)
exceed in the aggregate 10% of the number of Firm U.S. Shares or Additional
U.S. Shares, such Firm U.S. Shares or Additional U.S. Shares, as the case may
be, to which the default relates shall be purchased by the non-defaulting U.S.
Underwriters in proportion to the respective proportions which the numbers of
Firm U.S. Shares set forth opposite their respective names in Schedule I hereto
bear to the aggregate number of Firm U.S. Shares set forth opposite the names
of the non-defaulting U.S. Underwriters.

(b) In the event that such default relates to more
than 10% of the Firm U.S. Shares or Additional U.S. Shares, as the case may be,
you may in your discretion arrange for yourself or for another party or parties
(including any non-defaulting U.S. Underwriter or U.S. Underwriters who so
agree) to purchase such Firm U.S. Shares or Additional U.S. Shares, as the
case may be, to which such default relates on the terms contained herein. In
the event that within five calendar days after such a default you do not
arrange for the purchase of the Firm U.S. Shares or Additional U.S. Shares, as
the case may be, to which such default relates as provided in this Section 11,
this Agreement or, in the case of a default with respect to the Additional U.S.
Shares, the obligations of the U.S. Underwriters to purchase and of the
Company to sell the Additional U.S. Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Sections 7, 9(a) and 10 hereof) or the U.S. Underwriters, but
nothing in this Agreement shall relieve a defaulting U.S. Underwriter or U.S.
Underwriters of its or their liability, if any, to the other U.S. Underwriters,
the Company and Medaphis for damages occasioned by its or their default
hereunder.

(c) In the event that the Firm U.S. Shares or
Additional U.S. Shares to which the default relates are to be purchased by the
non-defaulting U.S. Underwriters, or are to be purchased by another party or
parties as aforesaid, you or the Company shall have the right to postpone the
Closing Date or Additional Closing Date, as the case may be for a period, not
exceeding five business days, in order to effect whatever changes may thereby
be made necessary in the Registration Statement or the U.S. Prospectus or in
any other documents and arrangements, and the Company agrees to file promptly
any amendment or supplement to the Registration Statement or the U.S.
Prospectus which, in the opinion of Underwriters' Counsel, may thereby be made
necessary or advisable. The term "U.S. Underwriter" as used in this Agreement
shall include any party substituted under this Section 11 with like effect as
if it had originally been a party to this Agreement with respect to such Firm
U.S. Shares and Additional U.S. Shares.

12. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the U.S.
Underwriters, the Company and Medaphis contained in this Agreement, including
the agreements contained in Section 7, the indemnity agreements contained in
Section 9 and the contribution agreements contained in Section 10, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any U.S. Underwriter or any controlling person thereof or by or
on behalf of the Company, any of its officers and directors or any controlling
person thereof, and shall survive delivery of and payment for the U.S. Shares
to and by the U.S. Underwriters. The representations contained

22
<PAGE> 23

in Sections 1 and 2, and the agreements contained in Sections 7, 9, 10 and
13(d) hereof shall survive the termination of this Agreement, including
termination pursuant to Section 11 or 13 hereof.

13. Effective Date of Agreement; Termination.

(a) This Agreement shall become effective, upon the
later of when (i) you, the Company and Medaphis shall have received
notification of the effectiveness of the Registration Statement or (ii) the
execution of this Agreement. If either the initial public offering price or
the purchase price per Share has not been agreed upon prior to 5:00 P.M., New
York time, on the fifteenth full business day after the Registration Statement
shall have become effective, this Agreement shall thereupon terminate without
liability to the Company, Medaphis or the U.S. Underwriters except as herein
expressly provided. Until this Agreement becomes effective as aforesaid, it
may be terminated by the Company by notifying you or by you notifying the
Company. Notwithstanding the foregoing, the provisions of this Section 13 and
of Sections 1, 2, 6, 7, 8 and 9 hereof shall at all times be in full force and
effect.

(b) You shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of the U.S.
Underwriters to purchase the Additional U.S. Shares at any time prior to the
Additional Closing Date, as the case may be, if (A) any domestic or
international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, the market for the
Company's securities or securities in general; or (B) if trading on the Nasdaq
National Market or the New York or American Stock Exchanges shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required, on the
Nasdaq National Market by the NASD or on the New York or American Stock
Exchanges by the New York or American Stock Exchanges or by order of the
Commission or any other governmental authority having jurisdiction; or (C) if a
banking moratorium has been declared by a state or federal authority or if any
new restriction materially adversely affecting the distribution of the Firm
U.S. Shares or the Additional U.S. Shares, as the case may be, shall have
become effective; or (D) (i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United
States or there is a declaration of a national emergency or war by the United
States or (ii) if there shall have been such change in political, financial or
economic conditions if the effect of any such event in (i) or (ii) as in your
judgment makes it impracticable or inadvisable to proceed with the offering,
sale and delivery of the Firm U.S. Shares or the Additional U.S. Shares, as the
case may be, on the terms contemplated by the U.S. Prospectus.

(c) Any notice of termination pursuant to this
Section 13 shall be by telephone, telex, or telegraph, confirmed in writing by
letter.

(d) If this Agreement shall be terminated pursuant
to any of the provisions hereof (otherwise than pursuant to (i) notification by
you as provided in Section 13(a) hereof or (ii) Section 11(b) or 13(b) hereof),
or if the sale of the U.S. Shares provided for herein is not consummated
because any condition to the obligations of the U.S. Underwriters set forth
herein is not satisfied or because of any refusal, inability or failure on the
part of the Company to perform any agreement herein or comply with any
provision hereof, the Company will, subject to demand by you, reimburse the
U.S. Underwriters for all out-of-pocket expenses (including the

23
<PAGE> 24

fees and expenses of their counsel), incurred by the U.S. Underwriters in
connection herewith.

14. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
U.S. Underwriter, shall be mailed, delivered, or telexed or telegraphed and
confirmed in writing, to such U.S. Underwriter c/o Bear, Stearns & Co. Inc.,
245 Park Avenue, New York, N.Y. 10167, Attention: Stephen M. Parish, Senior
Managing Director (and a copy thereof shall be sent in the same manner to
Underwriters' Counsel, 425 Lexington Avenue, New York, New York 10017,
Attention: Gary L. Sellers, Esq.); if sent to the Company, shall be mailed,
delivered, or telegraphed and confirmed in writing to the Company, 1400
Watterson Tower, Louisville, Kentucky 40218, Attention: Patrick B. McGinnis,
Chairman and Chief Executive Officer (and a copy thereof shall be sent in the
same manner to King & Spalding, 191 Peachtree Street, Atlanta, Georgia
30303-1763, Attention: Robert W. Miller, Esq.); if sent to Medaphis, shall be
mailed, delivered, or telegraphed and confirmed in writing to Medaphis, 2700
Cumberland Parkway, Suite 300, Atlanta, Georgia 30339, Attention: David E.
McDowell (and a copy thereof shall be sent in the same manner to King &
Spalding, 191 Peachtree Street, Atlanta, Georgia 30303-1763, Attention: Robert
W. Miller, Esq.).

15. Parties. This Agreement shall inure solely to the
benefit of, and shall be binding upon, the U.S. Underwriters, the Company and
Medaphis and the controlling persons, directors, officers, employees and agents
referred to in Sections 9 and 10, and their respective successors and assigns,
and no other person shall have or be construed to have any legal or equitable
right, remedy or claim under or in respect of or by virtue of this Agreement or
any provision herein contained. The term "successors and assigns" shall not
include a purchaser, in its capacity as such, of U.S. Shares from any of the
U.S. Underwriters.

16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.

24
<PAGE> 25

If the foregoing correctly sets forth the understanding
between you, the Company and Medaphis, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.

Very truly yours,

HEALTHCARE RECOVERIES, INC.

By
-------------------------
Name:
Title:

MEDAPHIS CORPORATION

By
-------------------------
Name:
Title:

Accepted as of the date first above written

BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY INC.

By: BEAR, STEARNS & CO. INC.

By:
--------------------------------
Name:
Title:

On behalf of themselves and the other
U.S. Underwriters named in Schedule I hereto.

25
<PAGE> 26

SCHEDULE I

<TABLE>
<CAPTION>
Number of Firm U.S.
Name of U.S. Underwriter Shares to be Purchased
- ------------------------ ----------------------
<S> <C>
Bear, Stearns & Co. Inc
Donaldson, Lufkin & Jenrette
Securities Corporation
The Robinson-Humphrey Company Inc.

Total. . . . . .
----------

7,840,000

</TABLE>
<PAGE> 27

SCHEDULE II

Directors and Executive Officers subject to a Lock-Up Agreement

Patrick B. McGinnis
Dennis K. Burge
Douglas R. Sharps
Bobby T. Tokuuke
Debra M. Murphy
Kathleen K. Harreld
<PAGE> 28

9,800,000 SHARES OF COMMON STOCK

HEALTHCARE RECOVERIES, INC.

INTERNATIONAL UNDERWRITING AGREEMENT

_________, 1997

BEAR, STEARNS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.
as Lead Managers of the
several Managers named in
Schedule I attached hereto
c/o Bear, Stearns International Limited
One Canada Square
London E14 5AD, England

Dear Sirs:

Medaphis Corporation ("Medaphis"), the parent of Healthcare
Recoveries, Inc. (the "Company"), (each a corporation organized and existing
under the laws of Delaware), proposes, subject to the terms and conditions
stated herein, to sell to the several managers named in Schedule I hereto (the
"Managers") an aggregate of 1,960,000 shares (the "Firm International Shares")
of the Company's common stock, par value $.001 per share (the "Common Stock")
and, for the sole purpose of covering over-allotments in connection with the
sale of the Firm International Shares, at the option of the Managers, the
Company proposes to sell up to an additional 294,000 shares (the "Additional
International Shares") of Common Stock. The Firm International Shares and any
Additional International Shares purchased by the Managers are referred to
herein as the "International Shares." The International Shares are more fully
described in the Registration Statement referred to below.

It is understood that the Company and Medaphis are
concurrently entering into an agreement dated the date hereof (the "U.S.
Underwriting Agreement") pursuant to which Medaphis proposes, subject to the
terms and conditions stated therein, to sell within the United States and
Canada an aggregate of 7,840,000 shares of Common Stock (the "Firm U.S.
Shares") through arrangements with certain underwriters within the United
<PAGE> 29

States and Canada (the "U.S. Underwriters") for whom Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and The Robinson-Humphrey
Company, Inc. are acting as representatives and, for the sole purpose of
covering over-allotments in connection with the sale of Firm U.S. Shares, at
the option of the U.S. Underwriters, the Company proposes to sell up to an
additional 1,176,000 shares (the "Additional U.S. Shares") of Common Stock.
The Firm U.S. Shares and any Additional U.S. Shares purchased by the U.S.
Underwriters are referred to herein as the "U.S. Shares." It is understood that
the Company is not obligated to sell, and the Managers are not obligated to
purchase, any Firm International Shares unless all of the Firm U.S. Shares are
contemporaneously purchased by the U.S. Underwriters.

It is also understood and agreed to by all the parties that
the U.S. Underwriters have entered into an agreement with the Managers (the
"Agreement between U.S. Underwriters and Managers") contemplating the
coordination of certain transactions between the U.S. Underwriters and the
Managers and that, pursuant thereto and subject to the conditions set forth
therein, the U.S. Underwriters may (i) purchase from the Managers a portion of
the International Shares to be sold to the Managers pursuant to this Agreement
or (ii) sell to the Managers a portion of the U.S. Shares to be sold to the
U.S. Underwriters pursuant to the U.S. Underwriting Agreement. The Company
also understands that any such purchases and sales between the U.S.
Underwriters and the Managers shall be governed by the Agreement between U.S.
Underwriters and the Managers and shall not be governed by the terms of this
Agreement.

1. Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, the Managers that:

(a) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and may have
filed an amendment or amendments thereto, on Form S-1 (No. 333-23287), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules
and Regulations of the Commission under the Act (the "Regulations"), is herein
called the "Registration Statement" and the prospectus, in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations or filed as part
of the Registration Statement at the time of effectiveness if no Rule 424(b) or
Rule 434 filing is required, is herein called the "International Prospectus".
The term "International preliminary prospectus" as used herein means a
preliminary prospectus as described in Rule 430 of the Regulations.

(b) At the time of the effectiveness of the
Registration Statement or the effectiveness of any post-effective amendment to
the Registration Statement, when the International Prospectus is first filed
with the Commission pursuant to Rule 424(b) or Rule 434 of the Regulations,
when any supplement to or amendment of the International Prospectus is filed
with the Commission and the Additional Closing Date (as hereinafter
respectively defined), if any, the Registration Statement and the International
Prospectus

2
<PAGE> 30

and any amendments thereof and supplements thereto complied or will comply in
all material respects with the applicable provisions of the Act and the
Regulations and does not or will not contain an untrue statement of a material
fact and does not or will not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein (i) in the
case of the Registration Statement, not misleading and (ii) in the case of the
International Prospectus, in light of the circumstances under which they were
made, not misleading. When any related International preliminary prospectus
was first filed with the Commission (whether filed as part of the registration
statement for the registration of the Shares or any amendment thereto or
pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or
supplement thereto was first filed with the Commission, such International
preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the International Prospectus
or any related International preliminary prospectus or any amendment thereof or
supplement thereto in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Manager through you
as herein stated expressly for use in connection with the preparation thereof.
If Rule 434 is used, the Company will comply with the requirements of Rule 434.

(c) Insofar as statements in the International
Prospectus purport to summarize the status of litigation or the provisions of
laws, rules, regulations, orders, judgments, decrees, contracts, agreements,
instruments, leases or licenses, such statements are correct in all material
respects.

(e) Subsequent to the respective dates as of which
information is given in the Registration Statement and the International
Prospectus, except as set forth in the Registration Statement and the
International Prospectus, there has been no material adverse change or any
development involving a prospective material adverse change in the business,
prospects, properties, operations, condition (financial or other) or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, and since the date of the latest balance sheet
presented in the Registration Statement and the International Prospectus, the
Company has not incurred or undertaken any liabilities or obligations, direct
or contingent, which are material to the Company except for liabilities or
obligations which are reflected in the Registration Statement and the
International Prospectus.

3
<PAGE> 31

(g) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or lapse
of time, or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company pursuant to, any agreement, instrument, franchise, license or
permit to which the Company is a party or by which the Company or its
properties or assets may be bound or (ii) violate or conflict with any
provision of the certificate of incorporation or by-laws of the Company or any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over the
Company or its properties or assets. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or its properties or assets is required for the
execution, delivery and performance of this Agreement or the consummation of
the transactions contemplated hereby, including the issuance, sale and delivery
of the International Shares to be issued, sold and delivered by the Company
hereunder, except the registration under the Act of the Shares and such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
International Shares by the Managers.

(h) All of the outstanding shares of Common Stock
are duly and validly authorized and issued, fully paid and nonassessable and
were not issued and are not now in violation of or subject to any preemptive
rights. The Firm International Shares and the Additional International Shares,
when issued, delivered and sold in accordance with this Agreement, will be duly
and validly issued and outstanding, fully paid and nonassessable, and will not
have been or were not issued in violation of or be subject to any preemptive
rights. The Company had, at March 31, 1997, an authorized and outstanding
capitalization as set forth in the Registration Statement and the International
Prospectus. The Common Stock and the Shares conform to the descriptions
thereof contained in the Registration Statement and the International
Prospectus.

(i) Assuming the exercise of the Managers'
over-allotment option, upon the issuance and delivery of the Additional
International Shares and payment therefor pursuant hereto, good and valid title
to such Additional International Shares, free and clear of all liens,
encumbrances, equities, claims, security interests, restrictions on transfer,
shareholders' agreements, voting trusts or other defects of title whatsoever,
will pass to the several Managers.

(j) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. The Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the character
or location of its properties (owned, leased or licensed) or the nature or
conduct of its business makes such qualification necessary, except for those
failures to be so qualified or in good standing which will not in the aggregate
have a material adverse effect on the Company. The Company has all requisite
power and authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits of and from all
public, regulatory or governmental agencies and bodies, to own, lease and
operate its properties and conduct its business as now being conducted and as
described in the Registration Statement and the International Prospectus,
except where the failure to do so, will not, in the aggregate, have a material
adverse effect on the Company, and no such consent, approval, authorization,
order, registration, qualification, license or permit contains a materially
burdensome restriction

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<PAGE> 32

not adequately disclosed in the Registration Statement and the International
Prospectus. The Company has no subsidiaries.

(k) Except as described in the International
Prospectus, there is no litigation or governmental proceeding to which the
Company is a party or to which any property of the Company is subject or which
is pending or, to the knowledge of the Company, contemplated against the
Company which might result in any material adverse change or any development
involving a material adverse change in the business, prospects, properties,
operations, condition (financial or other) or, results of operations of the
Company or which is required to be disclosed in the Registration Statement and
the International Prospectus.

(m) The financial statements, including the notes
thereto, and supporting schedules included in the Registration Statement and
the International Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of its operations for the
periods specified; except as otherwise stated in the Registration Statement,
said financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis; and the
supporting schedules included in the Registration Statement present fairly the
information required to be stated therein.

(n) Except as described in the International
Prospectus, no holder of securities of the Company has any rights to the
registration of securities of the Company because of the filing of the
Registration Statement or otherwise in connection with the sale of the
International Shares contemplated hereby.

(o) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.

5
<PAGE> 33

regulations and published interpretations thereunder (the "Code"); each
"pension plan" for which the Company would have any liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification; and the there has been
no action threatened against the Company by the Pension Benefit Guaranty
Corporation to terminate any of the Company's pension plans.

(s) Except as described in the International
Prospectus, the Company owns or possesses adequate rights to use all material
patents, patent applications, patent rights, inventions, trade secrets,
know-how, proprietary techniques, including processes and substances,
trademarks, service marks, trademark registrations, service mark registrations,
trade names, copyrights and licenses described or referred to in the
International Prospectus or owned or used by it or which are necessary for the
conduct of its business as described in the International Prospectus. Except
as described in the International Prospectus, the Company has not received any
notice of, or is aware of, any infringement of or conflict with asserted rights
of others with respect to any patents, patent applications, patent rights,
inventions, trade secrets, know-how, proprietary techniques, including
processes and substances, trademarks, service marks, trademark registrations,
service mark registrations, trade names, copyrights or licenses which
individually or in the aggregate, if the subject of an unfavorable decision,
ruling or finding might result in a material adverse change or development
involving a prospective material adverse change in the business, prospects,
properties, operations, condition (financial or other) or results of operations
of the Company.

(t) There are no contracts or other documents which
are required to be described in the International Prospectus or filed as
exhibits to the Registration Statement by the Act or by the Regulations which
have not been described in the International Prospectus or filed as exhibits to
the Registration Statement.

(w) Since the date as of which information is given
in the International Prospectus through the date hereof, and except as may
otherwise be disclosed in the International Prospectus, the Company has not (i)
issued or granted any securities, (ii) entered into any transaction not in the
ordinary course of business or (iii) declared or paid any dividend on its
capital stock.

(x) Each of the Company's executive officers and
directors, as have been heretofore designated by you and listed on Schedule II
attached hereto, has entered into or is subject to a lock-up agreement (the
"Lock-Up Agreements") under which such stockholder has agreed not, directly or
indirectly, to offer or agree to sell, hypothecate, pledge or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock (or securities exchangeable for, exercisable for or convertible into
Common Stock) owned by them for a period of 180 days after the date of the
International Prospectus, without the prior written consent of Bear, Stearns &
Co. Inc.; each Lock-Up Agreement constitutes the legal, valid and binding
obligations of the

6
<PAGE> 34

stockholder or stockholders party thereto enforceable against each such
stockholder in accordance with its terms.

2. Representations and Warranties of Medaphis. Medaphis
represents and warrants to, and agrees with, the Managers that:

(b) Immediately prior to the closing of the offering
contemplated hereby, Medaphis will have good and valid title to the Firm
International Shares to be sold by it hereunder on such date, free and clear of
all liens, encumbrances, equities, claims, security interests, restrictions on
transfer, shareholders' agreements, voting trusts or other defects of title
whatsoever; and upon delivery of such Firm International Shares and payment
therefor pursuant hereto, good and valid title to such Firm International
Shares, free and clear of all liens, encumbrances, equities, claims, security
interests, restrictions on transfer, shareholders' agreements, voting trusts or
other defects of title whatsoever, will pass to the several Managers.

(c) Medaphis has full right, power and authority to
enter into this Agreement; the execution, delivery and performance of this
Agreement by Medaphis and the consummation by it of the transactions
contemplated hereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which Medaphis is a party or by which Medaphis is bound or to
which any of its property or assets is subject, nor will such actions result in
any violation of the provisions of the constituent documents of Medaphis, if
any, or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over it or its property or
assets; and, except for the registration of the International Shares under the
Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under applicable state securities laws in
connection with the purchase and distribution of the International Shares by
the Managers, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement by Medaphis and
the consummation by it of the transactions contemplated hereby.

(d) Medaphis is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940.

(e) To the extent that any statements or omissions
made in the Registration Statement, the International preliminary prospectus,
the International Prospectus or any amendment or supplement thereto are made in
reliance upon and in conformity with written information furnished to the
Company by Medaphis specifically for use therein, (i) the Registration
Statement and any amendments or supplements thereto will not, when they become
effective or are filed with the Commission, as the case may be, contain any
untrue statement of a material fact or omit to state any material fact

7
<PAGE> 35

required to be stated therein or necessary to make the statements therein not
misleading and (ii) the International preliminary prospectus, the International
Prospectus and any amendments or supplements thereto will not, when each
registration statement of which they are a part becomes effective or is filed
with the Commission, as the case may be, contain any untrue statement of a
material fact or omit to state any material fact stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; and Medaphis has no actual knowledge of facts which
lead it to believe that the Registration Statement, the International
preliminary prospectus, the International Prospectus or any amendments or
supplements thereto will, when they become effective or are filed with the
Commission, as the case may be, contain any untrue statement of any other
material fact or omit to state any other material fact required to be stated
therein or necessary to make the statements therein not misleading.

3. Purchase, Sale and Delivery of the International Shares.

(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, Medaphis agrees to sell to the Managers and the
Managers, severally and not jointly, agree to purchase from Medaphis, at a
purchase price per share of $_______, the number of Firm International Shares
set forth opposite the respective names of the Managers in Schedule I hereto
plus any additional number of International Shares which such Manager may
become obligated to purchase pursuant to the provisions of Section 11 hereof.

(b) Payment of the purchase price for, and delivery
of certificates for, the International Shares shall be made at the office of
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, or at
such other place as shall be agreed upon by you and Medaphis, at 10:00 A.M. on
the third or fourth business day (as permitted under Rule 15c6-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (unless
postponed in accordance with the provisions of Section 11 hereof) following the
date of the effectiveness of the Registration Statement (or, if the Company has
elected to rely upon Rule 430A of the Regulations, the third or fourth business
day (as permitted under Rule 15c6-1 under the Exchange Act) after the
determination of the initial public offering price of the International
Shares), or such other time not later than ten business days after such date as
shall be agreed upon by you and Medaphis (such time and date of payment and
delivery being herein called the "Closing Date"). Payment shall be made to
Medaphis by wire transfer in same day funds, against delivery to you for the
respective accounts of the Managers of certificates for the International
Shares to be purchased by them. Certificates for the International Shares
shall be registered in such name or names and in such authorized denominations
as you may request in writing at least two full business days prior to the
Closing Date. Medaphis will permit you to examine and package such
certificates for delivery at least one full business day prior to the Closing
Date.

(c) In addition, the Company hereby grants to the
Managers the option to purchase up to 294,000 Additional International Shares
at the same purchase price per share to be paid by the Managers to Medaphis for
the Firm International Shares as set forth in this Section 3, for the sole
purpose of covering over-allotments in the sale of Firm International Shares by
the Managers. This option may be exercised at any time, in whole or in part,
on or before the thirtieth day following the date of the International

8
<PAGE> 36

Prospectus, by written notice by you to the Company. Such notice shall set
forth the aggregate number of Additional International Shares as to which the
option is being exercised and the date and time, as reasonably determined by
you, when the Additional Shares are to be delivered (such date and time being
herein sometimes referred to as the "Additional Closing Date"); provided,
however, that the Additional Closing Date shall not be earlier than the Closing
Date or earlier than the second full business day after the date on which the
option shall have been exercised nor later than the eighth full business day
after the date on which the option shall have been exercised (unless such time
and date are postponed in accordance with the provisions of Section 11 hereof).
Certificates for the Additional International Shares shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date.

The number of Additional International Shares to be sold to
each Manager shall be the number which bears the same ratio to the aggregate
number of Additional International Shares being purchased as the number of Firm
International Shares set forth opposite the name of such Manager in Schedule I
hereto (or such number increased as set forth in Section 11 hereof) bears to
1,196,000 shares, subject, however, to such adjustments to eliminate any
fractional shares as you in your sole discretion shall make.

Payment for the Additional International Shares shall be made
by wire transfer in same day funds at the offices of [Bear, Stearns & Co. Inc.,
245 Park Avenue, New York, New York 10167], or such other location as may be
mutually acceptable, upon delivery of the certificates for the Additional
International Shares to you for the respective accounts of the Managers.

4. Offering. Upon your authorization of the release of the
Firm International Shares, the Managers propose to offer the International
Shares for sale to the public upon the terms set forth in the International
Prospectus.

5. Covenants of the Company. The Company covenants and
agrees with the Managers that:

(a) If the Registration Statement has not yet been
declared effective the Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the
International Prospectus is otherwise required under Rule 424(b) or Rule 434,
the Company will file the International Prospectus (properly completed if Rule
430A has been used) pursuant to Rule 424(b) or Rule 434 within the prescribed
time period and will provide evidence satisfactory to you of such timely
filing. If the Company elects to rely on Rule 434, the Company will prepare
and file a term sheet that complies with the requirements of Rule 434.

9
<PAGE> 37

receipt of any comments from the Commission, and (vi) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the International Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for that purpose. If the Commission shall
propose or enter a stop order at any time, the Company will make every
reasonable effort to prevent the issuance of any such stop order and, if
issued, to obtain the lifting of such order as soon as possible. The Company
will not file any amendment to the Registration Statement or any amendment of
or supplement to the International Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement to
which you shall reasonably object in writing after being timely furnished in
advance a copy thereof.

(c) If at any time when a prospectus relating to the
International Shares is required to be delivered under the Act any event shall
have occurred as a result of which the International Prospectus as then amended
or supplemented would, in the judgment of the Managers or the Company include
an untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or
if it shall be necessary at any time to amend or supplement the International
Prospectus or Registration Statement to comply with the Act or the Regulations,
the Company will notify you promptly and prepare and file with the Commission
an appropriate amendment or supplement (in form and substance satisfactory to
you) which will correct such statement or omission or which will effect such
compliance and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.

(d) The Company will promptly deliver to you such
reasonable number of signed copies of the Registration Statement, including
exhibits and all amendments thereto, and the Company will promptly deliver to
each of the Managers such number of copies of any International preliminary
prospectus, the International Prospectus, the Registration Statement and all
amendments of and supplements to such documents, if any, as you may reasonably
request.

(e) The Company will endeavor in good faith, in
cooperation with you, at or prior to the time of effectiveness of the
Registration Statement, to qualify the International Shares for offering and
sale under the securities laws relating to the offering or sale of the
International Shares of such jurisdictions as you may designate and to maintain
such qualification in effect for so long as required for the distribution
thereof; except that in no event shall the Company be obligated in connection
therewith to qualify as a foreign corporation or to execute a general consent
to service of process.

(g) During the period of 180 days from the date of
the International Prospectus, the Company will not, without your prior written
consent, issue, sell, offer or agree to sell, grant any option for the sale of,
or otherwise dispose of, directly or indirectly, any Common Stock (or any
securities convertible into, exercisable for or exchangeable for Common Stock),
other than (i) the Company's sale of Additional

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<PAGE> 38

International Shares hereunder and the Company's sale of Additional U.S. Shares
under the U.S. Underwriting Agreement and (ii) the Company's issuance of Common
Stock and stock options pursuant to the (a) Healthcare Recoveries, Inc. Non-
Qualified Stock Option Plan of Eligible Employees, (b) Healthcare Recoveries,
Inc. Directors' Stock Option Plan or (c) the Divestiture Bonus Agreement.

(i) The Company will apply the proceeds received by
it, if any, from the sale of the Shares as set forth under "Use of Proceeds" in
the International Prospectus.

(j) The Company will use its best efforts to cause
the Shares to be listed for inclusion on the Nasdaq National Market.

6. Covenants of Medaphis. Medaphis covenants and agrees with
the Managers that:

(a) If at any time when a prospectus relating to the
International Shares is required to be delivered under the Act any information
which Medaphis has provided to the Company or the Managers becomes incorrect,
or if it shall be necessary at any time to amend or supplement any information
provided by Medaphis to the Company for inclusion in the International
preliminary prospectus, International Prospectus or Registration Statement to
comply with the Act or the Regulations, Medaphis will notify the Company and
the Managers promptly so that the Company may prepare and file with the
Commission an appropriate amendment or supplement (in form and substance
satisfactory to the Managers) which will correct such statement or omission.

(b) Medaphis will deliver to the Lead Managers prior
to the Closing Date a properly completed and executed United States Treasury
Department Form W-9.

7. Payment of Expenses. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
Medaphis hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company and Medaphis hereunder,
including, without limitation, those in connection with (i) preparing,
printing, duplicating, filing and distributing the Registration Statement, as
originally filed and all amendments thereof (including all exhibits thereto),
any International preliminary prospectus, the International Prospectus and any
amendments or supplements thereto, the underwriting documents (including this
Agreement, the U.S. Underwriting Agreement, the Master Agreement Among
Underwriters and the Supplement to Master Agreement Among Underwriters, the
Master Selling Agreement, the Agreement between U.S. Underwriters and Managers
and the Agreement Among Managers) and all other documents related to the public
offering of the Shares (including those supplied to the Underwriters in
quantities as hereinabove stated) (in each case, including, without limitation,
fees and expenses of the Company's accountants and counsel, but not
Underwriters' Counsel (as defined below)), (ii) the issuance, transfer and
delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and
mailing a preliminary and final "Blue Sky Survey" and the fees of counsel for
the Underwriters and such counsel's disbursements in relation thereto, (iv)
quotation of the Shares on the Nasdaq National Market, (v) filing fees of the
Commission

11
<PAGE> 39

and the National Association of Securities Dealers, Inc. (the "NASD"), (vi) the
cost of printing certificates representing the Shares, (vii) the cost and
charges of any transfer agent or registrar and (viii) travel and lodging
expenses of employees of the Company who participate in the advertising and
marketing of the Shares.

8. Conditions of Managers' Obligations. The obligations of
the Managers to purchase and pay for the Firm International Shares and the
Additional International Shares, as provided herein, shall be subject to the
accuracy of the representations and warranties of the Company and Medaphis
herein contained, as of the date hereof and as of the Closing Date (for
purposes of this Section 8 "Closing Date" shall refer to the Closing Date for
the Firm International Shares and any Additional Closing Date, if different,
for the Additional International Shares), to the absence from any certificates,
opinions, written statements or letters furnished to you or to Simpson Thacher
& Bartlett ("Underwriters' Counsel") pursuant to this Section 8 of any
misstatement or omission, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:

(a) The Registration Statement shall have become
effective not later than 5:30 P.M., New York time, on the date of this
Agreement or at such later time and date as shall have been consented to in
writing by you; if the Company shall have elected to rely upon Rule 430A or
Rule 434 of the Regulations, the International Prospectus shall have been filed
with the Commission in a timely fashion in accordance with Section 5(a) hereof;
and, at or prior to the Closing Date no stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereof shall
have been issued and no proceedings therefor shall have been initiated or
threatened by the Commission.

(b) At the Closing Date you shall have received the
opinion of King & Spalding, counsel for the Company, dated the Closing Date
addressed to the Managers and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:

(ii) The Company has an authorized capital stock
as set forth in the Registration Statement and the International
Prospectus. All of the outstanding shares of Common Stock are duly
and validly authorized and issued, are fully paid and nonassessable
and were not issued in violation of or subject to any preemptive
rights. The International Shares to be delivered on the Closing Date
have been duly and validly authorized and, each of (A) the Firm
International Shares, when delivered by Medaphis in accordance with
this Agreement, and (B) the Additional International Shares, when
delivered by the Company in accordance with this Agreement, will be
duly and validly issued, fully paid and nonassessable and will not
have been issued in violation of or subject to any preemptive rights.
The Common Stock and the International Shares conform to the
descriptions thereof contained in the Registration Statement and the
International Prospectus.

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<PAGE> 40

(iii) Assuming the exercise of the Underwriters'
over-allotment option, upon the issuance and delivery of the
Additional International Shares and payment therefor pursuant hereto,
good and valid title to such Additional International Shares, free and
clear of all liens, encumbrances, equities, claims, security
interests, restrictions on transfer, shareholders' agreements, voting
trusts or other defects of title whatsoever, will pass to the several
Managers.

(iv) The International Shares to be sold under
this Agreement to the Managers are duly authorized for quotation on
the Nasdaq National Market.

(v) This Agreement has been duly and validly
authorized, executed and delivered by the Company.

(vi) Assuming due execution and delivery by the
Lead Managers of this Agreement, this Agreement constitutes the legal,
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except that enforceability may
be subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of creditors
generally and by general equitable principles and, except as the
enforceability of rights to indemnity and contribution under this
Agreement may be limited under applicable securities laws or the
public policy underlying such laws.

(vii) There is no litigation or governmental or
other action, suit, proceeding or investigation before any court or
before or by any public, regulatory or governmental agency or body
pending or to the best of such counsel's knowledge threatened against,
or involving the properties or business of, the Company, which is of a
character required to be disclosed in the Registration Statement and
the International Prospectus which has not been properly disclosed
therein.

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<PAGE> 41

(ix) The Registration Statement and the
International Prospectus and any amendments thereof or supplements
thereto (other than the financial statements and schedules and other
financial data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations.

(xi) In addition, such opinion shall also
contain a statement that such counsel has participated in conferences
with officers and representatives of the Company, representatives of
the independent public accountants for the Company and the
Underwriters at which the contents of the International Prospectus and
related matters were discussed and, no facts have come to the
attention of such counsel which would lead such counsel to believe
that either the Registration Statement at the time it became effective
(including the information deemed to be part of the Registration
Statement at the time of effectiveness pursuant to Rule 430A(b) or
Rule 434, if applicable), or any amendment thereof made prior to the
Closing Date as of the date of such amendment, contained an untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the International Prospectus as of its
date (or any amendment thereof or supplement thereto made prior to the
Closing Date as of the date of such amendment or supplement) and as of
the Closing Date contained or contains an untrue statement of a
material fact or omitted or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading
(it being understood that such counsel need express no belief or
opinion with respect to the financial statements and schedules and
other financial data included therein or with respect to the matters
set forth under the heading "Notice to Canadian Residents").

(c) At the Closing Date you shall have received the
opinion of King & Spalding, counsel for Medaphis, dated the Closing Date
addressed to the Managers and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:

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<PAGE> 42

(i) This Agreement has been duly and validly
authorized, executed and delivered by Medaphis.

(ii) Assuming the due execution and delivery by
the Lead Managers of this Agreement, this Agreement constitutes the
legal, valid and binding obligation of Medaphis, enforceable against
Medaphis in accordance with its terms, except that enforceability may
be subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of creditors
generally and by general equitable principles and, except as the
enforceability of rights to indemnity and contribution under this
Agreement may be limited under applicable securities laws or the
public policy underlying such laws.

(iii) The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
hereby by Medaphis do not and will not (A) conflict with or result in
a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of Medaphis pursuant to, any agreement, instrument, franchise,
license or permit known to such counsel to which it is a party or by
which its properties or assets may be bound or (B) violate or conflict
with any provision of the certificate of incorporation or by-laws of
Medaphis, or, to the best knowledge of such counsel, any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over
Medaphis or its properties or assets. No consent, approval,
authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental, or regulatory
agency or body having jurisdiction over Medaphis or its properties or
assets is required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby,
except for (1) such as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Shares by the Managers (as to which such counsel need express no
opinion) and (2) such as have been made or obtained under the Act.

(iv) The Firm International Shares, when
delivered by Medaphis in accordance with this Agreement, will be fully
paid and nonassessable and will not have been issued in violation of
or subject to any preemptive rights.

(v) Immediately prior to the closing of the
offering contemplated hereby, Medaphis will have good and valid title
to the Firm International Shares to be sold by it hereunder on such
date, free and clear of all liens, encumbrances, equities, claims,
security interests, restrictions on transfer, shareholders'
agreements, voting trusts or other defects of title whatsoever; and
upon delivery of such Firm International Shares and payment therefor
pursuant hereto, good and valid title to such Firm International
Shares, free and clear of all liens, encumbrances, equities or claims,
will pass to the several Managers.

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<PAGE> 43

to Underwriters' Counsel, familiar with the applicable laws; and (B) as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of Medaphis and certificates or other written statements of officers
of departments of various jurisdictions having custody of documents respecting
the corporate existence or good standing of Medaphis, provided that copies of
any such statements or certificates shall be delivered to Underwriters'
Counsel. The opinion of such counsel for Medaphis shall state that the opinion
of any such other counsel is in form satisfactory to such counsel and, in their
opinion, you and they are justified in relying thereon.

(d) All proceedings taken in connection with the
sale of the Firm International Shares and the Additional International Shares
as herein contemplated shall be satisfactory in form and substance to you and
to Underwriters' Counsel, and the Managers shall have received from said
Underwriters' Counsel a favorable opinion, dated as of the Closing Date with
respect to the issuance and sale of the International Shares, the Registration
Statement and the International Prospectus and such other related matters as
you may reasonably require, and the Company shall have furnished to
Underwriters' Counsel such documents as they request for the purpose of
enabling them to pass upon such matters.

(e) At the Closing Date you shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of the
Company, dated the Closing Date to the effect that (i) the condition set forth
in subsection (a) of this Section 8 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing
Date the obligations of the Company to be performed hereunder on or prior
thereto have been duly performed and (iv) subsequent to the respective dates as
of which information is given in the Registration Statement and the
International Prospectus, the Company has not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development involving a material
adverse change, in the business prospects, properties, operations, condition
(financial or otherwise), or results of operations of the Company, except in
each case as described in or contemplated by the International Prospectus.

16
<PAGE> 44

latest available unaudited interim financial statements of the Company, a
reading of the minutes of meetings and consents of the shareholders and board
of directors of the Company and the committees of such board subsequent to
December 31, 1996, inquiries of officers and other employees of the Company who
have responsibility for financial and accounting matters of the Company with
respect to transactions and events subsequent to December 31, 1996 and other
specified procedures and inquiries to a date not more than five days prior to
the date of such letter, nothing has come to their attention that would cause
them to believe that: (A) the unaudited financial statements and schedules of
the Company presented in the Registration Statement and the International
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable published
rules and regulations of the Commission thereunder or that such unaudited
financial statements are not fairly presented in conformity with generally
accepted accounting principles; (B) with respect to the period subsequent to
December 31, 1996, there were, as of the date of the most recent available
monthly financial statements of the Company, if any, and as of a specified date
not more than five days prior to the date of such letter, any changes in the
capital stock or long-term indebtedness of the Company or any decrease in the
net current assets or stockholders' equity of the Company, in each case as
compared with the amounts shown in the most recent balance sheet presented in
the Registration Statement and the International Prospectus, except for changes
or decreases which the Registration Statement and the International Prospectus
disclose have occurred or may occur or which are set forth in such letter or
(C) that during the period from December 31, 1996 to the date of the most
recent available monthly financial statements of the Company, and to a
specified date not more than five days prior to the date of such letter, there
was any decrease, as compared with the corresponding period in the prior fiscal
year, in total revenues, or total or per share net income, except for decreases
which the Registration Statement and the International Prospectus disclose have
occurred or may occur or which are set forth in such letter; and (iv) stating
that they have compared specific dollar amounts, numbers of shares, percentages
of revenues and earnings, and other financial information pertaining to the
Company set forth in the Registration Statement and the International
Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial records of
the Company or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found
them to be in agreement.

(i) Prior to the Closing Date the Company shall have
furnished to you such further information, certificates and documents as you
may reasonably request.

(j) At the Closing Date, the Shares shall have been
approved for quotation on the Nasdaq National Market.

17
<PAGE> 45

(k) The NASD, upon review of the terms of the
underwriting arrangements for the public offering of the Shares, shall have
raised no objections thereto.

If any of the conditions specified in this Section 8 shall not
have been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 8 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Managers hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Managers to purchase the Additional International Shares may
be cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.

9. Indemnification.

(a) Each of the Company and Medaphis agrees to
indemnify, jointly and severally, and hold harmless each Manager and each
person, if any, who controls any Manager within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement for
the registration of the Shares, as originally filed or any amendment thereof or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
or (ii) any untrue statement or alleged untrue statement of a material fact, in
light of the circumstances under which they were made, contained in any related
International preliminary prospectus or the International Prospectus, or in any
supplement thereto or amendment thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however,
neither the Company nor Medaphis will be liable in any such case to the extent
but only to the extent that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company or Medaphis, as
the case may be, by or on behalf of any Manager through you expressly for use
therein. This indemnity agreement will be in addition to any liability which
the Company or Medaphis may otherwise have including under this Agreement. The
foregoing indemnity agreement with respect to any International preliminary
prospectus shall not inure to the benefit of any Manager from whom the person
asserting any such losses, claims, damages or liabilities purchased Shares (or
any person who controls such Manager within the meaning of Section 15 of the
Act) if a copy of the International Prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements thereto) was
not sent or given by or on behalf of such Manager to such person, if such is
required by law, at or prior to the written confirmation of the sale of such
Shares to such person and if the International Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage or liability.

18
<PAGE> 46

(b) Each Manager severally, and not jointly, agrees
to indemnify and hold harmless the Company and Medaphis, each of the directors
of the Company and Medaphis, each of the officers of the Company who shall have
signed the Registration Statement, and each other person, if any, who controls
the Company or Medaphis within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any losses, liabilities, claims, damages and
expenses whatsoever as incurred (including but not limited to attorneys' fees
and any and all expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed or any amendment thereof or in any amendment
thereof or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or (ii) any
untrue statement or alleged untrue statement of a material fact, in light of
the circumstances in which they were made, contained in any related
International preliminary prospectus or the International Prospectus, or in any
supplement thereto or amendment thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Manager through you expressly for use therein; provided, however,
that in no case shall any Manager be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Manager hereunder. This indemnity will be in addition to any liability which
any Manager may otherwise have including under this Agreement. The Company and
Medaphis each acknowledge that the statements set forth in the last paragraph
of the cover page and in the paragraphs four, six, seven, eight and ten under
the caption "Underwriting" in the International Prospectus constitute the only
information furnished in writing by or on behalf of any Manager expressly for
use in the registration statement relating to the Shares as originally filed or
in any amendment thereof, any related International preliminary prospectus or
the International Prospectus or in any amendment thereof or supplement thereto,
as the case may be.

19
<PAGE> 47

defense of such action, (ii) the indemnifying parties shall not have employed
counsel to have charge of the defense of such action within a reasonable time
after notice of commencement of the action, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and expenses
shall be borne by the indemnifying parties. Anything in this subsection to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent was not unreasonably withheld.

10. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 9 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company,
Medaphis and the Managers shall contribute to the aggregate losses, claims,
damages, liabilities and expenses of the nature contemplated by such
indemnification provision (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claims asserted, but after deducting in the
case of losses, claims, damages, liabilities and expenses suffered by the
Company or Medaphis any contribution received by the Company or Medaphis, as
the case may be, from persons, other than the Managers, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company, Medaphis and one or more of the Managers may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company and Medaphis, on the one hand, and the Managers, on the
other hand, from the offering of the International Shares or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 9 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company and Medaphis, on the one hand, and the Managers, on the other hand,
in connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
Medaphis, on the one hand, and the Managers, on the other hand, shall be deemed
to be in the same proportion as (x) the total proceeds from the offering (net
of underwriting discounts and commissions but before deducting expenses)
received by the Company and Medaphis and (y) the underwriting discounts and
commissions received by the Managers, respectively, in each case as set forth
in the table on the cover page of the International Prospectus. The relative
fault of the Company and Medaphis, on the one hand, and of the Managers, on the
other hand, shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Managers and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. The Company and the Managers agree that it would not be just and
equitable if contribution pursuant to this Section 10 were determined by pro
rata allocation (even if the Managers were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the provisions
of this Section 10, (i) in no case shall any Manager be liable or responsible
for any amount in excess of the underwriting discount applicable to the
International Shares purchased by such Manager hereunder, and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of

20
<PAGE> 48

Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. Notwithstanding the
provisions of this Section 10 and the preceding sentence, no Manager shall be
required to contribute any amount in excess of the amount by which the total
price at which the International Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages that
such Manager has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 10, each person, if any, who controls a Manager within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same
rights to contribution as such Manager, and each person, if any, who controls
the Company or Medaphis within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company and Medaphis who shall
have signed the Registration Statement and each director of the Company and
Medaphis shall have the same rights to contribution as the Company and
Medaphis, as the case may be, subject in each case to clauses (i) and (ii) of
this Section 10. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against
such party in respect of which a claim for contribution may be made against
another party or parties, notify each party or parties from whom contribution
may be sought, but the omission to so notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have under this Section 10 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; provided, however, that such consent was not unreasonably
withheld.

11. Default by Manager.

(a) If any Manager or Managers shall default in its
or their obligation to purchase Firm International Shares or Additional
International Shares hereunder, and if the Firm International Shares or
Additional International Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm
International Shares or Additional International Shares, such Firm
International Shares or Additional International Shares, as the case may be, to
which the default relates shall be purchased by the non-defaulting Managers in
proportion to the respective proportions which the numbers of Firm
International Shares set forth opposite their respective names in Schedule I
hereto bear to the aggregate number of Firm International Shares set forth
opposite the names of the non-defaulting Managers.

(b) In the event that such default relates to more
than 10% of the Firm International Shares or Additional International Shares,
as the case may be, you may in your discretion arrange for yourself or for
another party or parties (including any non-defaulting Manager or Managers who
so agree) to purchase such Firm International Shares or Additional
International Shares, as the case may be, to which such default relates on the
terms contained herein. In the event that within five calendar days after such
a default you do not arrange for the purchase of the Firm International Shares
or Additional International Shares, as the case may be, to which such default
relates as provided in this Section 11, this Agreement or, in the case of a
default with respect to the Additional International Shares, the obligations of
the Managers to purchase and of the Company to sell the Additional
International Shares shall thereupon terminate, without liability on the part
of the Company with respect thereto (except in each case as provided in
Sections 7, 9(a) and 10 hereof) or the Managers, but nothing in this Agreement
shall relieve a defaulting Manager or Managers of its or their liability, if
any, to the other Managers and the Company and Medaphis for damages occasioned
by its or their default hereunder.

21
<PAGE> 49

(c) In the event that the Firm International Shares
or Additional International Shares to which the default relates are to be
purchased by the non-defaulting Managers, or are to be purchased by another
party or parties as aforesaid, you or the Company shall have the right to
postpone the Closing Date or Additional Closing Date, as the case may be, for a
period, not exceeding five business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the
International Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the International Prospectus which, in the opinion of
Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Manager" as used in this Agreement shall include any party substituted under
this Section 11 with like effect as if it had originally been a party to this
Agreement with respect to such Firm International Shares and Additional
International Shares.

12. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the Managers, the
Company and Medaphis contained in this Agreement, including the agreements
contained in Section 7, the indemnity agreements contained in Section 9 and the
contribution agreements contained in Section 10, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any Manager or any controlling person thereof or by or on behalf of the
Company, any of its officers and directors or any controlling person thereof,
and shall survive delivery of and payment for the International Shares to and
by the Managers. The representations contained in Sections 1 and 2, and the
agreements contained in Sections 7, 9, 10 and 13(d) hereof shall survive the
termination of this Agreement, including termination pursuant to Section 11 or
13 hereof.

13. Effective Date of Agreement; Termination.

(a) This Agreement shall become effective, upon the
later of when (i) you, the Company and Medaphis shall have received
notification of the effectiveness of the Registration Statement or (ii) the
execution of this Agreement. If either the initial public offering price or
the purchase price per Share has not been agreed upon prior to 5:00 P.M., New
York time, on the fifteenth full business day after the Registration Statement
shall have become effective, this Agreement shall thereupon terminate without
liability to the Company, Medaphis or the Managers except as herein expressly
provided. Until this Agreement becomes effective as aforesaid, it may be
terminated by the Company by notifying you or by you notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 13 and of
Sections 1, 2, 6, 7, 8 and 9 hereof shall at all times be in full force and
effect.

(b) You shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of the
Managers to purchase the Additional International Shares at any time prior to
the Additional Closing Date, as the case may be, if (A) any domestic or
international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, the market for the
Company's securities or securities in general; or (B) if trading on the Nasdaq
National Market or the New York or American Stock Exchanges shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required, on the
Nasdaq National Market by the NASD or on the New York or American Stock
Exchanges by the New York or American Stock Exchanges or by order of the
Commission or any other governmental authority having jurisdiction; or (C) if a
banking moratorium has been declared by a state or federal authority or if any
new restriction materially adversely affecting the distribution of the Firm
International Shares or the Additional International Shares, as the case may
be, shall

22
<PAGE> 50

have become effective; or (D)(i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United
States or there is a declaration of a national emergency or war by the United
States or (ii) if there shall have been such change in political, financial or
economic conditions if the effect of any such event in (i) or (ii) as in your
judgment makes it impracticable or inadvisable to proceed with the offering,
sale and delivery of the Firm International Shares or the Additional
International Shares, as the case may be, on the terms contemplated by the
International Prospectus.

(c) Any notice of termination pursuant to this
Section 13 shall be by telephone, telex, or telegraph, confirmed in writing by
letter.

(d) If this Agreement shall be terminated pursuant
to any of the provisions hereof (otherwise than pursuant to (i) notification by
you as provided in Section 13(a) hereof or (ii) Section 11(b) or 13(b) hereof),
or if the sale of the International Shares provided for herein is not
consummated because any condition to the obligations of the Managers set forth
herein is not satisfied or because of any refusal, inability or failure on the
part of the Company to perform any agreement herein or comply with any
provision hereof, the Company will, subject to demand by you, reimburse the
Managers for all out-of-pocket expenses (including the fees and expenses of
their counsel), incurred by the Managers in connection herewith.

14. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
Manager, shall be mailed, delivered, or telexed or telegraphed and confirmed in
writing, to such Manager c/o Bear, Stearns International Limited, One Canada
Square, London E14 5AD, England, Attention: Corporate Finance Dept. (and a copy
thereof shall be sent in the same manner to Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, N.Y. 10167, Attention: Gal Israely, and to Underwriters'
Counsel, 425 Lexington Avenue, New York, New York 10017, Attention: Gary L.
Sellers, Esq.); if sent to the Company, shall be mailed, delivered, or
telegraphed and confirmed in writing to the Company, 1400 Watterson Tower,
Louisville, Kentucky 40218, Attention: Patrick B. McGinnis, Chairman and Chief
Executive Officer (and a copy thereof shall be sent in the same manner to King
& Spalding, 191 Peachtree Street, Atlanta, Georgia 30303-1763, Attention:
Robert W. Miller, Esq.); if sent to Medaphis, shall be mailed, delivered, or
telegraphed and confirmed in writing to Medaphis, 2700 Cumberland Parkway,
Suite 300, Atlanta, Georgia 30339, Attention: David E. McDowell (and a copy
thereof shall be sent in the same manner to King & Spalding, 191 Peachtree
Street, Atlanta, Georgia 30303-1763, Attention: Robert W. Miller, Esq.).

15. Parties. This Agreement shall inure solely to the
benefit of, and shall be binding upon, the Managers, the Company and Medaphis
and the controlling persons, directors, officers, employees and agents referred
to in Sections 9 and 10, and their respective successors and assigns, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors and assigns" shall not
include a purchaser, in its capacity as such, of International Shares from any
of the Managers.

16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.

23
<PAGE> 51

Very truly yours,

HEALTHCARE RECOVERIES, INC.

By
------------------------
Name:
Title:

MEDAPHIS CORPORATION

By
------------------------
Name:
Title:

Accepted as of the date first above written

BEAR, STEARNS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY INC.

By: BEAR, STEARNS INTERNATIONAL LIMITED

By:
----------------------------------
Name:
Title:

On behalf of themselves and the other
Managers named in Schedule I hereto.

24
<PAGE> 52

SCHEDULE I

<TABLE>
<CAPTION>
Number of Firm International
Name of Manager Shares to be Purchased
- --------------- ----------------------
<S> <C>
Bear, Stearns International Limited
Donaldson, Lufkin & Jenrette
Securities Corporation
The Robinson-Humphrey Company Inc.

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,960,000
=========
</TABLE>
<PAGE> 53

SCHEDULE II

Directors and Executive Officers subject to a Lock-Up Agreement

Patrick B. McGinnis
Dennis K. Burge
Douglas R. Sharps
Bobby T. Tokuuke
Debra M. Murphy
Kathleen K. Harreld

<PAGE> 1
EXHIBIT 3.1

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HEALTHCARE RECOVERIES, INC.

Healthcare Recoveries, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Healthcare Recoveries, Inc.
(the "Corporation"). The Corporation was originally incorporated under the name
Administrative Technology Inc., and the original Certificate of Incorporation
was filed with the Secretary of State of the State of Delaware on June 30,
1988.
2. Pursuant to Sections 242 and 245 of the Delaware General
Corporation Law, this Restated and Amended Certificate of Incorporation
restates and integrates and further amends the provisions of the Certificate of
Incorporation of the Corporation.
3. This Restated and Amended Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 242 and 245 of the
Delaware General Corporation Law.
4. The text of the Certificate of Incorporation as heretofore
amended or supplemented is hereby restated and further amended to read in its
entirety as follows:
<PAGE> 2

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HEALTHCARE RECOVERIES, INC.

FIRST: The name of the corporation is Healthcare Recoveries, Inc.
(the "Corporation").

SECOND: The address of the Corporation's registered office in the
State of Delaware is 1209 Orange Street, Newcastle County, Wilmington, Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.

THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.

FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 22,000,000, consisting of (i)
20,000,000 shares, par value $.001 per share, of Common Stock ("Common Stock")
and (ii) 2,000,000 shares, par value $.001 per share, of Preferred Stock
("Preferred Stock").

4.1 Common Stock Provisions.

4.1.1 Dividend Rights. Subject to the provisions of
applicable law and the preferences of the Preferred Stock, the holders of the
Common Stock shall be entitled to receive dividends at such times and in such
amounts as may be determined by the Board of Directors.

4.1.2 Voting Rights. Each holder of Common Stock shall
have one vote for each share on each matter submitted to a vote or consent of
the stockholders of the Corporation.

4.1.3 Liquidation Rights. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Corporation and the preferential amounts to which the
holders of the Preferred Stock shall be entitled, the holders of the Common
Stock shall be entitled to share ratably in the remaining assets of the
Corporation.

4.2 Preferred Stock Provisions.

4.2.1 The Preferred Stock may be issued from time to time
in one or more series. Subject to limitations prescribed by law and the
provisions of this Restated and Amended Certificate of Incorporation or any
amendment hereto, authority is expressly granted to the Board of Directors to
authorize the issue of one or more series of Preferred Stock without any vote
or other action by

-2-
<PAGE> 3

the stockholders of the Corporation (the "Stockholders"), and to fix by
designation (the "Preferred Stock Designation") the voting powers,
designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations and restrictions thereof to
the full extent now or hereafter permitted by law, including but not limited to
the following:

(a) The number of shares constituting that series
and the distinctive designation of the series.

(b) The dividend rate (or method of determining
such rate) on the shares of that series, the conditions and
dates upon which such dividends shall be payable, whether such
dividends shall be cumulative, and, if so, from which date or
dates, and the relative rights of priority, if any, of payment
of dividends on shares of that series to the dividends payable
on any other class or series of stock of the Corporation;

(c) Whether that series shall have voting rights,
in addition to the voting rights provided by law, and, if so,
the terms of such voting rights;

(d) Whether or not the shares of that series
shall be convertible into or exchangeable for shares of any
other class or classes or of any other series of any class or
classes of stock of the Corporation, or convertible into or
exchangeable for other securities of the Corporation or
securities of any other corporation, partnership, or other
person or entity, and, if so, the times, prices, rates,
adjustments, and other terms and conditions of such conversion
or exchange;

(e) Whether or not the shares of that series
shall be redeemable, in whole or in part, at the option of the
Corporation or at the option of the holder thereof or upon the
happening of a specified event, and if so, the times, prices
and other terms and conditions of such redemption;

(f) Whether that series shall have a sinking fund
for the redemption or purchase of shares of that series, and,
if so, the terms and amount of such sinking fund;

(g) The rights of the shares of that series in
the event of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, and the relative
rights of priority, if any, with respect to payment of amounts
payable in such event on shares of that series to amounts
payable in such event on shares of any other class or series
of stock of the Corporation; and

(h) Any other relative rights, preferences and
limitations of that series.

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<PAGE> 4

4.2.2 All shares of any one series of Preferred Stock shall
be identical except as to dates of issue and the dates from which dividends on
shares of the series issued on different dates shall accumulate (if
cumulative).

4.2.3 If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the assets available for
distribution to holders of shares of Preferred Stock of all series shall be
insufficient to pay such holders the full preferential amount to which they are
entitled, then such assets shall be distributed ratably among the shares of all
series of Preferred Stock in accordance with the respective preferential
amounts (including unpaid cumulative dividends, if any) payable with respect
thereto.

4.3 Other Provisions.

4.3.1 The Board of Directors shall have authority to
authorize the issuance from time to time without any vote or other action by
the stockholders of the Corporation, of any or all shares of stock of the
Corporation of any class at any time authorized, and any securities convertible
into or exchangeable for any such shares, in each case to such persons and for
such consideration and on such terms as the Board of Directors from time to
time in its discretion lawfully may determine; provided, however, that the
consideration for the issuance of shares of stock of the Corporation having par
value shall not be less than such par value. Shares so issued, for which the
consideration has been paid to the Corporation, shall be fully paid, and the
holders of such stock shall not be liable to any further call or assessments
thereon.

4.3.2 No holder of stock of any class or series of the
Corporation nor of any security convertible into or exchangeable for stock of
any class or series of the Corporation, nor of any warrant, option or right to
purchase, subscribe for or otherwise acquire stock of any class or series of
the Corporation, whether now or hereafter authorized, shall, as such holder,
have any preemptive right whatsoever to purchase, subscribe for or otherwise
acquire stock of any class or series of the Corporation, or any security
convertible into or exchangeable for, or any warrant, option or right to
purchase, subscribe for or otherwise acquire, stock of any class or series of
the Corporation, whether now or hereafter authorized. Nothing in this Section
4.3.2 shall be deemed to eliminate or limit the ability of the Corporation to
grant by contract a preemptive right to purchase, subscribe for or otherwise
acquire stock of any class or series of the Corporation or any security
convertible into or exchangeable for, or any warrant, option or right to
purchase, subscribe for or otherwise acquire, stock of any class or series of
the Corporation, whether now or hereafter authorized.

4.3.3 The Board of Directors may set a record date in the
manner and for the purposes authorized in the Bylaws of the Corporation, with
respect to shares of stock of the Corporation of any class or series.

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<PAGE> 5

FIFTH:

5.1 Whenever the vote of stockholders at a meeting thereof is
required or permitted to be taken for or in connection with any corporate
action, whether by any provision of the Delaware General Corporation Law or of
the Corporation's Bylaws or of this Restated and Amended Certificate of
Incorporation, such corporate action may be taken without a meeting, without
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by all of the holders of outstanding stock of the
Corporation.

5.2 Special meetings of stockholders of the Corporation may be
called by the Chairman of the Board or by a majority of the Directors then in
office and shall be called by the Chief Executive Officer or the Secretary at
the request in writing of stockholders holding together at least a majority of
the numbers of shares of the Common Stock outstanding and entitled to vote at
such meeting.

5.3 At a meeting of the stockholders of the Corporation, only such
business shall be conducted which has been properly brought before the meeting.
To be properly brought before a meeting of the stockholders, business must be
(i) specified in the notice of meeting (or any supplement thereto) given by, or
at the direction of, the Board of Directors, (ii) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or by a
stockholder. For business to be properly brought before a meeting by a
stockholder, the stockholder must have given timely notice of the business to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
in writing delivered to or mailed, postage prepaid, and received by the
Secretary not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that if less than 70 days notice or prior public disclosure
of the date of the meeting is given to stockholders, notice by the stockholder
to be timely must be received by the Secretary not later than the close of
business on the tenth day following the day on which notice of the date of the
meeting was mailed or public disclosure was made. For each matter the
stockholder proposes to bring before the meeting, the notice to the Secretary
shall include (i) a brief description of the business desired to be brought
before the meeting and the reasons for conducting the business at the meeting,
(ii) the name and address, as they appear on the Corporation's books, of the
stockholder proposing the business, (iii) the class and number of shares of the
Corporation which are beneficially owned by the stockholder and (iv) any
material interest of the stockholder in such business. Notwithstanding
anything in the Corporation's Bylaws to the contrary, no business shall be
conducted at the meeting except in accordance with the procedures set forth in
this Section 5.3. The chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 5.3. If
the chairman determines that business was not properly brought before the
meeting in accordance with the provisions of this Section 5.3, the business
shall not be transacted.

5.4 Notwithstanding any other provisions of this Restated and
Amended Certificate of Incorporation or any provision of law which might permit
a lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the capital stock of the
Corporation required by law, this Restated and Amended Certificate of
Incorporation or any

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<PAGE> 6

amendment hereto or any Preferred Stock Designation, the affirmative vote of
the holders of at least 66-2/3% of the voting power of all of the then
outstanding shares of capital stock of the Corporation entitled to vote on all
matters submitted to the stockholders of the Corporation generally (the "Voting
Stock") shall be required to alter, amend, repeal, or adopt any provision
inconsistent with this Article FIFTH.

SIXTH: Court May Sanction Compromise or Arrangement with
Creditors or Stockholders.

Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its Stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or Stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation, under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the Stockholders or class of Stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the Stockholders or class of Stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of Stockholders, of this Corporation, as the case may be,
and also on this Corporation.

SEVENTH: Existence.

The Corporation is to have perpetual existence.

EIGHTH: Board of Directors.

8.1 The Board of Directors of the Corporation shall be such number
as is determined in accordance with the Bylaws of the Corporation. The
directors of the Corporation shall be divided into three classes, designated as
Class A, Class B and Class C. In the event that the number of directors shall
not be evenly divisible by three, the Board of Directors shall determine in
which class or classes the remaining director or directors, as the case may be,
shall be included. The term of office of each director shall be three years;
provided, however, that, the term of office of the directors in Class A shall
expire at the first annual meeting of the stockholders after the date of this
Restated Certificate of Incorporation, the term of the office of the directors
in Class B shall expire at the second annual meeting after the date of filing
of this Restated Certificate of Incorporation, and the term of office of the
directors in Class C shall expire at the third annual meeting after the date of
filing

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<PAGE> 7

of this Restated Certificate of Incorporation. At each annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed those whose terms expire.

8.2 Nominations for election to the Board of Directors of the
Corporation at a meeting of stockholders may be made by the Board of Directors,
on behalf of the Board of Directors by any nominating committee appointed by
the Board of Directors, or by any stockholder of the Corporation entitled to
vote for the election of directors at the meeting. Nominations, other than
those made by or on behalf of the Board of Directors, shall be made by notice
in writing delivered to or mailed, postage prepaid, and received by the
Secretary not less than 60 nor more than 90 days prior to any meeting of
stockholders called for the election of directors; provided, however, that if
less than 70 days notice or prior public disclosure of the date of the meeting
is given to stockholders, the nomination must be received by the Secretary not
later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure was made.
The notice shall set forth: (i) the name and address, as they appear on the
Corporation's books, of the stockholder who intends to make the nomination;
(ii) the name, age, business address and, if known, residence address of each
nominee; (iii) the principal occupation or employment of each nominee (iv) the
class and number of shares of stock of the Corporation which are beneficially
owned by each nominee and by the nominating stockholder; (v) any other
information concerning the nominee that must be disclosed of nominees in a
proxy solicitation pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended; and (vi) the executed consent of each nominee to being
named in the proxy statement for such proxy solicitation as a nominee, and to
serve as a director of the Corporation, if elected. The chairman of the
meeting of stockholders may, if the facts warrant, determine that a nomination
was not made in accordance with the foregoing procedures, and if the chairman
should so determine, the chairman shall so declare to the meeting and the
defective nomination shall be disregarded.

8.3 Newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled by
the affirmative vote of a majority of the directors then in office, even though
less than a quorum, or by the sole remaining director, as the case may be.
Such a director shall hold office until the first annual meeting of
stockholders next succeeding their election and until such director's successor
shall have been elected and qualified. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.

8.4 Notwithstanding the foregoing Sections 8.1, 8.2 and 8.3 of
this Article EIGHTH, whenever the holders of any one or more classes or series
of Preferred Stock issued by the Corporation shall have the right, voting
separately by class or series, to elect directors at an annual or special
meeting of stockholders, (i) the election, filling of vacancies and other
features of such directorships shall be governed by the terms of this Restated
and Amended Certificate of Incorporation or the Preferred Stock Designation
applicable to such class or series of Preferred Stock, (ii) the then authorized
number of directors of the Corporation shall be increased by the number of
additional directors to be elected, and (iii) the directors so elected shall
serve a term which shall expire at the annual meeting of stockholders next
succeeding their election or as otherwise

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<PAGE> 8

specified by the terms of this Restated and Amended Certificate of
Incorporation or the Preferred Stock Designation applicable to such class or
series.

8.5 Unless and except to the extent that the Bylaws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.

8.6 Notwithstanding any other provisions of this Restated and
Amended Certificate of Incorporation or any provisions of law which might
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the capital stock of the
Corporation required by law, this Restated and Amended Certificate of
Incorporation or any amendment hereto or any Preferred Stock Designation, the
affirmative vote of the holders of at least 66-2/3% of the voting power of all
of the then outstanding shares of Voting Stock, voting together as a single
class, shall be required to alter, amend, repeal, or adopt any provision
inconsistent with, this Article EIGHTH.

8.7 In furtherance, and not in limitation of the powers conferred
on it by statute, the Board of Directors is expressly authorized;

(a) to adopt, amend or repeal the Bylaws of the
Corporation, subject to such restrictions upon the exercise of such power as
may be imposed by this Restated and Amended Certificate of Incorporation or any
amendment hereto:

(b) to authorize and cause to be executed mortgages and
liens upon the whole or any part of the real and personal property of the
Corporation, without any action of or by the stockholders of the Corporation,
except as otherwise provided by statute; and

(c) to set apart out of any of the funds of the
Corporation available for dividends a reserve or reserves for any proper
purpose or to abolish any such reserve in the manner in which it was created.

The Corporation may in its Bylaws confer powers upon its Board
of Directors in addition to the foregoing, and in addition to the powers and
authorities expressly conferred upon it by statute.

8.8 The Board of Directors shall have power from time to time to
fix and to determine and vary the amount of the working capital of the
Corporation and to direct and determine the use and disposition of any surplus
or net profits over and above the capital as determined pursuant to, and
subject to, the provisions of the General Corporation Law of Delaware; and in
its discretion the Board of Directors may use and apply any such surplus or
accumulated profits in purchasing or acquiring bonds, debentures, notes, or
other obligations or securities of the Corporation or shares of its own stock
of any class so far as may be permitted by law, to such extent and in such
manner and upon such terms as the Board of Directors shall deem expedient, but
any such bonds, debentures, notes, obligations, securities or stock so
purchased or acquired (together with any stock or securities

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<PAGE> 9

acquired in satisfaction of a debt or otherwise), may be resold. Nothing,
however, shall be held to limit the general power of the Corporation to apply
any other funds or assets to the purchase or acquisition or retirement of its
stock, bonds, debentures, notes or other obligations or securities.

8.9 The Board of Directors, subject to the applicable provisions
of the General Corporation Law of Delaware, may from time to time determine
whether and to what extent and at what times and places and under what
conditions and regulations the accounts and books of the Corporation or any of
them shall be open to the inspection of the stockholders; and no stockholder
shall have any right to inspect any account book or document of the
Corporation, except as conferred by law or as authorized by the Board of
Directors or by resolutions of the Stockholders.

8.10 The books of the Corporation may be kept within or without the
State of Delaware at such place or places as may be designated from time to
time by the Board of Directors.

8.11 The Board of Directors may determine, from time to time, the
amount of compensation which shall be paid to its members. The Board of
Directors shall also have power, in its discretion, to provide for and to pay
directors rendering unusual or exceptional services to the Corporation special
compensation appropriate to the value of such services as determined by the
Board of Directors from time to time.

8.12 Subject to the rights of the holders of any series of
Preferred Stock then outstanding to remove directors that the holders of such
Preferred Stock were entitled to elect, a director of the Corporation may be
removed only for cause. Such removal for cause may be effected only by the
resolution of all other Board members, stating such cause, or by the
affirmative vote of all other Board members or the holders of at least 66-2/3%
of the voting power of all of the then outstanding shares of Voting Stock,
voting together as a single class. No director so removed may be reinstated so
long as the cause for removal continues to exist. "Cause," within the
meaning of this Article EIGHTH, shall be limited to criminal acts and gross
negligence.

NINTH: Liability of Directors.

9.1 No Director of the Corporation shall be personally liable to
the Corporation or its Stockholders for monetary damages for any breach of
fiduciary duty by such Director as a Director. Notwithstanding the foregoing
sentence, a Director shall be liable to the extent provided by applicable law
(i) for breach of the Director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the Director derived an improper personal benefit. No amendment to or
repeal of this Section 9.1 shall apply to or have any effect on the liability
or alleged liability of any Director of the Corporation for or with respect to
any acts or omissions prior to such amendment or repeal.

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<PAGE> 10

9.2 The Corporation shall indemnify, to the fullest extent
authorized or permitted and in the manner provided by law, any person made, or
threatened to be made, a party to any action, suit, or proceeding (whether
civil, criminal, or otherwise) by reason of the fact that he or she or a person
of whom he or she is the legal representative is or was a Director or officer
of the Corporation or by reason of the fact that such Director or officer, at
the request of the Corporation, is or was serving any other corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
in any capacity. Nothing contained herein shall affect any rights to
indemnification to which employees and agents other than Directors and officers
may be entitled by law, and the Corporation may indemnify such employees and
agents to the fullest extent and in the manner permitted by law. The rights to
indemnification set forth in this Section 9.2 shall not be exclusive of any
other rights to which any person may be entitled under any statute, provision
of this Restated and Amended Certificate of Incorporation, bylaw, agreement,
contract, vote of stockholders or disinterested directors, or otherwise. The
Corporation also is authorized to enter into contracts of indemnification.

TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated and Amended Certificate of
Incorporation in the manner now or hereafter prescribed by statute, and all
rights conferred upon Stockholders herein are granted subject to this
reservation.

IN WITNESS WHEREOF, Healthcare Recoveries, Inc. has caused its
corporate seal to be hereunto affixed and this Restated and Amended Certificate
of Incorporation to be signed its Secretary this ____ day of May, 1997.

Healthcare Recoveries, Inc.

---------------------------------------
Douglas R. Sharps
Executive Vice President - Finance and
Administration, Chief Financial Officer
and Secretary

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<PAGE> 1
EXHIBIT 3.2

AMENDED AND RESTATED
BYLAWS
OF
HEALTHCARE RECOVERIES, INC.
ADOPTED AS OF __________________, 1997

ARTICLE I
STOCKHOLDERS

SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders
for the election of directors and for the transaction of such other business as
may properly come before the meeting shall be held at such place, either within
or without the State of Delaware, on such date and at such time as the Board of
Directors may by resolution provide. The Board of Directors may specify by
resolution prior to any special meeting of stockholders held within the year
that such meeting shall be in lieu of the annual meeting.

SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders of
the Corporation may be called at any time by the Chairman of the Board or by a
majority of the Directors then in office and shall be called by the President
or the Secretary at the request in writing of stockholders holding together at
least a majority of the numbers of shares of the Common Stock outstanding and
entitled to vote at such meeting. Special meetings shall be held at such
place, either within or without the State of Delaware, as is stated in the call
and notice thereof.

SECTION 3. NOTICE OF MEETINGS.

(a) Unless otherwise provided by law, whenever
stockholders are required or permitted to take any action at a meeting, a
written notice of the meeting stating the place, date
<PAGE> 2

and hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given not less than ten nor
more than sixty days prior to such meeting to each stockholder entitled to vote
at the meeting. If mailed, such notice shall be deemed to be given when
deposited in the mail, postage prepaid, directed to the stockholder at such
stockholder's address as it appears on the records of the Corporation.
Whenever notice is required to be given to any stockholder, a written waiver
thereof, signed by the stockholder entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance at
a meeting shall constitute a waiver of notice of such meeting, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business transacted
at, nor the purpose of, any regular or special meeting need be stated in the
written waiver of notice of such meeting.

(b) Notice of any meeting may be given by or at the
direction of the Chairman, the President, the Secretary or the Board of
Directors. No notice need be given of the time and place of reconvening of any
adjourned meeting if the time and place to which the meeting is adjourned are
announced at the adjourned meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
of record entitled to vote at the meeting.

SECTION 4. LIST OF STOCKHOLDERS. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, showing the
address of each stockholder and the number of shares registered in the name of
each

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<PAGE> 3

stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the Corporation, or to vote in person or by proxy
at any meeting of the stockholders.

SECTION 5. QUORUM; REQUIRED STOCKHOLDER VOTE. Except as otherwise
provided by the Amended and Restated Certificate of Incorporation, each
stockholder entitled to vote at any meeting of stockholders shall be entitled
to one vote for each share of stock held by such stockholder that has voting
power upon the matter in question. A quorum for the transaction of business at
any annual or special meeting of stockholders shall exist when the holders of a
majority of the outstanding shares entitled to vote are represented either in
person or by proxy at such meeting. In all matters other than the election of
directors, the affirmative vote of a majority of the shares present in person
or represented by proxy at the meeting and entitled to vote on the subject
matter shall be the act of the stockholders, unless a greater vote is required
by law, by the Amended and Restated Certificate of Incorporation or by these
Bylaws. Directors shall be elected by the affirmative vote of a plurality of
the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. When a

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<PAGE> 4

quorum is once present to organize a meeting, the stockholders present may
continue to do business at the meeting or at any adjournment thereof
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of
the Corporation to vote stock, including but not limited to its own stock, held
by it in a fiduciary capacity.

SECTION 6. PROXIES. A stockholder may vote either in person or by a
proxy which such stockholder has duly executed in writing. No proxy shall be
valid after three years from the date of its execution unless a longer period
is expressly provided in the proxy. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the Corporation.

SECTION 7. ORGANIZATION. Meetings of stockholders shall be presided
over by the Chairman of the Board, or in his absence by the President, or in
the absence of the foregoing persons by a chairman designated by the Board of
Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary shall act as secretary of the meeting, but in his
absence the chairman of the meeting may appoint any person to act as secretary
of the meeting.

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<PAGE> 5

SECTION 8. ACTION OF STOCKHOLDERS WITHOUT MEETING. Whenever the vote
of stockholders at a meeting thereof is required or permitted to be taken for
or in connection with any corporate action, whether by any provision of the
Delaware General Corporation Law or of the Certificate of Incorporation or
these Bylaws or otherwise, such corporate action may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the all of the holders of
outstanding stock.

SECTION 9. RECORD DATE. In order that the Corporation may determine
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for any
other lawful purpose, the Board of Directors of the Corporation may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date: (a) in the case of the determination of stockholders
entitled to vote at any meeting of stockholders or adjournment thereof, shall
not be more than sixty nor less than ten days before the date of such meeting;
(b) in the case of the determination of stockholders entitled to express
consent to corporate action in writing without a meeting, shall not be more
than ten days after the date upon which the resolution fixing the record date
is adopted by the Board of Directors; and (c) in the case of any other action,
shall not be more than sixty days prior to such other action. If no record
date is fixed: (x) the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day

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<PAGE> 6

next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held; (y) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no prior action
of the Board of Directors is required by law, shall be the first date on which
a signed written consent setting forth the action taken or proposed to be taken
is delivered to the Corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution
taking such prior action; and (z) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned
meeting.

SECTION 10. NOTICE OF STOCKHOLDER BUSINESS. At any meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before a meeting, business
must be (a) specified in the notice of meeting (or any supplement) given by or
at the direction of the Board of Directors, (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before a meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, not
less than sixty days nor

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more than ninety days prior to the meeting; provided, however, that in the
event that less than seventy days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
10th day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting (a) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (b) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (c) the class and number of shares
of the Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
meeting except in accordance with the procedures set forth in this Section 10.
The chairman of the meeting shall, if the facts warrant, determine that
business was not properly brought before the meeting in accordance with the
provisions of this Section 10, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.

SECTION 11. NOTICE OF STOCKHOLDER NOMINEES. Only persons who are
nominated in accordance with the procedures set forth in this Section 11 shall
be eligible for election as directors. Nominations of persons for election to
the Board of Directors of the Corporation may be made at a meeting of
stockholders by or at the direction of the Board of Directors or by any
stockholder of the Corporation entitled to vote for the election of Directors
at the meeting who

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complies with the notice procedures set forth in this Section 11. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the Corporation
not less than sixty days nor more than ninety days prior to the meeting;
provided, however, that in the event that less than seventy days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder must be so received no later than the
close of business on the 10th day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares
of the Corporation which are beneficially owned by such person, and (iv) any
other information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act") (including, without limitation, a copy of
such person's written consent to being named in any applicable proxy statement
as a nominee and to serving as a director if elected); and (b) as to the
stockholder giving the notice, (i) the name and address, as they appear on the
Corporation's books, of such stockholder and (ii) the class and number of
shares of the Corporation which are beneficially owned by such stockholder. At
the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set

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forth in a stockholder's notice of nomination which pertains to the nominee.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section
11. The chairman of the meeting shall, if the facts warrant, determine that a
nomination was not made in accordance with the procedure prescribed by this
Section 11, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded. Nothing in this Section 11
shall be construed to affect the requirements for proxy statements of the
Corporation under Regulation 14A of the Exchange Act.

SECTION 12. REPORT OF BUSINESS. At each annual stockholders'
meeting, one of the officers of the Corporation shall submit a statement of the
business done during the preceding year, together with a report of the general
financial condition of the Corporation and of the condition of its tangible
property.

ARTICLE II
DIRECTORS

SECTION 1. POWER OF DIRECTORS. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors. In addition to the authority and powers conferred upon the Board of
Directors of the Corporation by the General Corporation Law of the State of
Delaware, the Amended and Restated Certificate of Incorporation and these
Bylaws, the Board of Directors is hereby authorized and empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, subject to the

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provisions of the General Corporation Law of the State of Delaware, the
Amended and Restated Certificate of Incorporation and these Bylaws.

SECTION 2. COMPOSITION OF THE BOARD.

(a) The number of directors that shall constitute the Board of
Directors of the Corporation shall not be less than two nor more than eighteen,
as shall be determined from time to time exclusively by the Board of Directors
pursuant to a resolution adopted by a majority of the Board then in office.

(b) The directors shall be divided into three classes,
designated Class A, Class B and Class C. Each class shall consist, as nearly
as may be possible, of one-third of the total number of directors constituting
the entire Board of Directors. Each director shall serve for a term ending on
the third annual meeting following the annual meeting at which such director
was elected; provided, however, that the directors first elected to Class A
shall serve for a term expiring at the annual meeting next following the end of
the calendar year 1997, the directors first elected to Class B shall serve for
a term expiring at the second annual meeting next following the end of the
calendar year 1997, and the directors first elected to Class C shall serve for
a term expiring at the third annual meeting next following the end of the
calendar year 1997.

(c) A director shall hold office until the annual meeting for
the year in which his term expires and until his successor shall be elected and
shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.

(d) At each annual election, the directors chosen to succeed
those whose terms then expire shall be of the same class as the directors they
succeed, unless, by reason of any intervening changes in the authorized number
of directors, the Board of Directors of the

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Corporation shall designate one or more directorships whose term then expires
as directorships of another class in order more nearly to achieve equality of
number of directors among the classes.

(e) Notwithstanding the rule that the three classes shall be
as nearly equal in number of directors as possible, in the event of any change
in the authorized number of directors, each director then continuing to serve
as such shall nevertheless continue as a director of the class of which he is
a member until the expiration of his current term, or his prior death,
resignation or removal. If any newly created directorship may, consistent with
the rule that the three classes shall be as nearly equal in number of directors
as possible, be allocated to one or two or more classes, the Board of Directors
of the Corporation shall allocate it to that of the available classes whose
terms of office are due to expire at the earliest date following such
allocation.

SECTION 3. MEETINGS OF THE BOARD; NOTICE OF MEETINGS; WAIVER OF
NOTICE. Regular meetings of the Board of Directors may be held at such places
within or without the State of Delaware and at such times as the Board of
Directors may from time to time determine, and if so determined, notices
thereof need not be given. Special meetings of the Board of Directors may be
held at such places within or without the State of Delaware and may be called
by the Chairman, the President or a majority of the entire Board of Directors.
Written notice of the time and place of such special meetings shall be given to
each director by the persons calling such meeting by first class or registered
mail at least four days before the meeting or by telephone, telecopy or in
person at least one day before the meeting. Whenever notice is required to be

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given to any director, a written waiver thereof, signed by such director,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance at a meeting shall constitute a waiver of any required
notice of such meeting, except when the director attends such meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the Board of Directors need be stated in the notice or waiver of
notice of such meeting.

SECTION 4. QUORUM; VOTE REQUIREMENT. A majority of the directors
then in office shall constitute a quorum for the transaction of business at any
meeting. When a quorum is present, the vote of a majority of the directors
present shall be the act of the Board of Directors, unless a greater vote is
required by law, by the Amended and Restated Certificate of Incorporation, by
these Bylaws or by a resolution of the Board of Directors.

SECTION 5. ORGANIZATION. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, or in his absence by the President,
or in their absence by a chairman chosen at the meeting. The Secretary shall
act as secretary of the meeting, but in his absence the chairman of the meeting
may appoint any person to act as secretary of the meeting.

SECTION 6. ACTION OF BOARD WITHOUT MEETING. Any action required or
permitted to be taken at a meeting of the Board of Directors or any committee
thereof may be taken without a meeting if a written consent, setting forth the
action so taken, is signed by all the directors or committee members and filed
with the minutes of the proceedings of the Board of Directors or committee.
Such consent shall have the same force and effect as a unanimous affirmative
vote of the Board of Directors or committee, as the case may be.

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SECTION 7. REMOVAL. Subject to the rights of the holders of any
series of Preferred Stock then outstanding to remove directors that the holders
of such Preferred Stock were entitled to elect, a director of the Corporation
may be removed only for cause. Such removal for cause may be effected only by
the resolution of all other Board members, stating such cause, or by the
affirmative vote of all other Board members or the holders of at least
two-thirds of the voting power of all of the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class. No director so removed may be
reinstated so long as the cause for removal continues to exist. "Cause,"
within the meaning of this Section 7, shall be limited to criminal acts and
gross negligence.

SECTION 8. VACANCIES. Subject to the rights of the holders of any
series of Preferred Stock then outstanding, (i) newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority vote of the directors then in office, and (ii) any vacancies in
the Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or otherwise shall be filled only by a
majority vote of the directors then in office, though less than a quorum, or by
the sole remaining Director, and not by the stockholders. Directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been chosen expires.
Except as otherwise provided in the Amended and Restated Certificate of
Incorporation, no decrease in the authorized number of directors shall shorten
the term of any incumbent director.

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SECTION 9. CONFERENCE TELEPHONE MEETINGS. Members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board or any such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in
a meeting pursuant to this Section 9 shall constitute presence in person at
such meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.

SECTION 10. COMMITTEES. The Board of Directors, by resolution passed
by a majority of all of the directors, may designate one or more committees,
each committee to consist of one or more of the directors. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of the committee, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in place of any such
absent or disqualified member. Any such committee, to the extent provided in
the resolution of the Board of Directors, shall have and may exercise all the
power and authority of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation
to be affixed to all papers which may require it; provided that no committee
shall have the power or authority of the Board of Directors in reference to (a)
amending the Amended and Restated Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in

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Section 151(a) of the Delaware General Corporation Law fix the designations and
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation), (b) adopting an agreement of merger or consolidation
under Sections 251 or 252 of the Delaware General Corporation Law, (c)
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the property and assets of the Corporation, (d)
recommending to the stockholders a dissolution of the Corporation or a
revocation thereof, or (e) amending the Bylaws of the Corporation. In
addition, unless the resolution of the Board of Directors or the Amended and
Restated Certificate of Incorporation expressly so provides, no such committee
shall have the power or authority to declare a dividend, to authorize the
issuance of stock, or to adopt a certificate of ownership and merger pursuant
to Section 253 of the Delaware General Corporation Law. Unless the Board of
Directors otherwise provides, each committee designated by the Board may make,
alter and repeal rules for the conduct of its business. In the absence of such
rules each committee shall conduct its business in the same manner as the Board
of Directors conducts its business pursuant to this Article II.

SECTION 11. COMPENSATION. Directors, as such, shall not receive any
stated salary for their services, but, by resolution of the Board, a specific
sum fixed by the Board plus expenses may be allowed for attendance at each
regular or special meeting of the Board and a quarterly or annual fixed fee may
be allowed; provided, however, that nothing herein contained shall be

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construed to preclude any Director from serving the Corporation or any parent
or subsidiary corporation thereof in any other capacity and receiving
compensation therefor.

ARTICLE III

OFFICERS

SECTION 1. EXECUTIVE STRUCTURE. The officers of the Corporation
shall be a Chairman of the Board of Directors, a Chief Executive Officer, as
many Vice Presidents as the Board of Directors may from time to time deem
advisable and one or more of which may be designated an Executive Vice
President or Senior Vice President, a Secretary, a Chief Financial Officer, and
such Assistant Secretaries as the Board of Directors may from time to time deem
advisable, and such other officers as the Board of Directors may from time to
time deem advisable and designate, including a President. The Chairman of the
Board of Directors and the Chief Executive Officer shall be members of and be
elected by the Board of Directors. All other officers shall be elected by the
Board of Directors. Any two of said offices may be held by one person except
the office of President and Vice President.

SECTION 2. CHAIRMAN. The Chairman of the Board of Directors shall
preside, if present, at all meetings of the Board of Directors and shall have
and perform such other duties as from time to time may be assigned by the Board
of Directors.

SECTION 3. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of
the Corporation shall have such general executive powers and duties of
supervision and management as are usually vested in such office and shall
perform such other duties as are authorized by the Board

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of Directors. The Chief Executive Officer shall sign all contracts,
certificates and other instruments of the Corporation as authorized by the
Board of Directors.

SECTION 4. PRESIDENT. The Board of Directors may, but need not,
appoint a President, who shall exercise such duties and obligations as may be
determined by the Board of Directors.

SECTION 5. VICE PRESIDENT. A Vice President shall have such duties,
obligations and authority usually enjoyed by a person holding such office as
the Board of Directors may determine

SECTION 6. SECRETARY. The Secretary shall issue notices of all
directors' and stockholders' meetings, and shall attend and keep the minutes of
the same; shall have charge of all corporate books, records and papers; shall
be custodian of the corporate seal; shall attest with his signature, which may
be a facsimile signature if authorized by the Board of Directors, and impress
with the corporate seal, all stock certificates and written contracts of the
Corporation; and shall perform all other duties as are incident to the office.
Any Assistant Secretary, in the absence or inability of the Secretary, shall
perform all duties of the Secretary and such other duties as may be required.

SECTION 7. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall have custody of all money and securities of the Corporation and shall
perform such duties customarily performed by a treasurer. He shall keep
regular books of account and shall submit them, together with all his vouchers,
receipts, records and other papers, to the directors for their examination and
approval annually; and semi-annually, or when directed by the Board of
Directors, he shall submit to each director a statement of the condition of the
business and accounts of the

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Corporation; and shall perform all such other duties as are incident to his
office. In the absence or inability of the Chief Financial Officer, such
person as shall be designated by the Board of Directors shall perform all the
duties of the Chief Financial Officer and such other duties as may be required.

SECTION 8. RESIGNATIONS; REMOVAL; VACANCIES. Any officer may resign
at any time upon written notice to the Corporation. The Board of Directors may
remove any officer with or without cause at any time, but such removal shall be
without prejudice to the contractual rights of such officer, if any, with the
Corporation. Any vacancy occurring in any office of the Corporation by reason
of death, resignation, removal or otherwise may be filled for the unexpired
portion of the term by the Board of Directors at any regular or special
meeting.

SECTION 9. COMPENSATION. The salaries of the officers shall be fixed
from time to time by the Board of Directors, by a Committee of the Board or by
any officer the Board designates. No officer shall be prevented from receiving
such salary by reason of the fact that such officer is also a director of the
Corporation.

ARTICLE IV

STOCK

SECTION 1. STOCK CERTIFICATES. Certificates representing shares of
stock of the Corporation shall be in such form as may be approved by the Board
of Directors, which certificates shall be issued to stockholders of the
Corporation in numerical order from the stock book of the Corporation, and each
of which shall bear the name of the stockholder, the number of shares
represented, and the date of issue; and which shall be signed by the Chairman,
the

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President or a Vice President and the Secretary or an Assistant Secretary of
the Corporation or any other officer authorized to sign by the Board of
Directors; and which shall be sealed with the seal of the Corporation. Any or
all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.

SECTION 2. TRANSFER OF STOCK. Shares of stock of the Corporation
shall be transferred only on the books of the Corporation upon surrender to the
Corporation of the certificate or certificates representing the shares to be
transferred accompanied by an assignment in writing of such shares properly
executed by the stockholder of record or such stockholder's duly authorized
attorney-in-fact and with all taxes on the transfer having been paid. The
Corporation may refuse any requested transfer until furnished evidence
satisfactory to it that such transfer is proper. The Board of Directors may
make such additional rules concerning the issuance, transfer and registration
of stock as it shall so determine.

SECTION 3. STOCK LEDGER. A record shall be kept by the Secretary or
by any other officer, employee or agent designated by the Board of Directors,
of the name of each person, firm or corporation holding capital stock of the
Corporation, the number of shares represented by, and the respective dates of,
each certificate for such capital stock, and in case of cancellation of any
such certificate, the respective dates of cancellation.

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SECTION 4. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF
NEW CERTIFICATES. The Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or his legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any
such certificate or the issuance of such new certificate or uncertificated
shares.

SECTION 5. REGISTERED STOCKHOLDERS. The Corporation may deem and
treat the holder of record of any stock as the absolute owner for all purposes
and shall not be required to take any notice of any right or claim of right of
any other person.

ARTICLE V

DEPOSITORIES AND SEAL

SECTION 1. DEPOSITORIES. All funds of the Corporation shall be
deposited in the name of the Corporation in such bank, banks, or other
financial institutions as the Board of Directors may from time to time
designate and shall be drawn out on checks, drafts or other orders signed on
behalf of the Corporation by such person or persons as the Board of Directors
may from time to time designate.

SECTION 2. SEAL. The Board of Directors may, in its discretion,
provide for a suitable seal, which seal shall be in the charge of the
Secretary.

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ARTICLE VI

INDEMNIFICATION

SECTION 1. LIMITATION OF LIABILITY. No person shall be liable to the
Corporation for any loss or damage suffered by it on account of any action
taken or omitted to be taken by such person as a director, officer, employee or
agent of the Corporation in good faith, if such person (a) exercised or used
the same degree of care and skill as a prudent person would have exercised or
used under the circumstances in the conduct of such person's own affairs, or
(b) took or omitted to take such action in reliance upon advice of counsel for
the Corporation or upon statements made or information furnished by officers or
employees of the Corporation which such person had reasonable grounds to
believe.

SECTION 2. INDEMNIFICATION.

(a) ACTIONS OTHER THAN THOSE BY OR IN THE RIGHT OF THE
CORPORATION.

(i) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that such person is or
was a director or officer of the Corporation, or is or was serving at
the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such
person acted in good faith and in a manner

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such person reasonably believed to be in or not opposed to the best
interests of the Corporation (or such other corporation or
organization), and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his or her conduct was unlawful.

(ii) The Corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that such person is
or was an employee or agent of the Corporation, or is or was serving
at the request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such
person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the
Corporation (or such other corporation or organization), and, with
respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful.

(iii) The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that such person did not act in good faith and in a manner
which he or she reasonably believed to be in or not opposed to the
best interests of the Corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his or her
conduct was unlawful.

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(b) ACTION BY OR IN THE RIGHT OF THE CORPORATION.

(i) The Corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that such person
is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith
and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation (or such other
corporation or organization) and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the Corporation
(or such other corporation or organization) unless and only to the
extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.

(ii) The Corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that

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such person is or was an employee or agent of the Corporation, or is
or was serving at the request of the Corporation as an employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good
faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation (or such other
corporation or organization) and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the Corporation
(or such other corporation or organization) unless and only to the
extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.

(c) SUCCESSFUL DEFENSE OF ACTION. Notwithstanding, and
without limitation of, any other provision of this Article VI, to the extent
that a director, officer, employee or agent of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraph (a) or (b) of this Section 2, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith.

(d) DETERMINATION REQUIRED. Any indemnification under
paragraph (a) or (b) of this Section 2 (unless ordered by a court) shall be
made by the Corporation only as authorized

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in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because such person
has met the applicable standard of conduct set forth in said paragraph. Such
determination shall be made (i) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to the particular action,
suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the stockholders.

(e) ADVANCES. Expenses (including attorney's fees)
incurred by an officer or director in defending or investigating any civil,
criminal, administrative, or investigative action, suit or proceeding shall be
paid by the corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the corporation as authorized in
this Article. Such expenses (including attorney's fees) incurred by employees
or agents who are not officers or directors may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate. The right
provided in the first sentence of this Section 2(e) is a contract right.

SECTION 3. INSURANCE. The Corporation may, when authorized by the
Board of Directors, purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and incurred by
such person in

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<PAGE> 26

any such capacity, or arising out of such person's status as such, whether or
not the Corporation would be required to indemnify such person against such
liability under the provisions of Section 2. The risks insured under any
insurance policies purchased and maintained on behalf of any person as
aforesaid or on behalf of the Corporation shall not be limited in any way by
the terms of this Article VI and to the extent compatible with the provisions
of such policies, the risks insured shall extend to the fullest extent
permitted by law, common or statutory.

SECTION 4. NONEXCLUSIVITY; DURATION. The indemnification, rights,
and limitations of liability provided by this Article VI shall not be deemed
exclusive of any other indemnification, rights or limitations of liability to
which any person may be entitled under the Certificate of Incorporation, any
Bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise, either as to action in such person's official capacity or as to
action in another capacity while holding office, and they shall continue
although such person has ceased to be a director, officer, employee or agent
and shall inure to the benefit of such person's heirs, executors and
administrators. The authorization to purchase and maintain insurance set forth
in Section 3 of this Article VI shall likewise not be deemed exclusive.

SECTION 5. OTHER INDEMNIFICATION. The Corporation's obligation, if
any, to indemnify any person who was or is serving at its request as a director
of another corporation, partnership, joint venture, trust, enterprise or
non-profit entity shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
enterprise or non-profit entity.

SECTION 6. AMENDMENT OR REPEAL. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any

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<PAGE> 27

person in respect of any act or omission occurring prior to the time of such
repeal or modification.

SECTION 7. EMPLOYEE BENEFIT PLANS. For purposes of this Article VI,
references to "other enterprises" shall include employee benefit plans; the
reference to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the corporation" shall include any service as a director, officer, employee
or agent of the corporation which imposes duties on, or involves services by,
such director, officer or employee with respect to an employee benefit plan,
its participants or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this Article VI.

ARTICLE VII

AMENDMENT OF BYLAWS

These Bylaws may be altered, amended or repealed only as specified in
the Amended and Restated Certificate of Incorporation.

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<PAGE> 1

EXHIBIT 5.1

May 15, 1997

Healthcare Recoveries, Inc.
1400 Watterson Tower
Louisville, Kentucky 40218

Re: Registration Statement on Form S-1 Relating to Common
Stock, par value $.001 per share, of Healthcare
Recoveries, Inc.

Gentlemen:

We have acted as counsel for Healthcare Recoveries, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Registration
Statement"), relating to 9,800,000 shares of Common Stock of the Company, par
value $.001 per share ("Common Stock"), to be sold by Medaphis Corporation
("Medaphis"), the sole stockholder of the Company, to the underwriters ("U.S.
Underwriters") named in the Registration Statement pursuant to an U.S.
Underwriting Agreement and to the managers (the "Managers") named in the
Registration Statement pursuant to an International Underwriting Agreement, the
form of which have been filed as Exhibit 1.1 to the Registration Statement
(collectively, the "Underwriting Agreements").

Such 9,800,000 shares include (i) 7,840,000 shares to be offered in
the United States and Canada under the U.S. Underwriting Agreement (the "Firm
U.S. Shares"), and (ii) 1,960,000 shares to be offered outside of the United
States under the International Underwriting Agreement (the "Firm International
Shares"). Up to an additional 1,176,000 shares of Common Stock may be
purchased by the U.S. Underwriters upon the exercise of an over-allotment
option granted to the U.S. Underwriters by the Company under the U.S.
Underwriting Agreement (the "Additional U.S. Shares"). Also, up to an
additional 294,00 shares of Common Stock may be purchased by the Managers upon
the exercise of an over-allotment option granted to the Managers by the Company
under the International Underwriting Agreement (the "Additional International
Shares").

As counsel, we have examined and relied upon such records, documents,
certificates and other instruments as in our judgment are necessary or
appropriate to form the basis for the opinions hereinafter set forth. In all
such examinations, we have assumed the genuineness of signatures on original
documents and the conformity to such original documents of all copies submitted
to us as certified, conformed or photographic copies, and as to certificates of
public officials, we have assumed the same to have been properly given and to
be accurate.
<PAGE> 2

Based upon the foregoing, we are of the opinion that:

(i) The Firm U.S. Shares to be sold by Medaphis pursuant
to the U.S. Underwriting Agreement when sold in accordance with the terms set
forth in the U.S. Underwriting Agreement, will be duly authorized, validly
issued, fully paid and nonassessable; and

(ii) The Additional U.S. Shares to be issued and sold by
the Company pursuant to the U.S. Underwriting Agreement when issued in
accordance with the terms set forth in the U.S. Underwriting Agreement, will be
duly authorized, validly issued, fully paid and nonassessable; and

(iii) The Firm International Shares to be sold by Medaphis
pursuant to the International Underwriting Agreement when sold in accordance
with the terms set forth in the International Underwriting Agreement, will be
duly authorized, validly issued, fully paid and nonassessable; and

(iv) The Additional International Shares to be issued and
sold by the Company pursuant to the International Underwriting Agreement when
issued in accordance with the terms set forth in the International Underwriting
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable.

We are members of the Bar of the State of Georgia and, accordingly, do
not purport to be experts on or to express any opinion herein concerning any
law other than the laws of the State of Georgia, the corporate laws of the
State of Delaware, and the federal laws of the United States.

We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus that forms a part of the Registration Statement.

Very truly yours,

/s/ KING & SPALDING
-------------------
King & Spalding

<PAGE> 1
EXHIBIT 10.1

SEPARATION AGREEMENT

BY AND BETWEEN

MEDAPHIS CORPORATION

AND

HEALTHCARE RECOVERIES, INC.

DATED AS OF _____________, 1997

<PAGE> 2

SEPARATION AGREEMENT

THIS SEPARATION AGREEMENT, dated as of the IPO Effective Date, is
entered into by and between Medaphis and HRI. Capitalized terms used in this
Agreement and not otherwise defined shall have the respective meanings assigned
to them in Section 1.

WHEREAS, the Board of Directors of Medaphis has determined that it is
appropriate and desirable for Medaphis to sell for its account all of the
shares of HRI Common Stock owned by Medaphis; and

WHEREAS, it is appropriate and desirable to set forth certain
agreements of the parties in connection with the Separation.

NOW, THEREFORE, the parties agree as follows:

Section 1. Definitions.

For the purpose of this Agreement the following terms shall have the
following meanings:

"Action" means any demand, action, suit, countersuit, arbitration,
inquiry, proceeding or investigation by or before any federal, state, local,
foreign or international Governmental Authority or any arbitration or mediation
tribunal.

"Affiliate" of any Person means a Person that controls, is controlled
by, or is under common control with such Person. As used herein, "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such entity, whether through
ownership of voting securities or other interests, by contract or otherwise.

"Agreement" means this Separation Agreement, including all of the
Schedules.

"Ancillary Agreements" means any and all supplemental and other
agreements and instruments contemplated by this Agreement or entered into in
connection with this Agreement.

"Arbitration Act" means the Federal Arbitration Act, 9 U.S.C. Sections
1-14, as the same may be amended from time to time.

"Arbitration Demand Date" has the meaning set forth in Section 20.3.

<PAGE> 3

"Arbitration Demand Notice" has the meaning set forth in Section 20.3.

"Closing" means the receipt by Medaphis of the proceeds of the IPO in
accordance with the terms of the Underwriting Agreement.

"Closing Date" means the date on which the Closing occurs.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"CPR" means the Center for Public Resources.

"Environmental Law" means any federal, state, local, foreign or
international statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, common law (including tort and environmental
nuisance law), legal doctrine, order, judgment, decree, injunction, requirement
or agreement with any Governmental Authority, now or hereafter in effect
relating to health, safety, pollution or the environment (including ambient
air, surface water, groundwater, land surface or subsurface strata) or to
emissions, discharges, releases or threatened releases of any substance
currently or at any subsequent time listed, defined, designated or classified
as hazardous, toxic, waste, radioactive or dangerous, or otherwise regulated,
under any of the foregoing, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of any such substances, including the Comprehensive Environmental
Response, Compensation and Liability Act, the Superfund Amendments and
Reauthorization Act and the Resource Conservation and Recovery Act and
comparable provisions in state, local, foreign or international law.

"Environmental Liabilities" means all Liabilities relating to, arising
out of or resulting from any Environmental Law or contract or agreement
relating to environmental, health or safety matters (including all removal,
remediation or cleanup costs, investigatory costs, governmental response costs,
natural resources damages, property damages, personal injury damages, costs of
compliance with any settlement, judgment or other determination of Liability
and indemnity, contribution or similar obligations) and all costs and expenses
(including allocated costs of in-house counsel and other personnel), interest,
fines, penalties or other monetary sanctions in connection with such
liabilities.

"Escalation Notice" has the meaning set forth in Section 20.2.

"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated under the Exchange Act.

"GAAP" means generally accepted accounting principles.

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<PAGE> 4

"Governmental Authority" shall mean any federal, state, local, foreign
or international court, government, department, commission, board, bureau,
agency, official or other regulatory, administrative or governmental authority.

"HRI" means Healthcare Resources, Inc., a Delaware corporation.

"HRI Audited Balance Sheet" means the audited balance sheet of HRI,
including the notes thereto, as of December 31, 1996, a copy of which is
included in the Registration Statement when it becomes effective.

"HRI April 30 Balance Sheet" means the unaudited balance sheet of HRI
as of April 30, 1997, prepared in accordance with GAAP on a basis consistent
with the preparation of the HRI Audited Balance Sheet.

"HRI Common Stock" means the Common Stock, $0.001 par value per share,
of HRI.

"HRI Indemnitees" has the meaning set forth in Section 15.3.

"Indemnifying Party" has the meaning set forth in Section 15.4.

"Indemnitee" has the meaning set forth in Section 15.4.

"Indemnity Payment" has the meaning set forth in Section 15.4.

"Information" means information, whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or intangible
forms, stored in any medium, including studies, reports, records, books,
contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.

"Insurance Proceeds" means those monies:

(a) received by an insured from an insurance carrier;

(b) paid by an insurance carrier on behalf of the insured; or

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<PAGE> 5

(c) received (including by way of set off) from any third party in the
nature of insurance, contribution or indemnification in respect of any
Liability; in any such case net of any applicable premium adjustments
(including reserves and retrospectively rated premium adjustments) and net of
any costs or expenses (including allocated costs of in-house counsel and other
personnel) incurred in the collection of proceeds.

"IPO" means the public offering for sale by Medaphis of shares of HRI
Common Stock pursuant to the IPO Registration Statement.

"IPO Effective Date" means May __, 1997, which is the date on which the
IPO Registration Statement was declared effective by the Commission.

"IPO Registration Statement" means the registration statement,
Registration No. 333-23287, on Form S-1 filed under the Securities Act,
pursuant to which the HRI Common Stock to be sold in the IPO has been
registered.

"Liabilities" means any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, costs and
expenses, including those arising under any law, rule, regulation, Action,
threatened or contemplated Action (including the costs and expenses of demands,
assessments, judgments, settlements and compromises relating thereto and
attorneys' fees and any and all costs and expenses (including allocated costs
of in-house counsel and other personnel) whatsoever reasonably incurred in
investigating, preparing or defending against any such Actions or threatened or
contemplated Actions), order or consent decree of any Governmental Authority or
any award of any arbitrator or mediator of any kind.

"Medaphis" means Medaphis Corporation, a Delaware corporation.

"Medaphis Group" means Medaphis and each Person (other than HRI) that
is an Affiliate of Medaphis immediately after the Closing Date.

"Medaphis Indemnitees" has the meaning set forth in Section 17.2.

"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a
limited liability entity, any other entity and any Governmental Authority.

"Prime Rate" means the rate which SunTrust Bank (or any successor or
other major money center commercial bank agreed to by the parties) announces
from time to time as its prime lending rate, as in effect from time to time.

"Prospectus" means each preliminary, final or supplemental prospectus
forming a part of the IPO Registration Statement.

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<PAGE> 6

"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated under the Securities Act.

"Separation" means the transactions, arrangements and agreements
embodied in this Agreement entered into by the parties in preparation for the
sale by Medaphis of all HRI Common Stock held by Medaphis.

"Subsidiary" of any Person means any corporation or other organization
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Person or by any one or more
of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided, however that no Person that is not directly or indirectly wholly
owned by any other Person shall be a Subsidiary of such other Person unless
such other Person controls, or has the right, power or ability to control, that
Person.

"Tax" or "Taxes" means all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupations, use, service,
service use, license, payroll, franchise, transfer and recording taxes, fees
and charges, imposed by the United States, or any state, local or foreign
government or subdivision or agency thereof, whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest, fines, penalties or additional amounts attributable to or imposed
on or with respect to any such taxes, charges, fees, levies or other
assessments.

"Third Party Claim" has the meaning set forth in Section 15.5

"Underwriters" means the managing Underwriters for the IPO.

"Underwriting Agreement" means the underwriting agreement entered into
among Medaphis, HRI and the Underwriters with respect to the IPO.

Section 2. Effect of Agreement. This Agreement is being executed and
delivered on the IPO Effective Date to memorialize actions that have been taken
by the parties prior to the IPO Effective Date in connection with the
Separation, and to govern the conduct of the parties subsequent to the IPO
Effective Date as to the matters addressed in this Agreement. If the Closing
does not occur, this Agreement shall terminate.

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<PAGE> 7

Section 3. HRI Stockholders' Equity and Net Tangible Assets.

3.1 HRI April 30, 1997 Balance Sheet. A copy of the HRI April 30, 1997
Balance Sheet is attached as Schedule 3.1. As of April 30, 1997, as reflected
in the HRI April 30, 1997 Balance Sheet, the stockholders' equity of HRI was
not less than $4,100,000, and the net tangible assets of HRI were not less than
$4,100,000. After December 31, 1996 and prior to April 30, 1997, Medaphis and
HRI took the following actions affecting HRI's stockholders' equity and net
tangible assets:

(a) On May 19, 1997 (the "Dividend Date"), HRI declared
a dividend to Medaphis in the amount of $8,559,727, which dividend
was paid by means of satisfaction of the account receivable from
Medaphis on the books of HRI in the amount of $8,599,727 (no cash
owed or to be paid to Medaphis under this Section 3.1(a)).

(b) From the HRI April 30, 1997 Balance Sheet, HRI
transferred to Medaphis from time to time all of HRI's
unrestricted cash on hand in excess of cash required for working
capital. Such transfers were effected by transferring all of
HRI's cash to Medaphis, with Medaphis then providing funds as
necessary for HRI's working capital requirements, by HRI's
funding its working capital requirements and transferring excess
cash to Medaphis, or by a combination of the foregoing, as was
convenient from time to time.

(c) On or before the Closing Date, HRI will declare a
dividend in the amount equal to stockholders' equity of HRI on
April 30, 1997 (the Balance Sheet date) minus $4,100,000, which
dividend equals $601,194. The dividend will be paid and evidenced
by HRI's non-interest bearing promissory note due on the earlier
of (i) thirty days after the Closing Date and (ii) the date on
which HRI receives net proceeds from exercise of the Underwriters'
over-allotment option in an amount equal to or greater than the
amount of such dividend.

3.2 Closing Date Stockholders' Equity and Net Tangible Assets.
Medaphis shall take such actions as shall be necessary, including, without
limitation, any required contribution to capital, so that, at the Closing Date,
(i) the stockholders' equity of HRI is not less than $4,100,000, and the net
tangible assets of HRI are not less than $4,100,000, in each case as determined
in accordance with GAAP on a basis consistent with the determination thereof in
connection with the HRI Audited Balance Sheet, (ii) the assets of HRI do not
include any indebtedness of Medaphis to HRI (except for obligations expressly
created by this Agreement and any Ancillary Agreements), and (iii) the
liabilities of HRI do not include any indebtedness of HRI

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<PAGE> 8

to Medaphis (except for obligations expressly created by this Agreement and
any Ancillary Agreements). The parties acknowledge and agree that, as of the
Closing Date, HRI's unrestricted cash on hand is not likely to exceed a nominal
amount, and that there is no requirement that Medaphis take any action to
cause HRI's unrestricted cash on hand to be any particular amount. Prior to the
Closing Date, Medaphis shall be entitled to all unrestricted cash of HRI
subject to the restrictions set forth in the first sentence of this Section
3.2.

Section 4. Certain Tax Matters.

4.1 Federal Income Tax Returns. Medaphis will include the income of
HRI (including any deferred income required to be recognized under Treasury
Regulation ss. 1.1502-13 and any excess loss account taken into income under
Treasury Regulation ss. 1.1502-19) on the Medaphis consolidated federal income
tax returns for all periods from August 29, 1995 through the Closing Date and
will pay all Taxes assessed with respect to such consolidated federal income
tax returns. HRI will furnish all information reasonably required by Medaphis
for inclusion in Medaphis' federal consolidated income tax returns in
accordance with HRI's past custom and practice. Medaphis will allow HRI an
opportunity to review and comment on such federal consolidated income tax
returns (including any amended returns) to the extent they relate to HRI. HRI
will include its income on its separate federal income tax returns for all
taxable periods ended on or before August 28, 1995, and all taxable periods
beginning after the Closing Date. The income of HRI will be apportioned to the
period up to and including the Closing Date and the period after the Closing
Date by closing the books of HRI as of the end of the Closing Date, unless
Medaphis and HRI elect ratable allocation pursuant to Treasury Regulation ss.
1.1502-76(b)(2)(ii).

4.2 State, Local and Foreign Income Tax and Other Tax Returns. Medaphis
and HRI will file their tax returns for state, local and foreign income tax
purposes and all other Tax returns on a separate basis and shall be separately
responsible for all Taxes assessed with respect to such returns.

4.3 Audits. Medaphis will allow HRI and its counsel to participate at
HRI's own expense in any audits of the consolidated federal income tax returns
of Medaphis to the extent that such returns relate to HRI. Medaphis will not
settle any such audit in a manner that would adversely affect HRI after the
Closing Date unless such settlement would be reasonable in the case of a person
that owned HRI both before and after the Closing Date.

4.4 Post-Closing Elections. At Medaphis' request, HRI will make or
join with Medaphis in making any election for Tax purposes if the making of
such election does not have a material adverse impact on HRI for any taxable
period after the Closing Date.

4.5 Termination of Other Tax Sharing Agreements. Any Tax sharing or
allocation agreements between Medaphis and HRI other than this Agreement shall
terminate on the Closing Date.

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<PAGE> 9

Section 5. Insurance Matters.

5.1 New Policies. As of the respective dates indicated on Schedule
5.1, HRI obtained binders for the new business insurance policies listed on
such Schedule, which policies by their terms became or become effective no
later than the Closing Date. HRI is responsible for paying all premiums
required under such policies, and to the extent any such premiums became due
prior to the IPO Effective Date HRI has paid such premiums.

5.2 Tail Coverages. HRI is or has been a named insured under various
blanket business insurance policies owned by Medaphis that in their current
forms are listed on Schedule 5.2 (the "Medaphis Blanket Policies"). Medaphis
has made available to HRI the opportunity to purchase extended discovery period
coverage for the benefit of HRI under the Medaphis Blanket Policies, and HRI
has purchased the extended discovery period coverages listed on Schedule 5.2.

5.3 Refunds. The parties acknowledge that certain of the premiums paid
by Medaphis under the Medaphis Blanket Policies are subject to reduction after
the applicable insurer audits the related claims history. Refunds reflecting
any such reductions shall be solely for the account of Medaphis, and HRI shall
have no claim with respect thereto. To the extent that HRI receives any such
refund, HRI shall immediately pay it over to Medaphis.

5.4 Workers' Compensation. Effective as of Closing Date (the "WC
Switch Date"), HRI obtained the workers' compensation insurance arrangements
described on Schedule 5.4, and HRI shall be solely responsible for all workers'
compensation claims of HRI employees incurred after the WC Switch Date. As of
the WC Switch Date, Medaphis' recorded reserve for workers' compensation claims
by HRI employees was $51,736.36 (which amount, plus that amount of reserve to
be determined within one month of the date hereof by Medaphis' insurance
carrier with respect to those HRI employees who have reported or filed claims
prior to the WC Switch Date but whose claims are not reflected in the
$51,736.36 figure, are referred to as the "WC Reserve"). Medaphis shall be
solely responsible for all workers' compensation claims of HRI employees
incurred before the WC Switch Date, whether or not reported before such date,
to the extent that such claims do not exceed the WC Reserve. HRI shall be
solely responsible for all workers' compensation claims of HRI employees
incurred before the WC Switch Date, whether or not reported before such date,
to the extent that such claims exceed the WC Reserve.

Section 6. Telecommunications Services. Since April 25, 1997 (the
"Telecom Switch Date"), HRI has obtained telecommunications services,
separately billed from Medaphis, from one or more vendors selected by HRI. To
the extent known at the date of the HRI April 30, 1997 Balance Sheet,
telecommunications charges incurred by HRI prior to the Telecom Switch Date
were taken into account and charged to HRI in determining the amount of the
account payable from Medaphis to HRI as of that date that is referred to in
Section 3.1(b). Subject to Medaphis' obligation under Section 3.2, to the
extent that, as of the Closing Date, the parties have been able to identify
telecommunications charges incurred by HRI prior to the Telecom Switch Date
that have not been previously taken into account, HRI shall reimburse Medaphis
for such charges on the Closing Date. The parties have diligently attempted to
identify all telecommunications charges incurred by HRI prior to the Telecom
Switch Date, to minimize any need to settle such charges after the Closing
Date. Upon presentation by Medaphis of reasonable

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<PAGE> 10

supporting documentation after the Closing Date, HRI will reimburse
Medaphis for any telecommunications charges incurred by HRI prior to the Telecom
Switch Date and not previously taken into account as of the Closing Date or the
date of the HRI April 30, 1997 Balance Sheet.

Section 7. Pittsburgh Telephone Equipment. On the Closing Date,
Medaphis shall execute and deliver to HRI a bill of sale transferring to HRI,
free and clear of any lien or other encumbrance, the assets identified on
Schedule 7 relating to the telephone system in HRI's Pittsburgh, Pennsylvania
offices. The parties acknowledge that such assets originally were acquired by
HRI and later were included as collateral in a financing lease facility
obtained by Medaphis, the lien of which shall be released as contemplated by
Section 8 and title to which shall be (if necessary) transferred to HRI.

Section 8. Lien and Guaranty Releases. It is the parties' intention
that, from and after the Closing Date, (a) no assets (including, without
limitation, cash balances in bank accounts and rights as lessee) or capital
stock of HRI will be subject to any lien, security interest, mortgage or other
encumbrance relating to any indebtedness of Medaphis or of any member of the
Medaphis Group, and (b) HRI will have no obligation, as guarantor or otherwise,
for any indebtedness of Medaphis or of any member of the Medaphis Group. To
that end, the parties have conducted a lien search in all jurisdictions deemed
by them to be relevant, and have otherwise diligently attempted to identify all
such liens and guaranties. Medaphis shall cause all such liens and guaranties
to be released on or before the Closing Date. If, after the Closing Date, any
lien or guaranty is discovered that encumbers any asset or capital stock of
HRI, or under which HRI has any obligation, and that relates to any
indebtedness of Medaphis or of any member of the Medaphis Group, Medaphis shall
take all actions that shall be necessary to obtain the release of such lien or
guaranty.

Section 9. Asset Transfer. As of the Closing Date, Medaphis shall
execute and deliver to HRI a quitclaim bill of sale, transferring to HRI any
interest Medaphis might have in any of the assets used by HRI in the conduct of
its business.

Section 10. Payroll. Since May 2, 1997 (the "Payroll Switch Date") and
effective for the payroll period ended April 26, 1997, HRI has obtained,
separately from Medaphis, payroll and employment tax administrative services
from one or more vendors selected by HRI and approved by Medaphis. Since the
Payroll Switch Date, HRI has borne all costs relating to payroll services for
its employees and has funded all payroll costs incurred with respect to its
employees. In determining the amount of the account due from Medaphis to HRI
that has been addressed as described in Section 3.1(b), the parties have taken
into account the obligation of HRI to fund all payroll related costs after the
Payroll Switch Date. Without limiting the foregoing, the parties have taken
such steps as they have deemed to be appropriate to cause HRI to have the
benefit of any deposits of payroll or withholding taxes for periods prior to
the Payroll Switch Date, to the extent that, under applicable law and
regulations, HRI will have liability for such taxes.

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<PAGE> 11

Section 11. Purchases of Goods and Services. Prior to the IPO
Effective Date, those vendors specified by Medaphis that have supplied goods or
services to HRI through Medaphis' centralized purchasing program have
been notified that, from and after the Closing Date, all goods and services
ordered by HRI are for the account of HRI and that Medaphis has no obligation
with respect thereto. To the extent deemed appropriate by HRI, on or prior to
the Closing Date HRI shall enter into purchase contracts with such vendors,
under which Medaphis shall have no liability. Any purchases made by HRI prior
to the date of the HRI April 30, 1997 Balance Sheet through Medaphis'
centralized purchasing program were taken into account in the settlement
referred to in Section 3.1(b). Any such purchases made by HRI since such date
shall be paid for by HRI on or prior to the Closing Date, subject to Medaphis'
obligation set forth in Section 3.2.

Section 12. Bank Accounts/Cash Management. Prior to the IPO Effective
Date, HRI has established such bank accounts as it deems to be necessary to
conduct its business (and/or, with the assistance of Medaphis, has amended the
authorizations relating to mutually agreed existing bank accounts so that they
are controlled exclusively by HRI personnel), and all authorizations, standing
wire instructions and the like relating to HRI's participation in Medaphis'
cash management system have been terminated.

Section 13. Employee Benefit Plans. Simultaneously with the execution
of this Agreement, HRI and Medaphis have executed the Agreement Respecting
Employee Benefits Matters attached as Schedule 13, which agreement constitutes
the agreement between HRI and Medaphis with respect to employee benefit aspects
of the Separation.

Section 14. Termination of Agreements. Except for this Agreement and
any Ancillary Agreements, in furtherance of the Separation, HRI and Medaphis
hereby terminate any and all agreements, arrangements, commitments or
understandings, whether or not in writing, between or among HRI, on the one
hand, and Medaphis and/or any member of the Medaphis Group, on the other hand,
effective as of the Closing Date.

Section 15. Mutual Releases; Indemnification.

15.1 Release of Pre-Closing Claims. (a) Except as provided in Section
15.1(c), effective as of the Closing Date, HRI does, for itself and its
successors and assigns, remise, release and forever discharge Medaphis, the
members of the Medaphis Group, their respective Affiliates (other than HRI),
successors and assigns, and all Persons who at any time prior to the Closing
Date have been shareholders, directors, officers, agents or employees of any
member of the Medaphis Group (in each case, in their respective capacities as
such), and their respective heirs, executors, administrators, successors and
assigns, from any and all Liabilities to HRI, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any acts
or

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<PAGE> 12

events occurring or failing to occur or alleged to have occurred or to have
failed to occur or any conditions existing or alleged to have existed on or
before the Closing Date.

(b) Except as provided in Section 15.1(c), effective as of the Closing
Date, Medaphis does, for itself and each other member of the Medaphis Group,
their respective Affiliates (other than HRI), successors and assigns, remise,
release and forever discharge HRI, and all Persons who at any time prior to the
Closing Date have been shareholders, directors, officers, agents or employees
of HRI (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, from any
and all Liabilities to Medaphis or any of the Medaphis Group, whether at law or
in equity (including any right of contribution), whether arising under any
contract or agreement, by operation of law or otherwise, existing or arising
from any acts or events occurring or failing to occur or alleged to have
occurred or to have failed to occur or any conditions existing or alleged to
have existed on or before the Closing Date.

(c) Nothing contained in Section 15.1(a) or (b) shall impair any
obligation under this Agreement or any Ancillary Agreement or any right of any
Person to enforce this Agreement or any Ancillary Agreement.

15.2 Indemnification by HRI. Except as provided in Section 15.4, HRI
shall indemnify, defend and hold harmless Medaphis, each member of the Medaphis
Group and each of their respective directors, officers and employees, and each
of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Medaphis Indemnitees"), from and against any and all
Liabilities of the Medaphis Indemnitees relating to, arising out of or
resulting from any of the following items (without duplication):

(i) the conduct by HRI of its business after the Closing Date;

(ii) the conduct by HRI of its business prior to August 28, 1995;
and

(iii) any breach by HRI of this Agreement or any Ancillary
Agreement;

(iv) Taxes incurred by HRI, or arising with respect to the
business conducted by HRI, during or with respect to any and all
periods ending on or prior to August 28, 1995, or after the Closing
Date.

15.3 Indemnification by Medaphis. Medaphis shall indemnify, defend and
hold harmless HRI, and each of its directors, officers and employees, and each
of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "HRI Indemnitees"), from and against any and all Liabilities
of the HRI Indemnitees relating to, arising out of or resulting from any of the
following items (without duplication):

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<PAGE> 13

(i) the conduct by Medaphis or any member of the Medaphis Group,
of its business at any time;

(ii) any breach by Medaphis or any member of the Medaphis Group of
this Agreement or any Ancillary Agreement; and

(iii) federal income Taxes incurred by, or arising with respect
to the business conducted by, HRI or any member of the Medaphis Group,
and state and local income and other Tax liabilities relating to
Medaphis or any member of the Medaphis Group, during or with respect
to any and all periods ending after August 28, 1995 and on or prior to
the Closing Date.

15.4 Indemnification Obligations Net of Insurance Proceeds and Other
Amounts. The parties intend that any Liability subject to indemnification or
reimbursement pursuant to this Section 15 will be net of Insurance Proceeds.

15.5 Procedures for Indemnification of Third Party Claims. (a) If an
Indemnitee shall receive notice or otherwise learn of the assertion by a Person
of any claim or of the commencement by any such Person of any Action
(collectively, a "Third Party Claim") with respect to which an Indemnifying
Party may be obligated to provide indemnification to such Indemnitee pursuant
to Section 15.2 or 15.3, or any other Section of this Agreement or any
Ancillary Agreement, such Indemnitee shall give such Indemnifying Party written
notice within 20 days after becoming aware of such Third Party Claim. Any such
notice shall describe the Third Party Claim in reasonable detail.
Notwithstanding the foregoing, the failure of any Indemnitee or other Person to
give notice as provided in this Section 15.5(a) shall not relieve the related
Indemnifying Party of its obligations under this Section 15, except to the
extent that such Indemnifying Party is actually prejudiced by such failure to
give notice.

(b) An Indemnifying Party may elect to defend (and to seek to settle
or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after
the receipt of notice from an Indemnitee in accordance with Section 15.5(a) (or
sooner, if the nature of such Third Party Claim so requires), the Indemnifying
Party shall notify the Indemnitee whether the Indemnifying Party will assume
responsibility for defending such Third Party Claim.

(c) If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 15.5(d), such Indemnitee may defend such Third Party
Claim at the cost and expense (including allocated costs of in-house counsel
and other personnel) of the Indemnifying Party.

(d) Unless the Indemnifying Party has failed to assume the defense of
the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim without the consent
of the Indemnifying Party.

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<PAGE> 14

(e) No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.

15.6 Additional Matters. (a) Any claim on account of a Liability that
does not result from a Third Party Claim shall be asserted by written notice
given by the Indemnitee to the related Indemnifying Party. Such Indemnifying
Party shall have a period of 30 days after the receipt of such notice within
which to respond. If such Indemnifying Party does not respond within such
30-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such 30-day period or rejects such claim in whole or in part,
such Indemnitee shall be free to pursue such remedies as may be available to
such party as contemplated by this Agreement and any Ancillary Agreement.

(b) In the event of payment by or on behalf of any Indemnifying Party
to any Indemnitee in connection with any Third Party Claim, such Indemnifying
Party shall be subrogated to and shall stand in the place of such Indemnitee as
to any events or circumstances in respect of which such Indemnitee may have any
right, defense or claim relating to such Third Party Claim against any claimant
or plaintiff asserting such Third Party Claim or against any other person. Such
Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner,
and at the cost and expense (including allocated costs of in-house counsel and
other personnel) of such Indemnifying Party, in prosecuting any subrogated
right, defense or claim.

15.7 Remedies Cumulative. The remedies provided in this Section 15
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.

15.8 Survival of Indemnities. The rights and obligations of each of
Medaphis and HRI and their respective Indemnitees under this Section 15 shall
survive the Closing for a period of three years.

15.9 Certain HRI Directors. Medaphis shall, by a separate agreement,
indemnify those persons who have agreed to become HRI directors upon the
Closing against Liabilities relating to the IPO to the extent customary for
indemnification of directors by issuers relating to initial public offerings.

Section 16. Certain Business Matters. (a) Neither HRI, Medaphis nor
any member of the Medaphis Group shall have any duty to refrain from (i)
engaging in the same or similar activities or lines of business as any other of
such Persons, (ii) doing business with any potential or actual supplier or
customer of any other of such Persons, or (iii) engaging in, or refraining
from, any other activities relating to any of the potential or actual suppliers
or

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<PAGE> 15

customers of any other of such Persons. Until the first anniversary of the
Closing Date, HRI shall not solicit any employee of Medaphis or of any member of
the Medaphis Group to become an employee of HRI, and neither Medaphis nor any
member of the Medaphis Group shall solicit any employee of HRI to become an
employee of Medaphis or of any member of the Medaphis Group.

Section 17. Late Payments. Any amount not paid when due pursuant to
this Agreement or any Ancillary Agreement shall accrue interest at a rate per
annum equal to the Prime Rate plus 1%.

Section 18. Exchange of Information; Confidentiality.

18.1 Exchange of Information. (a) Each of Medaphis and HRI agrees to
provide, or cause to be provided, to each other, at any time after the Closing
Date, as soon as reasonably practicable after written request, any Information
in its possession or under its control that the requesting party reasonably
needs (i) to comply with reporting, disclosure, filing or other requirements
imposed on the requesting party (including under applicable securities or tax
laws) by a Governmental Authority having jurisdiction over the requesting
party, (ii) for use in any other judicial, regulatory, administrative, tax or
other proceeding or in order to satisfy audit, accounting, claims, regulatory,
litigation, tax or other similar requirements, or (iii) to comply with its
obligations under this Agreement or any Ancillary Agreement; provided, however,
that if any party determines that any such provision of Information could be
commercially detrimental, violate any law or agreement, or waive any
attorney-client privilege, the parties shall take all reasonable measures to
permit the compliance with such obligations in a manner that avoids any such
harm or consequence.

(b) Ownership of Information. Any Information that is provided to a
requesting party pursuant to Section 18.1(a) shall be deemed to remain the
property of the providing party. Unless specifically set forth in this
Agreement, nothing contained in this Agreement shall be construed as granting
or conferring rights of license or otherwise in any such Information.

(c) Costs of Providing Information. The party requesting Information
agrees to reimburse the other party for the reasonable costs, if any, of
creating, gathering and copying such Information, to the extent that such costs
are incurred for the benefit of the requesting party.

(d) Record Retention. To facilitate the possible exchange of
Information pursuant to this Section 18 after the Closing Date, the parties
agree to use their reasonable best efforts to retain all Information in their
respective possession or control on the Closing Date in accordance with the
policies of Medaphis as in effect on the Closing Date. No party will destroy,
or permit any of its Subsidiaries to destroy, any Information that the other
party may have the right to obtain pursuant to this Agreement prior to the
third anniversary of the date of this Agreement without first using its
reasonable best efforts to notify the other party of the proposed destruction
and giving the other party the opportunity to take possession of such
Information

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<PAGE> 16

prior to such destruction; provided, however, that in the case of any
Information relating to Taxes or to Environmental Liabilities, such period shall
be extended to the expiration of the applicable statute of limitations (giving
effect to any extensions).

(e) Production of Witnesses; Records; Cooperation. (i) After the
Closing Date, except in the case of an adversarial Action by one party against
another party, each party shall use its reasonable best efforts to make
available to each other party, upon written request, the former, current and
future directors, officers, employees, other personnel and agents of the
members of its respective organization as witnesses and any books, records or
other documents within its control or that it otherwise has the ability to make
available, to the extent that any such person (giving consideration to business
demands of such directors, officers, employees, other personnel and agents) or
books, records or other documents may reasonably be required in connection with
any Action in which the requesting party may from time to time be involved,
regardless of whether such Action is a matter with respect to which
indemnification may be sought under this Agreement. The requesting party shall
bear all costs and expenses (including allocated costs of in-house counsel and
other personnel) in connection with complying with the request.

(ii) If an Indemnifying Party chooses to defend or to
seek to compromise or settle any Third Party Claim, the other
parties shall make available to such Indemnifying Party, upon
written request, the former, current and future directors,
officers, employees, other personnel and agents of the members
of its respective organization as witnesses and any books,
records or other documents within its control or which it
otherwise has the ability to make available, to the extent
that any such person (giving consideration to business demands
of such directors, officers, employees, other personnel and
agents) or books, records or other documents may reasonably be
required in connection with such defense, settlement or
compromise, or such prosecution, evaluation or pursuit, as the
case may be, and shall otherwise cooperate in such defense,
settlement or compromise, or such prosecution, evaluation or
pursuit, as the case may be.

(ii) In connection with any matter contemplated by
this Section 18(e), the parties will enter into a mutually
acceptable joint defense agreement so as to maintain to the
extent practicable any applicable attorney-client privilege or
work product immunity.

Section 19. Confidentiality. (a) Each of Medaphis and HRI agrees to
hold, and to cause its respective directors, officers, employees, agents,
accountants, counsel, other advisors and representatives, and Subsidiaries to
hold, in strict confidence, with at least the same degree of care that applies
to Medaphis' confidential and proprietary information pursuant to policies in
effect as of the Closing Date, all Information concerning the other that is
either in its possession (including Information in its possession prior to the
Closing Date) or furnished by such other or its respective directors, officers,
employees, agents, accountants, counsel and other advisors and

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<PAGE> 17

representatives at any time pursuant to this Agreement, any Ancillary Agreement
or otherwise, and shall not use any such Information other than for such
purposes as shall be expressly permitted by such agreements, except, in each
case, to the extent that such Information has been (i) in the public domain
through no fault of such party or any of its directors, officers, employees,
agents, accountants, counsel and other advisors and representatives, (ii) later
lawfully acquired from other sources by such party, which sources are not
themselves bound by a confidentiality obligation), or (iii) independently
generated without reference to any proprietary or confidential Information of
the other party.

(b) Protective Arrangements. In the event that any party either
determines on the advice of its counsel that it is required to disclose any
Information pursuant to applicable law or receives any demand under lawful
process or from any Governmental Authority to disclose or provide Information
of any other party that is subject to the confidentiality provisions of this
Agreement, such party shall notify the other party prior to disclosing or
providing such Information and shall cooperate at the expense of the requesting
party in seeking any reasonable protective arrangements requested by such other
party. Subject to the foregoing, the Person that received such request may
subsequently disclose or provide Information to the extent required by such law
(as so advised by counsel) or by lawful process or such Governmental Authority.

Section 20. Arbitration; Dispute Resolution.

20.1 Agreement to Arbitrate. The procedures for discussion,
negotiation and arbitration set forth in this Section 20 shall apply to all
disputes, controversies or claims that may arise out of or relate to, or arise
under or in connection with this Agreement or any Ancillary Agreement, or the
transactions contemplated by any such agreement. Each party agrees that the
procedures set forth in this Section 20 shall be the sole and exclusive remedy
in connection with any dispute, controversy or claim relating to any of the
foregoing matters and irrevocably waives any right to commence any Action in or
before any Governmental Authority, except to the extent provided under the
Arbitration Act in the case of judicial review of arbitration results or
awards. Each party irrevocably waives any right to any trial by jury with
respect to any claim, controversy or dispute set forth in the first sentence of
this Section 20.1.

20.2 Escalation. (a) It is the intent of the parties to use their
respective reasonable best efforts to resolve expeditiously any dispute,
controversy or claim between or among them with respect to the matters covered
hereby that may arise from time to time on a mutually acceptable negotiated
basis. In furtherance of the foregoing, any party involved in a dispute,
controversy or claim may deliver a notice (an "Escalation Notice") demanding an
in person meeting involving representatives of the parties at a senior level of
management of the parties (or if the parties agree, of the appropriate
strategic business unit or division within such entity). A copy of any such
Escalation Notice shall be given to the general counsel, or like officer or
official, of each party involved in the dispute, controversy or claim (which
copy shall state that it is an Escalation Notice pursuant to this Agreement) .
Any agenda, location or procedures for such discussions or negotiations between
the parties may be established by the parties from

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<PAGE> 18

time to time; provided, however, that the parties shall use their
reasonable best efforts to meet within 30 days of the Escalation Notice.

(b) The parties may, by mutual consent, retain a mediator to aid the
parties in their discussions and negotiations by informally providing advice to
the parties. Any opinion expressed by the mediator shall be strictly advisory
and shall not be binding on the parties, nor shall any opinion expressed by the
mediator be admissible in any arbitration proceedings. Mediation is not a
prerequisite to a demand for arbitration under Section 20.3.

20.3 Demand for Arbitration. At any time after the first to occur of
(i) the date of the meeting actually held pursuant to the applicable Escalation
Notice or (ii) 45 days after the delivery of an Escalation Notice (as
applicable, the "Arbitration Demand Date"), any party involved in the dispute,
controversy or claim (regardless of whether such party delivered the Escalation
Notice) may make a written demand (the "Arbitration Demand Notice") that the
dispute be resolved by binding arbitration.

20.4 Arbitrators. (a) Within 15 days after a valid Arbitration Demand
Notice is given, the parties involved in the dispute, controversy or referenced
claim shall attempt to select a sole arbitrator satisfactory to all such
parties.

(b) If such parties are not able jointly to select a sole arbitrator
within such 15- day period, such parties shall each appoint an arbitrator (who
need not be disinterested as to the parties or the matter) within 30 days after
delivery of the Arbitration Demand Notice. If one party appoints an arbitrator
within such time period and the other party or parties fail to appoint an
arbitrator within such time period, the arbitrator appointed by the one party
shall be the sole arbitrator of the matter.

(c) If a sole arbitrator is not selected pursuant to paragraph (a) or
(b) above and, instead, two or three arbitrators are selected pursuant to
paragraph (b) above, the two or three arbitrators will, within 30 days after
the appointment of the later of them to be appointed, select an additional
arbitrator who shall act as the sole arbitrator of the dispute. After selection
of such sole arbitrator, the initial arbitrators shall have no further role
with respect to the dispute. In the event that the arbitrators so appointed do
not, within 30 days after the appointment of the later of them to be appointed,
agree on the selection of the sole arbitrator, any party involved in such
dispute may apply to CPR, New York, New York to select the sole arbitrator,
which selection shall be made by such organization within 30 days after such
application. Any arbitrator selected pursuant to this paragraph (c) shall be
disinterested with respect to any of the parties and the matter and shall be
reasonably competent in the applicable subject matter.

(d) The sole arbitrator selected pursuant to paragraph (a), (b) or (c)
above will set a time for the hearing of the matter which will commence no
later than 90 days after the date of appointment cf the sole arbitrator
pursuant to paragraph (a), (b) or (c) above and which hearing will be no longer
than 30 days (unless in the judgment of the arbitrator the matter is

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unusually complex and sophisticated and thereby requires a longer time, in which
event such hearing shall be no longer than 90 days) . The final decision or such
arbitrator will be rendered in writing to the parties not later than 60 days
after the last hearing date, unless otherwise agreed by the parties in writing.

(e) The place of any arbitration will be Atlanta, Georgia, unless
otherwise agreed by the parties.

20.5 Hearings. Within the time period specified in Section 20.4(d),
the matter shall be presented to the arbitrator at a hearing by means of
written submissions of memoranda and verified witness statements, filed
simultaneously, and responses, if necessary in the judgment of the arbitrator
or both the parties. If the arbitrator deems it to be essential to a fair
resolution of the dispute, live cross-examination or direct examination may be
permitted, but is not generally contemplated to be necessary. The arbitrator
shall actively manage the arbitration with a view to achieving a just, speedy
and cost-effective resolution of the dispute, claim or controversy. The
arbitrator may, in his or her discretion, set time and other limits on the
presentation of each party's case, its memoranda or other submissions, and
refuse to receive any proffered evidence, which the arbitrator, in his or her
discretion, finds to be cumulative, unnecessary, irrelevant or of low probative
nature. Except as otherwise set forth herein, any arbitration hereunder will be
conducted in accordance with the CPR Rules for Non-Administered Arbitration of
Business Disputes then prevailing. The decision of the arbitrator will be final
and binding on the parties, and judgment thereon may be had and will be
enforceable in any court having jurisdiction over the parties. Arbitration
awards will bear interest at an annual rate of the Prime Rate plus 1% per
annum. To the extent that the provisions of this Agreement and the prevailing
rules of the CPR conflict, the provisions of this Agreement shall govern.

20.6 Discovery and Certain Other Matters.

(a) The arbitrator shall have full power and authority to set rules
for discovery and to determine issues of arbitrability but shall otherwise be
limited to interpreting or construing the applicable provisions of this
Agreement or any Ancillary Agreement, and will have no authority or power to
limit, expand, alter, amend, modify, revoke or suspend any condition or
provision of this Agreement or any Ancillary Agreement; it being understood,
however, that the arbitrator will have full authority to implement the
provisions of this Agreement or any Ancillary Agreement and to fashion
appropriate remedies for breaches of this Agreement (including interim or
permanent injunctive relief); provided that the arbitrator shall not have (i)
any authority in excess of the authority a court having jurisdiction over the
parties and the controversy or dispute would have absent these arbitration
provisions or (ii) any right or power to award punitive or treble damages. It
is the intention of the parties that in rendering a decision the arbitrator
give effect to the applicable provisions of this Agreement and the Ancillary
Agreements and follow applicable law (it being understood and agreed that this
sentence shall not give rise to a right of judicial review of the arbitrator's
award).

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<PAGE> 20

(b) If a party fails or refuses to appear at and participate in an
arbitration hearing after due notice, the arbitrator may hear and determine the
controversy upon evidence produced by the appearing party.

(c) Arbitration costs will be borne equally by each party involved in
the matter, except that each party will be responsible for its own attorney's
fees and other costs and expenses, including the costs of witnesses selected by
such party.

(d) Judgment upon any arbitration award may be entered in any court
having jurisdiction.

(e) Prior to the time at which an arbitrator is appointed, any party
may seek one or more temporary restraining orders in a court of competent
jurisdiction if necessary in order to preserve and protect the status quo.
Neither the request for, or grant or denial cf, any such temporary restraining
order shall be deemed a waiver of the obligation to arbitrate as set forth in
this Agreement and the arbitrator may dissolve, continue or modify any such
order. Any such temporary restraining order shall remain in effect until the
first to occur of the expiration of the order in accordance with its terms or
the dissolution of the order by the arbitrator.

20.7 Law Governing Arbitration Procedures. The interpretation of the
provisions of this Section, only insofar as they relate to the agreement to
arbitrate and any related procedures, shall be governed by the Arbitration Act
and other applicable federal law. In all other respects, the interpretation of
this Agreement shall be governed as set forth in Section 22.2.

Section 21. Further Assurances. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto shall use its reasonable best efforts, prior to, on and after the
Closing Date, to take, or cause to be taken, all actions, and to do, or cause
to be done, all things, reasonably necessary, proper or advisable under
applicable laws, regulations and agreements to consummate and make effective
the transactions contemplated by this Agreement and the Ancillary Agreements.

Section 22. Miscellaneous.

22.1 Counterparts; Entire Agreement. (a) This Agreement and each
Ancillary Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement, and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party.

(b) This Agreement any Ancillary Agreements and the Schedules hereto
and thereto contain the entire agreement between the parties with respect to
the subject matter hereof, supersede all previous agreements, negotiations,
discussions, writings, understandings, commitments and conversations with
respect to such subject matter and there are no agreements or understandings
between the parties other than those set forth or referred to herein or
therein.

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22.2 Governing Law. Except as set forth in Section 20.7, this
Agreement and each Ancillary Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of Georgia (other than as
to its laws of arbitration which shall be governed under the Arbitration Act or
other applicable federal law pursuant to Section 20.7), irrespective of the
choice of laws principles of the State of Georgia, as to all matters, including
matters of validity, construction, effect, enforceability, performance and
remedies.

22.3 Assignability. This Agreement and each Ancillary Agreement shall
be binding upon and inure to the benefit of the parties to such agreements,
respectively, and their respective successors and assigns; provided, however,
that no party may assign its respective rights or delegate its respective
obligations under this Agreement or any Ancillary Agreement without the express
prior written consent of the other parties.

22.4 Third Party Beneficiaries. Except for the indemnification rights
under this Agreement of any Medaphis Indemnitee or HRI Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement and each
Ancillary Agreement are solely for the benefit of the parties and are not
intended to confer upon any Person except the parties any rights or remedies
under this Agreement, and (b) there are no third party beneficiaries of this
Agreement or any Ancillary Agreement and neither this Agreement nor any
Ancillary Agreement shall provide any third person with any remedy, claim,
liability, reimbursement, claim of action or other right in excess of those
existing without reference to this Agreement or any Ancillary Agreement.

22.5 Notices. All notices or other communications under this Agreement
or any Ancillary Agreement shall be in writing and shall be deemed to be duly
given when (a) delivered in person or (b) deposited in the United States mail
or private express mail, postage prepaid, addressed as follows:

If to Medaphis, to: Secretary
Medaphis Corporation
2840 Mt. Wilkinson Parkway
Suite 300
Atlanta, Georgia 30339

If to HRI, to: Secretary
Healthcare Recoveries, Inc.
1400 Watterson Tower
Louisville, Kentucky 40218

Any party may, by notice to the other party, change the address to which such
notices are to be given.

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22.6 Severability. If any provision of this Agreement or any Ancillary
Agreement or its application to any Person or circumstance is determined by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions of such agreement, or the application of such provision to
Persons or circumstances or in jurisdictions other than those as to which it
has been held invalid or unenforceable, shall remain in full force and effect
and shall in no way be affected, impaired or invalidated, so long as the
economic or legal substance of the transactions contemplated by such agreement,
as the case may be, is not affected in any manner adverse to any party. Upon
such determination, the parties shall negotiate in good faith in an effort to
agree upon such a suitable and equitable provision to effect the original
intent of the parties.

22.7 Force Majeure. No party shall be deemed in default of this
Agreement or any Ancillary Agreement to the extent that any delay or failure in
the performance of its obligations under this Agreement or any Ancillary
Agreement results from any cause beyond its reasonable control and without its
fault or negligence, such as acts of God, acts of civil or military authority,
embargoes, epidemics, war, riots, insurrections, fires, explosions,
earthquakes, floods, unusually severe weather conditions, labor problems or
unavailability of parts, or, in the case of computer systems, any failure in
electrical or air conditioning equipment. In the event of any such excused
delay, the time for performance shall be extended for a period equal to the
time lost by reason of the delay.

22.8 Publicity; Expenses. Prior to the Closing Date, each of HRI and
Medaphis shall consult with each other prior to issuing any press releases or
otherwise making public statements with respect to the IPO, the Separation or
any of the other transactions contemplated hereby. Certain expenses incurred in
connection with the implementation of the IPO and the Separation, as set forth
on Schedule 22.8, shall be for the account of HRI. Except as otherwise
expressly provided for in this Agreement, all other expenses incurred in
connection with the IPO and the Separation shall be for the account of
Medaphis.

22.9 Waivers of Default. Waiver by any party of any default by the
other party of any provision of this Agreement or any Ancillary Agreement shall
not be deemed a waiver by the waiving party of any subsequent or other default,
nor shall it prejudice the rights of the other party.

22.10 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement or any Ancillary Agreement, the party or parties who are or are to be
aggrieved shall have the right to specific performance and injunctive or other
equitable relief of its rights under this Agreement or such Ancillary
Agreement, in addition to any and all other rights and remedies at law or in
equity, and all such rights and remedies shall be cumulative. The parties agree
that the remedies at law for any breach or threatened breach, including
monetary damages, are inadequate compensation for any loss and that any defense
in any action for specific performance that a remedy at law would be

- 21 -

<PAGE> 23

adequate is waived. Any requirements for the securing or posting of any bond
with such remedy are waived.

22.11 Amendments. No provision of this Agreement or any Ancillary
Agreement shall be deemed waived, amended, supplemented or modified by any
party, unless such waiver, amendment, supplement or modification is in writing
and signed by the authorized representative of the party against whom it is
sought to enforce such waiver, amendment, supplement or modification.

IN WITNESS WHEREOF, the parties have caused this Separation Agreement
to be executed by their duly authorized representatives.

MEDAPHIS CORPORATION

By:
----------------------------
Name:
-----------------------
Title:
----------------------

- 22 -

<PAGE> 24

HEALTHCARE RECOVERIES, INC.

By:
----------------------------
Name:
-----------------------
Title:
----------------------

- 23 -

<PAGE> 25

SCHEDULE 1(A)

See attached copy of the HRI Audited Balance Sheet

<PAGE> 26

SCHEDULE 3.1

See attached copy of the HRI _____________, 1997 Balance Sheet

<PAGE> 27

SCHEDULE 5.1

New HRI Insurance Policies:

Policy Date Bound
------ ----------

<PAGE> 28

SCHEDULE 5.2

Medaphis Blanket Polices:

Extended Discovery Period Coverages Purchased by HRI:

<PAGE> 29

SCHEDULE 5.4

HRI's workers' compensation coverage:

<PAGE> 30

SCHEDULE 7

Pittsburgh telephone assets:

<PAGE> 31

SCHEDULE 8

Liens and Guaranties to be Released:

<PAGE> 32

SCHEDULE 22.8

Certain IPO and Separation expenses allocated to HRI:

<PAGE> 1

EXHIBIT 10.4

DIVESTITURE BONUS AGREEMENT

THIS DIVESTITURE BONUS AGREEMENT (the "Agreement") is made and entered
into as of this __ day of April, 1997, by and between MEDAPHIS CORPORATION, a
Delaware corporation ("Medaphis"), and the individuals whose names appear under
the caption "Grantees" on the signature page of this Agreement ("Grantees").

W I T N E S S E T H

WHEREAS, Healthcare Recoveries, Inc. ("HRI") is a wholly owned
subsidiary of Medaphis;

WHEREAS, Medaphis has determined that it is appropriate and desirable
for Medaphis to divest itself of its ownership of Healthcare Recoveries, Inc.
("HRI") and may sell for its account, in an underwritten initial public
offering ("IPO"), 100% of the shares (the "Offered Shares") of Common Stock of
HRI owned by Medaphis; and

WHEREAS, HRI has determined that, in the event of an IPO, it is
appropriate and desirable to grant a bonus equal to 2% of the shares (the
"Bonus Shares") of Common Stock of HRI to certain members of the HRI management
team, to be issued immediately following the closing of the IPO;

NOW, THEREFORE, in consideration of the promises and the mutual
covenants and agreements set forth in the Agreement, the parties agree as
follows:

SECTION 1. GRANT OF SHARES.

1.1. TRANSFER. Upon the successful completion of the IPO, as
determined under Section 1.2, Medaphis shall promptly transfer to each of the
persons listed below that percentage of the Bonus Shares (adjusted for stock
splits and capital adjustments) listed next to such person, as provided below:

<TABLE>
<CAPTION>
Grantee Percentage Grant
------- ----------------
<S> <C>
Patrick B. McGinnis 40%
Kathleen K. Harreld 18%
Dennis K. Burge 10%
Douglas R. Sharps 10%
Bobby T. Tokuuke 7.5%
Debra M. Murphy 7.5%
Others 7%

</TABLE>
<PAGE> 2

The 7% of the Bonus Shares granted to "Others" shall be granted, as
determined by Patrick B. McGinnis in his sole discretion, to any employee or
employees of HRI, excluding Mr. McGinnis.

1.2. COMPLETION OF IPO. The IPO shall be deemed to be completed for
purposes of Section 1.1, upon the receipt of the proceeds of the sale of the
Offered Shares by Medaphis.

1.3. TAXES. Simultaneously with the issuance of the Bonus Shares,
the individuals set forth in Section 1.1 shall pay to Medaphis amounts Medaphis
determines to be required for income and other tax withholding under federal
and state tax law.

1.4. TERM. The term of this Agreement shall be for a period of six
months commencing on the date of this Agreement and expiring on the six month
anniversary of that date. If the IPO is not completed on or before the end of
the term, then Medaphis shall have no obligation to issue the Bonus Shares.

1.5. EMPLOYMENT. No Bonus Shares shall be issuable to a Grantee
unless the Grantee is an employee of HRI on the date of the completion of the
IPO, except that (i) this Section 1.5 shall not apply to Kathleen K. Harreld,
and (ii) this Section shall not apply if a Grantee's employment with HRI has
been terminated by HRI without cause prior to the date of completion of the
IPO.

1.6. MEDAPHIS DISCRETION. Grantees acknowledge and understand that
Medaphis has the discretionary authority to decide for any reason or reasons
not to complete the IPO and that in such event the Bonus Shares would not be
issuable to Grantees.

1.7. RESTRICTIONS ON SHARES. Grantees acknowledge and understand
that the Bonus Shares are not registered and may not be sold except in reliance
on Rule 144 under the Securities Act of 1933, as amended. Each Grantee shall
enter into a lockup agreement for up to 180 days from the closing of the IPO,
in form and substance satisfactory to Bear, Stearns & Co., Inc. No Grantee may
sell more than one-half of the Bonus Shares granted to such Grantee until the
expiration of one year from the closing of the IPO. Such shares may bear an
appropriate restrictive legend, which shall be removed upon written request
accompanied by an opinion of counsel acceptable to HRI stating that such legend
may be removed in conformity with applicable law.

SECTION 2. MISCELLANEOUS.

2.1. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Georgia, without regard
to Georgia's conflict of law rules.

2
<PAGE> 3

2.2. BINDING EFFECT. This Agreement shall be binding upon the
parties and their respective heirs, representatives, successors, transferees
and permitted assigns. No assignment by any party is permitted without the
written consent of all other parties.

2.3. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

2.4. ENTIRE AGREEMENT. This Agreement is intended by the parties
hereto to be their complete agreement with respect to the subject matter of
this Agreement, and this Agreement supersedes any prior agreements or
understandings (oral or written) with respect to the subject matter between the
parties hereto.

3
<PAGE> 4

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.

MEDAPHIS CORPORATION

By:
------------------------------------------
Name:
------------------------------
Title:
------------------------------

GRANTEES

Signature:
-----------------------------------
Patrick B. McGinnis

Signature:
-----------------------------------
Kathleen K. Harreld

Signature:
-----------------------------------
Dennis K. Burge

Signature:
-----------------------------------
Douglas R. Sharps

Signature:
-----------------------------------
Bobby K. Tokuuke

Signature:
-----------------------------------
Debra M. Murphy

<PAGE> 1

EXHIBIT 10.5

HEALTHCARE RECOVERIES, INC.

SUPPLEMENTAL RETIREMENT SAVINGS PLAN

EFFECTIVE DATE

MAY __, 1997
<PAGE> 2

HEALTHCARE RECOVERIES, INC
SUPPLEMENTAL RETIREMENT SAVINGS PLAN

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page #
<S> <C> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.1 BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2 BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.3 BOOKKEEPING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.4 CODE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.5 COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.6 COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.7 COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.8 DEFERRAL ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.9 DEFERRAL AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.10 DEFERRALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.11 EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.12 EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.13 EMPLOYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.14 ENTRY DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.15 FORMER PARTICIPANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.16 HIGHLY COMPENSATED EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.17 INTEREST CREDITING FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.18 MATCHING CONTRIBUTION ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.19 MATCHING CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.20 PARTICIPANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.21 PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.22 PLAN YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.23 QUALIFIED PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.24 SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.25 VALUATION DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.26 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.1 ELIGIBILITY REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.2 PLAN BINDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.3 BENEFICIARY DESIGNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>

i
<PAGE> 3

<TABLE>
<S> <C>
CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.1 DEFERRALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.2 MATCHING CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ALLOCATIONS TO BOOKKEEPING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.1 BOOKKEEPING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.2 CREDITING OF INTEREST TO BOOKKEEPING ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.3 COMMITTEE JUDGMENT CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.1 AMOUNT OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.2 DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.3 BENEFITS TO MINORS AND INCOMPETENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.1 EMPLOYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.2 COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.3 CLAIMS PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.4 RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 6.5 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

AMENDMENT AND TERMINATION OF THIS PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.1 AMENDMENT OF THIS PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 7.2 TERMINATION OF THIS PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.1 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.2 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.3 PARTICIPANT'S RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.4 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.5 ADMINISTRATIVE EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.6 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>

ii
<PAGE> 4

INTRODUCTION

The Board of Directors of Healthcare Recoveries, Inc. ("Sponsoring
Employer") adopted the Healthcare Recoveries, Inc. Retirement Savings Plan
("Qualified Plan"), in order to provide benefits for certain of its eligible
employees.

The Board of Directors of the Sponsoring Employer adopted the
Healthcare Recoveries, Inc. Supplemental Retirement Savings Plan ("Plan"), in
order to provide additional, supplemental benefits for certain of its eligible
employees who are members of a select group of management or highly compensated
employees as defined under Department of Labor regulations and pronouncements,
and to allow those eligible employees to defer receipt, on a pre-tax basis, of
a portion of their Plan Year Compensation.
<PAGE> 5

ARTICLE 1

DEFINITIONS

Section 1.1 BENEFICIARY means any person designated by a
Participant to receive such benefits as may become
payable hereunder after the death of such
Participant.

Section 1.2 BOARD means the Board of Directors of the Employer.

Section 1.3 BOOKKEEPING ACCOUNT means the detailed record kept of
Deferrals (including Supplemental contributions made
in accordance with Section 3.1), Matching
Contributions and interest credited or charged to
each Participant in accordance with the terms hereof.

Section 1.4 CODE means the Internal Revenue Code of 1986, as
amended and revised.

Section 1.5 COMMITTEE means the Compensation Committee of the
Board.

Section 1.6 COMPANY means Healthcare Recoveries, Inc. and all of
the legal entities which are part of a controlled
group or affiliated service group with Healthcare
Recoveries, Inc., pursuant to the provisions of Code
Sections 414(b), (c), (m), or (o).

Section 1.7 COMPENSATION means, for any Plan Year, compensation
as defined in Article 1 of the Qualified Plan without
regard to the limitations under Code Section
401(a)(17).

Section 1.8 DEFERRAL ACCOUNT means that portion of a
Participant's Bookkeeping Account attributable to (i)
Deferrals made on his behalf pursuant to Section 3.1
and (ii) the Participant's proportionate share,
attributable to his Deferral Account, of the interest
on the Deferrals credited to his Bookkeeping Account.

Section 1.9 DEFERRAL AGREEMENT means an agreement, on such form
as the Employer or the Committee shall determine,
entered into by a Participant whereby the Participant
agrees to defer receipt of compensation pursuant
Section 3.1

Section 1.10 DEFERRALS means the portion of a Participant's
Compensation deferred under the Plan pursuant to
Section 3.1.

Section 1.11 EFFECTIVE DATE means April __, 1997.

Section 1.12 EMPLOYEE means any Highly Compensated Employee
employed by the Employer who is eligible to
participate under the Qualified Plan and who

-2-
<PAGE> 6

is a member of a select group of management or highly
compensated employees as defined under Department of
Labor regulations and pronouncements.

Section 1.13 EMPLOYER means Healthcare Recoveries, Inc. and each
of the legal entities, or any successor thereto that
is a part of the Company and that has adopted this
Plan for its eligible Employees with the consent of
the Sponsoring Employer. The adopting Employers
shall be shown on Appendix "A" attached hereto and
made a part of this document and may also be referred
to as "Participating Employers." The Sponsoring
Employer shall be Healthcare Recoveries, Inc.

Section 1.14 ENTRY DATE means the entry date as defined in Article
1 of the Qualified Plan. Notwithstanding the
foregoing, former participants of the Medaphis
Executive Deferred Compensation Plan who receive a
distribution from the Medaphis Executive Deferred
Compensation Plan as a result of any such former
participant's termination of employment with Medaphis
Corporation or a Medaphis affiliate shall be eligible
to participate in the Plan immediately upon their
commencing employment with the Company and shall have
an entry date coinciding with the date such employees
commence employment with the Company.

Section 1.15 FORMER PARTICIPANT means a Participant whose
participation in this Plan has terminated but who has
not received payment in full of the balance in his
Bookkeeping Account to which he is entitled.

Section 1.16 HIGHLY COMPENSATED EMPLOYEES means highly compensated
employees as defined in Article 1 of the Qualified
Plan

Section 1.17 INTEREST CREDITING FUNDS means the funds specified in
Section 4.2 for purposes of determining the interest
to be credited to the Participant's Bookkeeping
Account.

Section 1.18 MATCHING CONTRIBUTION ACCOUNT means that portion of a
Participant's Bookkeeping Account attributable to (i)
Matching Contributions credited to such Participant
pursuant to Section 3.2 and (ii) the Participant's
proportionate share, attributable to his Matching
Contribution Account, of the interest on the Matching
Contributions credited to his Bookkeeping Account.

Section 1.19 MATCHING CONTRIBUTIONS means contributions credited
to the Participant's Bookkeeping Account by the
Employer pursuant to Section 3.2.

Section 1.20 PARTICIPANT means any Employee who becomes a
participant as provided in Article 2 hereof.

-3-
<PAGE> 7

Section 1.21 PLAN means the Healthcare Recoveries, Inc.
Supplemental Retirement Savings Plan.

Section 1.22 PLAN YEAR means the Plan Year as defined under
Article 1 of the Qualified Plan.

Section 1.23 QUALIFIED PLAN means the Healthcare Recoveries, Inc.
Retirement Savings Plan.

Section 1.24 SERVICE means service as that term is defined under
the Article 1 of the Qualified Plan.

Section 1.25 VALUATION DATE means the valuation date as defined
under Article 1 of the Qualified Plan.

Section 1.26 CONSTRUCTION. Capitalized words and phrases used in
this Plan shall have the meanings specified in this
Article, unless a different meaning is clearly
required by the context. Any words herein used in
the masculine shall be read and construed in the
feminine where they would so apply. Words in the
singular shall be read and construed as though used
in the plural in all cases where they would so apply.

-4-
<PAGE> 8

ARTICLE 2

PARTICIPATION

Section 2.1 ELIGIBILITY REQUIREMENTS

Each Employee shall be eligible to participate upon
recommendation by the President of the Sponsoring
Employer and approval by the Committee. The Employees
shall begin participation on such date as the
President of the Sponsoring Employer, with approval
of the Committee, shall determine. Notwithstanding
the foregoing, Employees, as of the Effective Date,
who are former participants of the Medaphis Executive
Deferred Compensation Plan who receive a distribution
from the Medaphis Executive Deferred Compensation
Plan as a result of any such former participant's
termination of employment with Medaphis Corporation
or a Medaphis affiliate shall be eligible to
participate in the Plan immediately upon their
commencing employment with the Company.

Section 2.2 PLAN BINDING

Upon becoming a Participant, a Participant shall be
bound then and thereafter by the terms of this Plan,
including all amendments to this Plan made in the
manner herein authorized.

Section 2.3 BENEFICIARY DESIGNATION

Upon commencing participation, each Participant shall
designate a Beneficiary on forms furnished by the
Committee. Such Participant may then from time to
time change his Beneficiary designation by written
notice to the Committee and, upon such change, the
rights of all previously designated Beneficiaries to
receive any benefits under this Plan shall cease. If,
at the time of a Participant's death while benefits
are still outstanding, his named Beneficiary does not
survive him, the benefits shall be paid to his named
contingent Beneficiary. If a deceased Participant is
not survived by either a named Beneficiary or
contingent Beneficiary (or if no Beneficiary was
effectively named), the benefits shall be paid in a
single sum to the person or persons, in equal shares,
in the first of the following classes of successive
preference beneficiaries then surviving: the
Participant's (i) surviving spouse, (ii) children,
(iii) parents, (iv) brothers and sisters, (v)
executors and administrators. If the Beneficiary or
contingent Beneficiary is living at the death of the
Participant, but such person dies prior to receiving
the entire death benefit, the remaining portion of
such death benefits shall be paid in a single sum to
the estate of such deceased Beneficiary or contingent
Beneficiary.

-5-
<PAGE> 9

ARTICLE 3

CONTRIBUTIONS

Section 3.1 DEFERRALS

Each Employee who satisfies the requirements of
Section 2.1 and who has made the maximium salary
deferral election for the Plan Year under the
Qualified Plan may elect, in accordance with Section
3.1(a)(1), to have a portion of his Compensation
deferred, commencing on the date specified in Section
2.1. Such election shall be made by entering into a
Deferral Agreement with the Employer in which it is
agreed that the Employer will defer a portion of the
Participant's Compensation. The amount of said
Deferral and any interest credited thereto pursuant
to the terms of this Plan shall remain the property
of the Sponsoring Employer until paid to the
Participant pursuant to the terms hereof. In order to
make a Supplemental Contribution under Section
3.1(a)(2), an Employee need not make the maximum
salary deferral election for the Plan Year under the
Qualified Plan.

(a) DEFERRALS.

(1) Each Participant shall, pursuant to
a Deferral Agreement, defer a portion of the
Participant's Compensation during the Plan
Year, in an amount equal to an integral
percentage ranging from one percent (1%) to
sixteen percent (16%) of such Compensation.
The amount of deferrals shall be credited to
the Participant's Bookkeeping Account. For
any Plan Year, the maximum amount of
Deferrals pursuant to this Section shall be
reduced by the maximum pre-tax deferral that
the Participant could make under the
Qualified Plan for the Plan Year.

(2) Notwithstanding the foregoing, a
Participant who received a distribution from
the Medaphis Executive Deferred Compensation
Plan (the "Medaphis Plan") as a result of
such Participant's termination of employment
with Medaphis Corporation ("Medaphis") or a
Medaphis affiliate shall be entitled to make
supplemental contributions (the "Supplemental
Contributions") to the Plan for the Plan Year
ending December 31, 1997. Each Participant
entitled to make a Supplemental Contribution
may increase their election under a Deferral
Agreement so that in addition to the amount
that the Participant may otherwise defer to
the Plan during the Plan Year ending December
31, 1997, such Participant may defer an
additional amount under the Plan equal to

-6-
<PAGE> 10

the amount of the distribution such
Participant received from the Medaphis Plan.

(b) SUBMISSION OF FORM. In order for Deferrals to
commence on the appropriate date (the beginning of a
payroll period), the Deferral Agreement must be
received by the Committee at least fifteen (15) days
prior to the date Deferrals are to start. In the
event a Participant does not elect to have Deferrals
made on his behalf when initially eligible, he may
subsequently elect to have Deferrals made on his
behalf commencing with the Entry Date which is at
least fifteen (15) days after his election form is
delivered to the Committee. The Deferral Agreement
shall be on a form provided by the Committee. Such
agreement shall authorize the Employer to defer
Compensation otherwise payable to the Participant
during each pay period by the amount of Deferrals
elected.

(c) CHANGE IN DEFERRAL AMOUNTS. A Participant electing to
have Deferrals made on his behalf to this Plan
pursuant to this Section, may, on a Deferral
Agreement provided by and submitted to the Committee,
increase or decrease his Deferrals (within the
appropriate minimum and maximum) as of the Entry Date
which is at least fifteen (15) days after the date
his election form is received by the Committee, but
not retroactively. The Deferral Agreement shall
state the amount of Deferrals he desires to have
made.

(d) CESSATION OF DEFERRALS. Any Participant may elect to
cease future referrals to this Plan effective with
the first regular payroll period that is
administratively possible to do so following written
notification to the Committee. In the event any such
Participant desires thereafter to recommence having
Deferrals made on his behalf, he shall be allowed to
do so effective with any Entry Date which is at least
fifteen (15) days after receipt of written notice by
the Committee on the appropriate form stating the
amount of Deferrals he desires to have made.

(e) NOTICE REQUIREMENTS. Any of the notice requirements
in this Section may be lengthened or shortened by the
Committee if it finds it administratively necessary
or feasible to do so.

Section 3.2 MATCHING CONTRIBUTIONS

Each Plan Year, the Employer shall credit the
Participant's Bookkeeping Account with a Matching
Contribution. The Matching Contribution will be
determined based on the following formula:

(a) determine the amount of matching contribution
which would have been made under the Qualified Plan
if (i) the amount of salary deferrals contributed by
the Participant to the Plan pursuant to Plan Section
3.1(a)

-7-
<PAGE> 11

for the Plan Year (but excluding any Supplemental
Contributions) were made to the Qualified Plan (and
for this purpose considering any salary deferral
contributions actually made by the Participant to the
Qualified Plan for the Plan Year), (ii) the Qualified
Plan did not contain any provisions restricting
salary deferral contribution of "highly compensated
employees" which do not apply equally to employees
who are not "highly compensated employees" and any
restrictions required by Code Sections 401(a)(17),
401(1c), 401(m), 402(g), 415 and other limitations
under the Code did not apply; and

(b) reduce the amount determined under
Subsection (a) by matching contributions actually
made under the Qualified Plan for this Plan Year.

-8-
<PAGE> 12

ARTICLE 4

ALLOCATIONS TO BOOKKEEPING ACCOUNTS

Section 4.1 BOOKKEEPING ACCOUNTS

The Committee shall establish and maintain a
Bookkeeping Account in the name of each Participant
to which the Committee shall credit Deferrals and
Matching Contributions to be credited to each such
Participant pursuant to Article 3 and the following
Sections of this Article.

Section 4.2 CREDITING OF INTEREST TO BOOKKEEPING ACCOUNT

(a) The Interest Crediting Funds shall be:

(1) the investment funds under the Qualified
Plan, and

(2) such other funds as the Participant shall
select, with approval of the Committee.

(b) As of each Valuation Date, the Committee shall credit
the Participant's Bookkeeping Account with interest.
The amount of interest credited (or deducted in the
case of a loss by the Interest Crediting Fund) shall
equal the interest, dividends, increase or decrease
in market value and other earnings or losses that
would have been credited to the Participant's
Deferral Account if the percentage selected by the
Participant had actually been invested in the
Interest Crediting Fund for such time as elected by
the Participant. The direction given for current
Deferrals and the cumulative balance in the Deferral
Account portion of his Bookkeeping Account must be
the same. For purposes of calculating interest on the
Matching Contribution Account portion of the
Participant's Bookkeeping Account, his Matching
Contribution Account shall be deemed to be invested
in common stock of the Sponsoring Employer.

(c) A Participant who does not make any election under
this Section shall have the interest credited to the
Deferral Account portion of his bookkeeping Account
calculated based on the return generated by the fund
available for investment under the Qualified Plan as
the Committee in its sole discretion determines best
preserves an investor's principal.

Section 4.3 COMMITTEE JUDGMENT CONTROLS

In determining the fair market value of the
Participant's Bookkeeping Account, the Committee
shall exercise their best judgment, and all such

-9-
<PAGE> 13

determinations of value (in the absence of bad faith)
shall be binding upon all Participants and their
Beneficiaries.

-10-
<PAGE> 14

ARTICLE 5

DISTRIBUTIONS

Section 5.1 AMOUNT OF DISTRIBUTION

(a) Upon termination of employment for any reason (normal
retirement, late retirement, disability retirement,
as defined under the Qualified Plan, or death), a
Participant shall be entitled to a benefit equal to
the vested portion (as determined in this Section) of
the balance of his Bookkeeping Account, as of the
Valuation Date coincident with or immediately
preceding such termination of employment, plus any
Deferrals made by or on behalf of the Participant
since such Valuation Date, plus any Matching
Contributions to which the Participant becomes
entitled to since such Valuation Date.

(b) A Participant shall always be one hundred percent
(100%) vested in the balance of his Bookkeeping
Account attributable to Deferrals, including interest
credited thereon.

(c) A Participant shall be vested in the balance
attributable to his Matching Contribution Account,
including interest credited thereon, based on years
of Service as of his date of termination, in
accordance with the following schedule:

<TABLE>
<CAPTION>
Years of Service Vested Percentage
---------------- -----------------
<S> <C>
Less than 5 years 0%
5 years or more 100%
</TABLE>

Section 5.2 DISTRIBUTION OF BENEFITS

(a) Payment of Benefits. Benefits to be paid under this
Article (other than benefits payable as a result of a
Participant's death) shall be paid in the accordance
with the form and timing of benefits selected by the
Participant in such manner and on such forms as the
Committee shall direct from time to time. The
election relating to the form and timing of the
payment of benefits may be modified by the
Participant at any time, effective as of the date
that is twelve (12) months after the Committee (or
the Committee's authorized representative) processes
the modification pursuant to normal administrative
procedures.

(b) Death Distributions. Upon the death of a Participant
who dies prior to the date on which he is entitled to
the commencement of payments of the

-11-
<PAGE> 15

Participant's Bookkeeping Account, the Participant's
Beneficiary shall be entitled to the full value of
the Participant's Bookkeeping Account in a lump sum
in cash. Upon the death of a Participant who is no
longer an Employee, but prior to the complete payment
of his Bookkeeping Account, the Participant's
Beneficiary shall be entitled to receive the entire
unpaid vested portion of the Participant's
Bookkeeping Account in a lump sum in cash.

Section 5.3 BENEFITS TO MINORS AND INCOMPETENTS

(a) In case any person entitled to receive payment under
this Plan shall be a minor, the Committee, in its
discretion, may dispose of such amount in any one or
more of the ways specified in items (1) through (3)
of this Subsection.

(1) By payment thereof directly to such minor;

(2) By application thereof for benefit of such
minor;

(3) By payment thereof to either parent of such
minor or the legal guardian of the minor,
provided only that the parent or legal
guardian to whom any amount shall be paid
shall have advised the Committee in writing
that he will hold or use such amount for the
benefit of such minor.

(b) In the event that it shall be found that a person
entitled to receive payment under this Plan is
physically or mentally incapable of personally
receiving and giving a valid receipt for any payment
due (unless prior claim therefor shall have been made
by a duly qualified committee or other legal
representative), such payment may be made to the
spouse, son, daughter, parent, brother, sister or
other person deemed by the Committee to have incurred
expense for such person otherwise entitled to
payment.

-12-
<PAGE> 16

ARTICLE 6

ADMINISTRATION

Section 6.1 EMPLOYER

The Sponsoring Employer established and maintains
this Plan for the benefit of its Employees and for
Employees of Participating Employers and of necessity
retains control of the operation and administration
of this Plan. The Sponsoring Employer, in accordance
with specific provisions of this Plan, has as herein
indicated, delegated certain of these rights and
obligations to the Committee and which shall be
solely responsible for these, and only these,
delegated rights and obligations.

The Employer shall supply such full and timely
information for all matters relating to this Plan as
the Committee may require for the effective discharge
of their respective duties.

Section 6.2 COMMITTEE

(a) In accordance with the provisions hereof, the
Committee has been delegated certain administrative
functions relating to this Plan with all powers
necessary to enable it properly to carry out such
duties. The Committee shall have no power in any way
to modify, alter, add to or subtract from, any
provisions of this Plan. The Committee shall have the
power and authority in its sole, absolute and
uncontrolled discretion to control and manage the
operation and administration of this Plan and shall
have all powers necessary to accomplish these
purposes. The responsibility and authority of the
Committee shall include, but shall not be limited to,
(i) determining all questions relating to the
eligibility of employees to participate; (ii)
determining the amount and kind of benefits payable
to any Participant, spouse or Beneficiary; (iii)
establishing and reducing to writing and distributing
to any Participant or Beneficiary a claims procedure
and administering that procedure, including the
processing and determination of all appeals
thereunder; and (iv) interpreting the provisions of
this Plan including the publication of rules for the
regulation of this Plan as in its sole, absolute and
uncontrolled discretion are deemed necessary or
advisable and which are not inconsistent with the
express terms hereof, the Code or the Employee
Retirement Income Security Act of 1974, as amended.
All disbursements shall be made upon, and in
accordance with, the direction of the Committee. When
the Committee is required in the performance of its
duties hereunder to administer or construe, or to
reach a determination, under any of the provisions of
this Plan, it shall do so on a uniform, equitable and
nondiscriminatory basis.

-13-
<PAGE> 17

(b) The Committee shall establish rules and procedures to
be followed by the Participants, Former Participants
and Beneficiaries in filing applications for benefits
and for furnishing and verifying proofs necessary to
establish age, Service, and any other matters
required in order to establish their rights to
benefits in accordance with this Plan. Additionally,
the Committee shall establish accounting procedures
for the purpose of making the allocations, valuations
and adjustments to Participants' accounts. Should the
Committee determine that the strict application of
its accounting procedures will not result in an
equitable and nondiscriminatory allocation among the
accounts of Participants, it may modify its
procedures for the purpose of achieving an equitable
and non-discriminatory allocation in accordance with
the general concepts of this Plan.

Section 6.3 CLAIMS PROCEDURES

(a) The Committee shall receive all applications for
benefits. Upon receipt by the Committee of such an
application, it shall determine all facts which are
necessary to establish the right of an applicant to
benefits under the provisions of this Plan and the
amount thereof as herein provided. Upon request, the
Committee will afford the applicant the right of a
hearing with respect to any finding of fact or
determination. The applicant shall be notified in
writing of any adverse decision with respect to his
claim within ninety (90) days after its submission.
The notice shall be written in a manner calculated to
be understood by the applicant and shall include the
items specified in items (1) through (4) of this
Subsection.

(1) The specific reason or reasons for the
denial;

(2) Specific references to the pertinent Plan
provisions on which the denial is based;

(3) A description of any additional material or
information necessary for the applicant to
perfect the claim and an explanation why such
material or information is necessary; and

(4) An explanation of this Plan's claim review
procedures.

(b) If special circumstances require an extension of time
for processing the initial claim, a written notice of
the extension and the reason therefor shall be
furnished to the claimant before the end of the
initial ninety (90) day period. In no event shall
such extension exceed ninety (90) days.

(c) In the event a claim for benefits is denied or if the
applicant has had no response to such claim within
ninety (90) days of its submission (in which case the
claim for benefits shall be deemed to have been
denied), the applicant or his duly authorized
representative, at the applicant's sole

-14-
<PAGE> 18

expense, may appeal the denial to the Committee
within sixty (60) days of the receipt of written
notice of denial or sixty (60) days from the date
such claim is deemed to be denied. In pursuing such
appeal the applicant or his duly authorized
representative:

(1) May request in writing that the Committee
review the denial;

(2) May review pertinent documents; and

(3) May submit issues and comments in writing.

(d) The decision on review shall be made within sixty
(60) days of receipt of the request for review,
unless special circumstances require an extension of
time for processing, in which case a decision shall
be rendered as soon as possible, but not later than
one hundred twenty (120) days after receipt of a
request for review. If such an extension of time is
required, written notice of the extension shall be
furnished to the claimant before the end of the
original sixty (60) day period. The decision on
review shall be made in writing, shall be written in
a manner calculated to be understood by the claimant,
and shall include specific references to the
provisions of this Plan on which such denial is
based. If the decision on review is not furnished
within the time specified above, the claim shall be
deemed denied on review.

Section 6.4 RECORDS

All acts and determinations of the Committee shall be
duly recorded by the secretary of the Committee
thereof and all such records together with such other
documents as may be necessary in exercising his
duties under this Plan shall be preserved in the
custody of such secretary. Such records and
documents shall at all times be open for inspection
and for the purpose of making copies by any person
designated by the Sponsoring Employer.

Section 6.5 INDEMNIFICATION

The Employer shall indemnify and hold the Board,
officers of the Employer, the Committee and each of
its members, and any person acting on behalf of the
Board, officers or Committee, harmless from and
against any and all expense, claim, cause of action,
or liability it or any of them may incur in the
administration of this Plan, unless such expense,
claim, cause of action or liability is the result of
fraud or willful breach of his or their
responsibilities this Plan. This shall include the
advancement of any legal or other expenses incurred
in connection with the claim, cause of action or
liability.

-15-
<PAGE> 19

ARTICLE 7

AMENDMENT AND TERMINATION OF THIS PLAN

Section 7.1 AMENDMENT OF THIS PLAN

The Sponsoring Employer shall have the right at any
time by action of the Board to modify, alter or amend
this Plan in whole or in part.

Section 7.2 TERMINATION OF THIS PLAN

The Sponsoring Employer reserves the right at any
time by action of the Board to terminate its
participation in this Plan at any time.

-16-
<PAGE> 20

ARTICLE 8

MISCELLANEOUS

Section 8.1 GOVERNING LAW

This Plan shall be construed, regulated and
administered according to the laws of the
Commonwealth of Kentucky.

Section 8.2 CONSTRUCTION

The headings and subheadings in this Plan have been
inserted for convenience of reference only and shall
not affect the construction of the provisions hereof.
In any necessary construction the masculine shall
include the feminine and the singular the plural, and
vice versa.

Section 8.3 PARTICIPANT'S RIGHTS

No Participant in this Plan shall acquire any right
to be retained in the Employer's employ by virtue of
this Plan, nor, upon his dismissal, or upon his
voluntary termination of employment, shall he have
any right or interest in and to his Bookkeeping
Account other than as specifically provided herein.

Section 8.4 COUNTERPARTS

This Plan may be executed in any number of
counterparts, each of which shall constitute but one
and the same instrument and may be sufficiently
evidenced by any one counterpart.

Section 8.5 ADMINISTRATIVE EXPENSES

All expenses of administering the Plan shall be paid
by the Employer, and, at the Sponsoring Employer's
discretion, may be paid from any funds set aside to
pay benefits under the Plan to the extent funds are
set aside by the Employer.

-17-
<PAGE> 21

Section 8.6 SEVERABILITY

In case any provision of this Plan shall be held
illegal or invalid for any reason, such illegality or
invalidity shall not affect the remaining parts of
this Plan and this Plan shall be construed and
enforced as if such illegal and invalid provisions
had never been inserted herein.

* * * * * * * * * * * * * * *

SIGNATURES

IN WITNESS WHEREOF, the Sponsoring Employer has caused this Plan to be
executed this ____ day of May, 1997.

Witness: HEALTHCARE RECOVERIES, INC.

BY
- ---------------------------------- -------------------------------
President

-18-
<PAGE> 22

APPENDIX "A"

ADOPTING EMPLOYERS

None

-19-

<PAGE> 1
EXHIBIT 10.7

MANAGEMENT GROUP INCENTIVE
COMPENSATION PLAN

HEALTHCARE RECOVERIES, INC.

EFFECTIVE DATE:
JANUARY 1, 1997

<PAGE> 2
MANAGEMENT GROUP INCENTIVE COMPENSATION
PLAN OF HEALTHCARE RECOVERIES, INC.

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

This Management Group Incentive Compensation Plan implements HRI's philosophy
that compensation must properly align the interests of stockholders, customers
and employees, and reflect the financial results achieved by employees. To
that end, HRI intends that its senior managers receive incentive compensation
in lieu of permanent raises in base salaries, in an amount that varies directly
with changes in the value of HRI to its stockholders.

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

1. Eligibility; Modifications. The Compensation Committee shall designate
the officers of HRI who are eligible for this Plan, and shall have the sole
right to interpret the terms of this Plan. In 1997, the officers eligible
under this Plan are Patrick B. McGinnis, Dennis K. Burge, Debra M. Murphy,
Douglas R. Sharps, and Bobby T. Tokuuke.

2. Bonus Period. The bonus period for this Plan will be the calendar year.

3. Amount of Total Bonus Pool. In 1997, the total bonus pool for the bonus
period will equal the sum of 0.75% of the revenues of HRI for 1997, plus 2.5%
of the pre-tax income of HRI for 1997 before accruals for the bonus pools under
this Plan (the "adjusted pre-tax income"). Revenue and adjusted pre-tax income
will be determined from HRI's monthly financial statements, prepared in
accordance with generally accepted accounting principles and HRI's historic
accounting practices, subject to adjustments to HRI's annual financial report
that may be required by its independent auditors and adjustments that may be
made by the Compensation Committee for unusual items not reflective of HRI's
operating results.

4. Limitation on Total Bonus Pools Amount. The total bonus pool shall not
exceed the sum of 150% of the salary of HRI's CEO as of the end of the bonus
period, plus 100% of the aggregate salaries of all other participants in this
Plan, as of the end of the bonus period.

5. Division of Total Bonus Pool; Nondiscretionary Grants. The total bonus
pool will be divided in half, one portion being designated as the
nondiscretionary pool and the other portion as the discretionary bonus pool.
Payment of bonuses from the nondiscretionary bonus pool shall be made to
eligible officers pro rata in accordance with the proportion that the salary
paid to of each such eligible officer during the applicable bonus period bears
to the total salaries paid to all eligible persons paid during that bonus
period.

-1-

<PAGE> 3
6. Amount of Discretionary Bonus Pool. The total amount available for grants
to eligible officers on a discretionary basis will equal the result of [a]
one-half of the total bonus pool, multiplied by [b.] the Success Percentage.
The Success Percentage for the discretionary bonus pool will be based on
achieving the budget for revenue and adjusted pre-tax income:

<TABLE>
<CAPTION>
Percentage of Pool Earned on:
Percentage of Adjusted
Budget Achieved Revenue Pre-Tax Income
--------------- ------- --------------
<S> <C> <C>
Less than 92% 0% 0%
92%, up to 94% 10% 10%
94%, up to 96% 20% 20%
96%, up to 98% 30% 30%
98%, up to 100% 40% 40%
100% or more 50% 50%
</TABLE>

The budget for revenue and adjusted pre-tax income will be set by the Inside
Business Plan adopted by the Board of Directors for each year, subject to any
adjustments made by the Compensation Committee for unusual items.

7. Allocation & Grants from Discretionary Bonus Pool. The Compensation
Committee will grant to HRI's CEO an annual bonus from the discretionary bonus
pool based on its evaluation of that officer's performance in attaining HRI's
financial results. HRI's CEO will recommend to the Compensation Committee, for
its approval, the discretionary annual bonus of each eligible officer,
expressed as a percentage of the amount remaining in the discretionary bonus
pool after HRI's CEO's discretionary annual bonus. The CEO's recommendations
will be based on each eligible officer's performance in attaining HRI's
financial results.

8. Payment. Subject to the discretion of the Compensation Committee, payment
of the bonuses will be made to participants twice each year. The first payment
will be made at or about the date of the Quarterly Employee Meeting following
the end of the second quarter, but only to the extent of the amount accrued in
the non-discretionary bonus pool through the end of the second quarter, subject
to a reasonable hold-back. The second payment will be made within a reasonable
period following the issuance of the report of HRI's independent auditors with
respect to HRI's annual financial statements, at or about the date of the
Quarterly Employee Meeting following the end of the bonus period.

9. Termination. Any eligible officer who is terminated for any reason but
cause will be entitled to receive a prorated bonus payment. Any eligible
officer who is either terminated

-2-
<PAGE> 4
for cause or who voluntarily leaves the employ of HRI will forfeit all right to
a bonus payment.

-3-

<PAGE> 1
EXHIBIT 10.8

CREDIT AGREEMENT

THIS CREDIT AGREEMENT dated as of May ___, 1997 (this "Agreement") is
entered into by and between (i) HEALTHCARE RECOVERIES, INC., a Delaware
corporation (together with all entities that hereafter become Participating
Partnerships or Participating Subsidiaries, hereinafter collectively referred
to each individually as a "Borrower" and collectively as the "Borrowers"), and
(ii) NATIONAL CITY BANK OF KENTUCKY, a national banking association (the
"Lender").

P R E L I M I N A R Y S T A T E M E N T:

A. The Borrowers desire to borrow funds for their corporate
purposes.

B. The Lender has agreed to make available to the Borrowers a
revolving line of credit in the maximum principal amount of $10,000,000 (the
"Revolving Facility").

NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements set forth herein and for other good and valuable consideration,
the sufficiency and receipt of which are hereby acknowledged, the parties
hereto do hereby agree as follows:

ARTICLE I

DEFINITIONS

For the purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:

The terms defined in this article have the meanings attributed
to them in this article. Singular terms shall include the plural as
well as the singular, and vice versa. Words of masculine, feminine or
neuter gender shall mean and include the correlative words of other
genders.

All references herein to a separate instrument are to such
separate instrument as the same may be amended or supplemented from
time to time pursuant to the applicable provisions thereof.

All accounting terms not otherwise defined herein have the
meanings assigned to them, and all computations herein provided for
shall be made, in accordance with generally accepted accounting
principles applied on a consistent basis. All references herein to
"generally accepted accounting principles" refer to such principles as
they exist at the date of application thereof.

All references herein to designated "Articles", "Sections" and
other subdivisions or to lettered Exhibits are to

<PAGE> 2

the designated Articles, Sections and other subdivisions hereof and the
lettered Exhibits annexed hereto unless the context otherwise clearly
indicates. All Article, Section, other subdivision and Exhibit
captions herein are used for reference only and in no way limit or
describe the scope or intent of, or in any way affect, this Agreement.

The terms "herein", "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision.

The terms "include," "including" and similar terms shall be
construed as if followed by the phrase "without being limited to."

No inference in favor of or against either party shall be
drawn from the fact that such party or its counsel has drafted any
portion hereof.

Actual/360 Basis shall mean a method of computing interest or
other charges hereunder on the basis of an assumed year of 360 days
for the actual number of days elapsed, meaning that interest or other
charges accrued for each day will be computed by multiplying the rate
applicable on that day by the unpaid principal balance (or other
relevant sum) on that day and dividing the result by 360.

Acquisition shall mean each Consolidated Entity that is
hereafter acquired or created in compliance with Section 6.09(5).

Advance shall mean a borrowing under the Revolving Facility
pursuant to Section 2.01.

Affiliate of any specified person shall mean any other person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person. For purposes of
this definition, "control" when used with respect to any specified
person means the power to direct the management and policies of such
person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the
foregoing.

Agreement shall mean this Credit Agreement, as the same may be
amended in writing in accordance with Section 8.08.

Anniversary Date shall mean May 31 of each year.

Assumption Agreement shall have the meaning attributed to that
term in Section 2.01(b).

2
<PAGE> 3

Availability Fee shall have the meaning attributed to that
term in Section 2.05(b).

Base Rate shall mean the rate per annum equal to higher of (a)
the Prime Rate or (b) the Federal Funds Effective Rate plus 50 basis
points.

Borrower and Borrowers shall have the meanings attributed to
those terms in the preamble to this Agreement.

Business Day shall mean (a) any day on which the Lender's r's
Principal Office is open for business and (b) if such day relates to
the giving of notices or quotes in connection with a LIBOR Quote or to
a borrowing of, a payment or prepayment of principal of or interest on
or a LIBOR-Based Rate Period for, a LIBOR-Based Rate Segment or a
notice by the Borrowers with respect to any such borrowing, payment,
prepayment or LIBOR-Based Rate Period, any day on which dealings in
Dollar deposits are carried out in the London interbank market.

Capital Expenditure shall mean any payment by the Borrowers or
any of the other Consolidated Entities for the purpose of acquiring or
constructing any real property, plant and equipment or other fixed
assets, including any such payment made under a title retention
agreement or capital lease obligation, and any other expenditure or
liability (excluding capital expenditures related to Acquisitions,
capitalized loan costs or other amortized Acquisition costs, to the
extent properly so classified in accordance with generally accepted
accounting principles) that is properly charged to a capital account
or otherwise capitalized on the Borrowers' consolidated balance sheet
in accordance with generally accepted accounting principles.

Capital Stock of any person shall mean any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock of such person.

Capitalized Contingent Obligations shall mean such amounts
payable from future events that arise from Acquisitions and that are
reflected in the Borrowers' financial statements as liabilities.

Closing Date shall mean _____________, 1997.

Commitment Amount shall mean the obligation of the Lender to
make Advances pursuant to Section 2.01 hereof in an aggregate amount
at any one time outstanding up to but not exceeding Ten Million
Dollars ($10,000,000).

Common Stock of any person shall mean Capital Stock of such
person that does not rank prior, as to the payment of dividends or as
to the distribution of assets upon any volun-

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<PAGE> 4

tary or involuntary liquidation, dissolution or winding up of such
person, to shares of Capital Stock of any other class of such person.

Compliance Certificate shall have the meaning attributed to
that term in Section 6.03(3).

Consolidated Entity shall mean any person the financial
statements of which are appropriately consolidated with the Borrowers'
financial statements under generally accepted accounting principles.

Consolidated Net Income shall mean, for any period, the net
income of the Borrowers and its Consolidated Entities (on a
consolidated basis and excluding intercompany items), for such period,
determined in accordance with generally accepted accounting
principles.

Contracts shall mean the agreements entered into by the
Borrowers pursuant to which the Borrowers provide recovery services
for subrogated claims and is compensated for such services based upon
a percentage of the amount of the claims successfully recovered.

Controlled Partnership shall mean a general partnership of
which the Borrowers or a Subsidiary is a general partner, or a limited
partnership whose sole general partner is the Borrowers or a
Subsidiary and with respect to which partnership the Borrowers or a
Subsidiary is entitled to receive not less than 50% of any
distributions of cash made to the partners thereof, other than any
preferred cash distribution arrangement approved by the Lender in
writing.

Credit Obligations shall mean the Revolving Facility
Obligations and all other obligations and debts owing to the Lender
before or after the Maturity Date, and arising under the terms of this
Agreement, the Note, and the other Loan Documents, whether now or
hereafter incurred, existing or arising, including the principal
amount of all Advances, any sums expended by Lender in exercising the
rights and remedies described in Section 7.02, all accrued interest on
Advances, and all costs, fees, charges and expenses incurred and
payable in connection therewith, including fees payable under the
terms of, or in connection with, this Agreement, and all other
obligations and debts owing to the Lender arising in connection with,
ancillary to, or in support of Advances, and all extensions,
alterations, modifications, revisions and renewals of any of the
foregoing.

Debt of any person shall mean (i) the Credit Obligations and
all other indebtedness, whether or not represented by bonds,
debentures, notes or other securities, for the repayment of borrowed
money or for reimbursement of drafts drawn or

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<PAGE> 5

available to be drawn under letters of credit, (ii) all capitalized
lease obligations, (iii) Guaranteed Obligations with respect to Debt
of all persons that are not Consolidated Entities, (iv) all
indebtedness secured by any mortgage or pledge of, or Lien on,
property of such person, whether or not any indebtedness secured
thereby shall have been assumed and (v) Capitalized Contingent
Obligations.

Default shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.

Deferred Tax Assets shall mean deferred tax assets as on
the Borrowers' financial statements in a manner consistent with
release number 109 of the Financial Accounting Standards Board.

Dollar and the symbol "$" shall mean dollars constituting
legal tender for the payment of public and private debts in the United
States of America.

ERISA shall mean the Employee Retirement Income Security Act
of 1974, as amended.

ERISA Affiliate shall mean any corporation, partnership or
other trade or business under common control with the Borrowers within
the meaning of Sections 414(b), (c) or (m) of the Internal Revenue
Code, as amended.

Exchange Act shall mean the Securities Exchange Act of 1934
as amended.

Events of Default shall have the meaning attributed to that
term in Section 7.01.

Federal Funds Effective Rate shall mean, for any day, an
interest rate per annum equal to the weighted average of the rates on
overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as
published for such day (or, if such day is not a Business Day, for the
immediately preceding Business Day) by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations at approximately 10:00
a.m. Lender's Local Time on such day on such transactions received by
the Lender from three Federal funds brokers of recognized standing
selected by the Lender in its sole discretion.

Funded Debt shall mean all Debt of the Borrowers and the
Consolidated Entities, on a consolidated basis, that matures by its
terms more than one year after, or is renewable or extendable at the
option of the debtor to a date more than one

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<PAGE> 6

year after, the date as of which Funded Debt is being determined.

Governmental Authority shall mean any national, federal,
state, county, municipal or other agency, authority, department,
commission, bureau, board, court or other instrumentality thereof.

Governmental Requirements shall mean all laws, rules,
regulations, requirements, ordinances, judgments, decrees, codes and
orders of any Governmental Authority applicable to the Borrowers or
any other Consolidated Entity.

Guaranteed Obligations of any person shall mean all guaranties
(including guaranties of guaranties and guaranties of dividends and
other monetary obligations), endorsements, assumptions and other
contingent obligations with respect to, or to purchase or to otherwise
pay or acquire, Debt of others.

Hazardous Substance(s) shall have the meaning ascribed in and
shall include (a) any asbestos or insulation or other material
composed of or containing asbestos and (b) those substances listed
under the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. 9601 et seq. and the regulations promulgated
thereunder (as amended from time to time) and the Clean Air Act, 42
U.S.C. 7401, et seq. and the regulations promulgated thereunder (as
amended from time to time) and includes oil, waste oil, and used oil
as those terms are defined in the Clean Water Act, 33 U.S.C. 1251
et seq. and regulations promulgated thereunder (as amended from time
to time) and the Resource, Conservation and Recovery Act, 42 U.S.C.
6901 et seq. and regulations promulgated thereunder (as amended from
time to time) and the Oil Pollution Act of 1990, 33 U.S.C. 2701 et
seq. and regulations promulgated thereunder (as amended from time to
time) and shall include any other pollutant or contaminant designated
as such by Congress or the United States Environmental Protection
Agency (EPA) or defined by any other federal, state or local statute,
law, ordinance, code, rule, regulation, order or decree regulating,
relating to, or imposing liability or standards of conduct concerning
any hazardous, toxic or dangerous waste, substance or material, as
now or at any time hereafter in effect.

Interest Expense shall mean all interest incurred on Debt
(including obligations payable under capital leases attributable to
interest) during the period in question.

Lender's Local Time shall mean the time in effect in
Louisville, Kentucky.

Lender shall mean National City Bank of Kentucky, its
successors and assigns.

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<PAGE> 7

Liabilities shall mean all Debt and all other items (including
taxes accrued as estimated) that, in accordance with generally
accepted accounting principles, would be included in determining total
liabilities as shown on the liabilities side of a balance sheet.

LIBOR-Based Rate shall mean a rate per annum equal to the
LIBOR Quote plus 225 basis points.

LIBOR-Based Rate Period shall mean the period of time,
selected by the Borrowers under Section 3.01, with respect to which
the LIBOR-Based Rate is (or is proposed to be) applicable to a
Segment.

LIBOR-Based Rate Segment shall mean a Segment to which the
LIBOR-Based Rate is (or is proposed to be) applicable.

LIBOR Quote shall mean, with respect to any time at which the
LIBOR-Based Rate is to be determined, the rate of interest determined
by the Lender at such time, based upon such factors (including the
LIBOR Reserve Requirement) as the Lender deems relevant, as the
Lender's best estimate of the cost of funds available to the Lender
from the purchase on the London interbank market of funds in the form
of time deposits in Dollars in the approximate amount of the Segment
that is to bear interest at the LIBOR-Based Rate, having a maturity
comparable to the LIBOR-Based Rate Period during which the LIBOR-Based
Rate is to be in effect, it being expressly understood that (a) the
Lender may not actually purchase any such time deposits and obtain
such funds and (b) the LIBOR Quote will be an estimate, and for a
variety of reasons, including changing market conditions, the actual
cost of funds to the Lender (if the Lender elects to purchase funds in
the form of time deposits on such date) might vary from the LIBOR
Quote.

LIBOR Reserve Requirement shall mean the percentage (expressed
as a decimal) prescribed by the Board of Governors of the Federal
Reserve System (or any successor Governmental Authority), on the date
on which the LIBOR-Based Rate is determined, for determining the
reserve requirements of the Lender (including any marginal, emergency,
supplemental, special or other reserves) with respect to liabilities
relating to time deposits purchased in the London interbank market
having a maturity equal to the period during which the LIBOR-Based
Rate will be in effect and in an amount equal to the LIBOR-Based Rate
Segment involved, without any benefit or credit for any proration,
exemptions or offsets under any now or hereafter applicable
regulations.

Lien shall mean any mortgage, pledge, encumbrance, charge,
security interest, assignment or other preferential

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<PAGE> 8
arrangement of any kind, including any conditional sale agreement or
other title retention agreement.

Loan Documents shall mean this Agreement, the Note, the
Assumption Agreements, and all other agreements, instruments and
documents executed or delivered at any time in connection with the
Credit Obligations, or to evidence or secure any of the Credit
Obligations, and all amendments thereto.

Loans shall mean the aggregate outstanding principal amount of
all Advances and all extensions and renewals thereof.

Margin Stock shall have the meaning attributed to that term in
Regulation U of the Board of Governors of the Federal Reserve System,
as amended.

Maturity Date shall mean May 31, 1999, or such later date as
may be mutually agreed upon in writing by the Borrowers and the Lender.

Net Worth shall mean the sum of the amounts set forth on the
Borrowers' consolidated balance sheet determined in accordance with
GAAP as shareholders' equity (including the par or stated value of all
outstanding capital stock, retained earnings, additional paid-in
capital, capital surplus and earned surplus), less the sum of (i) any
surplus resulting from any write-up of assets, and (ii) any amounts
due from or owed by any stockholder or Affiliate in excess of
$100,000.

Note shall have the meaning attributed to such term in
Section 2.01.

Opinion of Counsel shall mean a favorable written opinion,
with such changes and modifications as may be required by the Lender
or its counsel, of the corporate general counsel of the Borrowers or
attorney or firm of attorneys duly licensed to practice law in the
jurisdiction the laws of which are applicable to the legal matters in
question.

Participating Partnership shall mean any Controlled
Partnership approved by the Lender that hereafter executes and
delivers to the Lender an Assumption Agreement, and all other
documents necessary to assume joint and several liability as to the
Credit Obligations to the extent of its Partnership Liabilities.

Participating Subsidiary shall mean any Subsidiary approved by
the Lender that hereafter executes and delivers to the Lender an
Assumption Agreement, and all other documents necessary to assume
joint and several liability as to the Credit Obligations (in the
maximum amount provided for in such Assumption Agreement).

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<PAGE> 9

Partnership Liability shall mean, with respect to a
Participating Partnership, that part, if any, of an Advance (together
with interest thereon and fees, prepayment premiums and other charges
properly attributable thereto) that is received by and used by or for
the benefit of such Participating Partnership, as certified to the
Lender by the Borrowers, under Section 2.02, in connection with the
Borrowers' request for such Advance; and Partnership Liabilities shall
mean the aggregate amount of all such parts of Advances that are
received by and used by or for the benefit of such Participating
Partnership.

Permitted Encumbrances shall mean:

(1) taxes, assessments and other governmental charges
that are not delinquent or that are being contested in good faith by
appropriate proceedings duly pursued;

(2) Liens in favor of the Lender;

(3) the existing Liens described in Schedule 2 hereto; and

(4) Liens in favor of landlords, the amount secured by
which landlords' Liens, in the aggregate, would not materially
adversely affect the Borrowers.

Permitted Investments shall mean investments consistent with
the type of investments permitted by the "Investment Policy" of the
Borrowers as such Investment Policy exists on the Closing Date, and
other investments made with the express prior written approval of the
Lender.

person shall include natural persons, sole proprietorships,
corporations, trusts, unincorporated organizations, associations,
companies, institutions, entities, joint ventures, partnerships and
Governmental Authorities.

Prime Rate means for any day, the "Prime Rate" of interest
generally charged by the National City Bank of Kentucky on such day to
its most substantial and credit-worthy commercial borrowers for 90 day
unsecured loans, it being understood and agreed by the Borrowers that
the "Prime Rate" is the rate of interest designated by the National
City Bank of Kentucky as its "Prime Rate", and such term does not
necessarily mean or imply that it is the lowest or best rate then
available from the National City Bank of Kentucky on floating rate
loans to specific borrowers of the class described above.

Principal Office shall mean the principal office of the Lender
located at National City Tower, 101 S. Fifth Street, Louisville,
Kentucky 40202.

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<PAGE> 10

Quarterly Payment Date shall have the meaning attributed to
that term in Section 2.03.

Related Person of any person means any other person owning (a)
5% or more of the outstanding Common Stock of such person or (b) 5% or
more of the Voting Stock of such person.

Request for Advances shall have the meaning attributed to that
term in Section 2.02.

Revolving Facility shall mean the credit facility made
available to the Borrowers under the terms of Article II.

Revolving Facility Obligations shall mean the outstanding
principal amount of all Advances, all interest accrued thereon, all
costs, charges, fees and expenses payable in connection therewith and
all extensions and renewals thereof.

Segment shall mean a portion of the Advances (or all thereof)
with respect to which a particular interest rate is (or is proposed to
be) applicable. The aggregate amount of all Advances that bear
interest at the Base Rate shall be deemed to constitute a single
Segment. The aggregate amount of all Advances that bear interest at
the same LIBOR-Based Rate and for the same LIBOR-Based Rate Period
shall be deemed to constitute a single LIBOR-Based Rate Segment.

Solvent shall mean, as to any person, on a particular date,
that such person has capital sufficient to carry on its business and
transactions and all business and transactions in which it is about to
engage, is able to pay its debts as they mature, owns property having
a value, both at fair valuation and at present fair saleable value,
greater than the amount required to pay its probable liability on
existing debts as they become mature (including known reasonable
contingencies and contingencies that should be included in notes of
such person's financial statements pursuant to generally accepted
accounting principles), and does not intend to, and does not believe
that it will, incur debts or probable liabilities beyond its ability
to pay such debts or liabilities as they mature.

Subsidiary shall mean any corporation, more than 50% of the
shares of Voting Stock of which is owned and controlled directly or
indirectly by the Borrowers.

Voting Stock of any person shall mean Capital Stock of such
person that ordinarily has voting power for the election of directors
(or persons performing similar functions) of such person, whether at
all times or only so long as no senior class of securities has such
voting power by reason of any contingency.

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<PAGE> 11

ARTICLE II

REVOLVING FACILITY TERMS

SECTION 2.01. Revolving Facility.

(a) From and after the Closing Date, on the terms and subject to
the conditions set forth in this Agreement, the Lender agrees to lend to the
Borrowers (except as limited by the terms of subsection (d) of this Section
2.01 or by the terms of the Assumption Agreements), and the Borrowers may
borrow, repay and reborrow, an amount not exceeding the Commitment Amount in
effect from time to time. All Advances made by the Lender to the Borrowers
under this Agreement shall be evidenced by the master promissory note (the
"Note") in the form attached hereto as Exhibit A dated the Closing Date payable
to the order of the Lender, duly executed by the Borrowers, and joined in by
each Subsidiary and Controlled Partnership that becomes a Participating
Subsidiary or Participating Partnership after the Closing Date under the terms
of an Assumption Agreement, and in a face amount equal to the Commitment
Amount. The Advances shall bear interest as provided in Article III below. The
unpaid principal amount of all Loans hereunder shall not exceed the Commitment
Amount.

(b) Each Subsidiary and Controlled Partnership that is to become
after the Closing Date a Participating Subsidiary or Participating Partnership,
as the case may be, shall, at the time it is to become a Participating
Subsidiary or Participating Partnership, execute and deliver to the Lender, in
accordance with the provisions of Section 6.14, an Assumption Agreement in the
form attached hereto as Exhibit B ("Assumption Agreement").

(c) Each Borrower, Participating Subsidiary and Participating
Partnership, separately and severally, hereby appoints and designates
Healthcare Recoveries, Inc. as such party's agent and attorney-in-fact to act
on behalf of such party for all purposes of the Loan Documents. Healthcare
Recoveries, Inc. shall have authority to exercise on behalf of each Borrower,
Participating Subsidiary and Participating Partnership all rights and powers
that Healthcare Recoveries, Inc. deems necessary, incidental or convenient in
connection with the Loan Documents, including the authority to execute and
deliver certificates, documents, agreements and other instruments referred to
in or contemplated by the Loan Documents, request Advances, receive all
proceeds of Advances, give all notices, approvals and consents required or
requested from time to time by the Lender and take any other actions and steps
that a Borrower, Participating Subsidiary or a Participating Partnership could
take for its own account in connection with the Loan Documents from time to
time, it being the intent of the Borrowers, Participating Subsidiaries and the
Participating Partnerships to grant to Healthcare Recoveries, Inc. plenary
power to act on behalf of the Borrowers, Participating Subsidiaries and the
Participating Partnerships in connection with and pursuant to the Loan
Documents. The appointment of Healthcare Recoveries, Inc. as agent and

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<PAGE> 12
attorney-in-fact for the Borrowers, Participating Sunsidiaries and the
Participating Partnerships hereunder shall be coupled with an interest and be
irrevocable so long as any Loan Document shall remain in effect. The Lender
need not obtain the consent or approval of any Borrower, Participating
Subsidiary or Participating Partnership for any act taken by Healthcare
Recoveries, Inc. pursuant to any Loan Document, and all such acts shall bind
and obligate the Borrowers, the Participating Subsidiaries and the
Participating Partnerships, jointly and severally. Each Borrower,
Participating Subsidiary and Participating Partnership forever waives and
releases any claim (whether now or hereafter arising) against the Lender based
on the lack of authority of Healthcare Recoveries, Inc. to act on behalf of any
Borrower, Participating Subsidiary or Participating Partnership in connection
with the Loan Documents.

(d) The liability of each Participating Partnership with respect
to the Credit Obligations shall be limited to an amount equal to its
Partnership Liabilities. The liability of each Participating Subsidiary with
respect to the Credit Obligations shall be limited to an amount equal to the
greater of (i) $1.00 less than the greatest of (A) the Participating
Subsidiary's Net Worth (as hereinafter defined) as of the end of the most
recently concluded fiscal quarter of the Participating Subsidiary ended on or
prior to the date the Participating Subsidiary became a Co-Borrower, (B) the
highest Net Worth of the Participating Subsidiary at the end of any fiscal
quarter ending after the Participating Subsidiary became a Borrower and prior
to the earlier of the date of the commencement of a case under the United
States Bankruptcy Code (the "Bankruptcy Code") involving the Participating
Subsidiary or the date enforcement of this Agreement or any of the other Loan
Documents is sought against the Participating Subsidiary, and (C) the Net Worth
of the Participating Subsidiary at the earlier of the date of the commencement
of a case under the Bankruptcy Code involving the Participating Subsidiary or
the date enforcement of this Agreement or any of the other Loan Documents is
sought against the Participating Subsidiary, or (ii) the amount that in a legal
proceeding brought within the applicable limitations period is determined by
the final, non-appealable order of a court having jurisdiction over the issue
and the applicable parties to be the amount of value or benefit given by the
Lender, or received by the Participating Subsidiary, in exchange for the
obligations of the Participating Subsidiary under this Agreement and the other
Loan Documents. As used in this subsection (e), "Net Worth" shall mean (x) the
fair value of the property of the Participating Subsidiary from time to time
(taking into consideration the value, if any, of rights of subrogation,
contribution and indemnity), minus (y) the total liabilities of the
Participating Subsidiary (including contingent liabilities [discounted in
appropriate instances], but excluding liabilities of the Participating
Subsidiary under this Agreement and the other Loan Documents) from time to
time.

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<PAGE> 13

(e) No Borrower will exercise any rights that it may acquire by
way of subrogation under this Agreement or any of the other Loan Documents, by
any payment made hereunder or under any of the other Loan Documents or
otherwise, until all the Credit Obligations have been paid in full and this
Agreement has been terminated and is no longer subject to reinstatement under
the final sentence of Section 8.13. If any amount shall be paid to a Borrower
on account of any such subrogation rights at any time when all of the Credit
Obligations shall not have been paid in full and this Agreement terminated,
such amount shall be held in trust for the benefit of the Lender and shall be
paid forthwith to the Lender to be credited and applied upon the Credit
Obligations, whether matured or unmatured, in accordance with the terms of the
Loan Documents.

SECTION 2.02. Advances. The Advances made by the Lender pursuant to
each request for Advances shall be in an aggregate amount not less than
$500,000 or a greater integral multiple of $100,000; provided, however, that a
request for Advances may be in an amount of less than $500,000 if the
difference between the Commitment Amount and the amount of the Loans then
outstanding is less than $500,000. No more than ten Advances may be
outstanding at any time. The maximum borrowing for each Advance will be
limited to the Commitment Amount. Each request for Advances must be in writing
(which may be by facsimile transmission) and must be received by the Lender not
later than 10:00 a.m. Lender's Local Time, on the day on which the Advances are
to be made, except that, if the Advances are to bear interest at the
LIBOR-Based Rate, the request must be received by the Agent not later than
10:00 a.m., Lender's Local Time, three Business Days prior to the day on which
the Advances are to be made. Each request for Advances shall be in the form
attached hereto as Exhibit C ("Request for Advances or Interest Rate Election")
and shall specify the aggregate amount of the Advances requested, the day as of
which the Advances are to be made and the part or parts, if any, of the
Advances that are to be received by and used by or for the benefit of
Participating Partnerships and Participating Subsidiaries, specifying the part
allocable to each Participating Partnership and Participating Subsidiary and
shall provide the interest rate information called for in Section 3.02. All
the Advances requested in a single Request for Advances or Interest Rate
Election shall be subject to the same interest rate terms. The Lender shall
make available the amount of the Advance to be made by it on such date to the
Borrowers, by (a) depositing the proceeds thereof into an account with the
Lender in the name of Healthcare Recoveries, Inc., acting in its capacity as
agent for itself, the Borrowers and each of the Participating Subsidiaries and
Participating Partnerships pursuant to Section 2.01(c) above. The Lender's
obligation to make Advances shall terminate, if not sooner terminated pursuant
to the provisions of this Agreement, 14 days prior to the Maturity Date. The
Lender shall have no obligation to make Advances if a Default or an Event of
Default has occurred and is continuing. Each Request for Advances shall be
signed by an officer of the Borrowers designated

<PAGE> 14
as authorized to sign and submit Request for Advances in the documnets
submitted to the Lender pursuant to Section 5.03(a) below. In lieu of
delivering a written Request for Advances, Borrowers may give the Lender
telephonic notice by the required time of the requested Advance under this
Section 2.02; provided that such notice shall be promptly confirmed in writing
by delivery of a Request for Advances to the Lender on or before the
date the Advances are to be made. Lender shall not incur any liability to the
Borrowers in acting upon any telephonic notice referred to herein which the
Lender believes in good faith to have been given by a duly authorized officer
of the Borrowers. The Borrowers may, from time to time, by written notice to
the Lender, terminate the authority of any person to submit Request for
Advances, such termination of authority to become effective upon actual receipt
by the Lender of such notice of termination. The Borrowers may from time to
time authorize other persons to sign and submit Request for Advances by
delivering to the Lender a certificate of the Secretary of the Borrowers
certifying the incumbency and specimen signature of each such person. The
Lender shall be entitled to rely conclusively upon the authority of any person
so designated by the Borrowers.

SECTION 2.03. Payments. All interest accrued at the Base Rate shall
be payable on the first day of each successive July, October, January and April
("Quarterly Payment Date"), commencing on July 1, 1997; and all interest
accrued on each LIBOR-Based Rate Segment shall be payable on the earlier of a
Quarterly Payment Date or last day of the applicable LIBOR-Based Rate Period.
The principal amount of the Advances outstanding shall be due and payable,
together with accrued interest thereon, on the Maturity Date.

SECTION 2.04. Prepayment.

(a) The Borrowers may at any time prepay all or any part of the
Advances, without premium or penalty; provided, however, that (i) no
LIBOR-Based Rate Segment may be prepaid during a LIBOR-Based Rate Period, and
(ii) the amount of any partial prepayment shall be in increments of $100,000.
The Borrowers shall pay, on the date of prepayment, all interest accrued to the
date of prepayment on any amount prepaid in connection with the prepayment in
full of the Credit Obligations and the concurrent termination of this
Agreement.

(b) If at any time the principal amount of the Advances is greater
than the Commitment Amount, the Borrowers shall immediately make a prepayment
(notwithstanding the provisions of clause (a) of this section, but subject to
the provisions of Section 3.07) on the Advances equal to the difference between
said aggregate principal amount of the Advances and the Commitment Amount.

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<PAGE> 15

SECTION 2.05. Other Fees.

(a) The Borrowers shall pay to the Lender on or before the Closing
Date a nonrefundable closing fee in the amount of $25,000.

(b) The Borrowers shall pay to the Lender an availability fee (the
"Availability Fee") computed at the rate of one-quarter of one percent (.25%)
per annum times the daily average difference between (i) the Commitment Amount
and (ii) the sum of the aggregate outstanding principal amount of the Advances
made by the Lender. The Availability Fee shall be payable in arrears on each
Quarterly Payment Date, commencing on July 1, 1997, and on the Maturity Date.
The Availability Fee shall be computed on an Actual/360 Basis.

SECTION 2.06. Time, Place and Application of Payments. The Credit
Obligations shall be payable to the Lender in Dollars on or before 11:00 a.m.
(Lender's Local Time) on the date on which due, at the Principal Office, in
immediately available funds, free and clear of any and all rights of setoff and
counterclaim. Payments received by the Lender shall be applied first to
expenses, fees and charges, then to accrued interest and finally to principal.

ARTICLE III

INTEREST

SECTION 3.01. Applicable Interest Rates. The Borrowers shall have the
option to elect to have any Segment bear interest at the Base Rate or the
LIBOR-Based Rate. For any period of time and for any Segment with respect to
which the Borrowers do not elect the LIBOR-Based Rate, such Segment shall bear
interest at the Base Rate. The Borrowers' right to elect the LIBOR-Based Rate
shall be subject to the following requirements: (a) each LIBOR-Based Rate
Segment shall be in the amount of $500,000 or an integral multiple of $100,000
or more and in an integral multiple thereof, (b) each LIBOR-Based Rate Segment
shall have a maturity selected by the Borrowers of one, two, three or six
months, (c) no more than nine Segments may be outstanding at any time, and (d)
no LIBOR-Based Rate Segment may have a maturity date later than the Maturity
Date.

SECTION 3.02. Procedure for Exercising Interest Rate Options. Health
Care Recoveries, Inc., on behalf of itself and the other Borrowers, may elect
to have a particular interest rate apply to a Segment by notifying the Lender
in writing (which may be by facsimile transmission) not later than 10:00 a.m.,
Lender's Local Time, on the day on which a requested interest rate is to
become-applicable, except that, if the Segment is to bear interest at the
LIBOR-Based Rate, the notice must be received by the Lender not later than
10:00 a.m. Lender's Local Time, three Business Days before the day on which the
requested interest rate is to become applicable. Any notice of interest rate
election hereunder shall

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<PAGE> 16

be irrevocable and shall be in the form of attached hereto as Exhibit C and
shall set forth the following: (a) the amount of the Segment to which the
requested interest rate will apply, (b) the date on which the selected interest
rate will become applicable, (c) whether the interest rate selected is the Base
Rate or the LIBOR-Based Rate and (d) if the interest rate selected is the
LIBOR-Based Rate, the maturity selected for the LIBOR-Based Rate Period. On
the day that the Lender receives a notice hereunder requesting that the
LIBOR-Based Rate be applicable, the Lender shall use its best efforts to notify
Health Care Recoveries, Inc. by telephone or by facsimile transmission of the
applicable LIBOR-Based Rate as early on that day or the next Business Day as
may be practical in the circumstances. The Lender shall not be required to
provide the quote of the LIBOR-Based Rate on any day on which dealings in
deposits in Dollars are not transacted in the London interbank market. If
Health Care Recoveries, Inc. does not immediately accept the LIBOR-Based Rate
quoted by the Lender, the Lender may, in view of changing market conditions,
revise the quoted LIBOR-Based Rate at any time. No LIBOR-Based Rate shall be
effective until mutually agreed upon by Health Care Recoveries, Inc. and the
Lender. If the Lender and Health Care Recoveries, Inc. attempt to agree on the
LIBOR-Based Rate but fail so to agree, or if there is any uncertainty as to
whether or not the Lender and Health Care Recoveries, Inc. have agreed upon the
LIBOR-Based Rate, interest shall accrue on the Segment for which the
LIBOR-Based Rate has been selected at the then applicable Base Rate.

SECTION 3.03. Base Rate. Each Segment subject to the Base Rate shall
bear interest at the Base Rate until payment in full, or until the LIBOR-Based
Rate is selected by the Borrowers and becomes applicable thereto, on the unpaid
principal balance of such Segment on an Actual/360 Basis. Any change in the
Base Rate caused by a change in the Prime Rate or the Federal Funds Effective
Rate shall take effect on the effective date of such change in the Prime Rate
designated by the Lender or the Federal Funds Effective Rate, without notice to
the Borrowers and without any further action by the Lender. Upon and after the
occurrence of an Event of Default, each Segment subject to the Base Rate shall
bear interest from the date of such Event of Default until payment in full at a
per annum rate (computed on an Actual/360 Basis) equal to two percent (2%) in
excess of the Base Rate that would otherwise have been applicable.
Notwithstanding the foregoing, for the purpose of enabling the Lender to send
periodic billing statements in advance of each interest payment date reflecting
the amount of interest payable on such interest payment date, the Prime Rate or
Federal Funds Effective Rate in effect 15 days prior to each interest payment
date shall be deemed to be the Prime Rate or the Federal Funds Effective Rate,
as applicable, as continuing in effect until the date prior to such interest
payment date for purposes of computing the amount of interest payable on such
interest payment date. If the Lender elects to use the Prime Rate or the
Federal Funds Effective Rate, as applicable, 15 days prior to the interest
payment date for billing purposes, and if the Prime Rate or the

<PAGE> 17
Federal Funds Effective Rate, as Effective Rate, as applicable, changes during
such 15-day period, the difference between the amount of interest that in fact
accrues during such period and the amount of interest actually paid will be
added to or subtracted from, as the case may be, the interest otherwise payable
in preparing the periodic billing statement for the next succeeding interest
payment date. In determining the amount of interest payable at the Maturity
Date or upon full prepayment of the Credit Obligations, all changes in the
Prime Rate or the Federal Funds Effective Rate, as applicable, occurring on or
prior to the day before the Maturity Date or the date of such full prepayment
shall be taken into account.

SECTION 3.04. LIBOR-Based Rate. Each LIBOR-Based Rate Segment shall
bear interest from the date the LIBOR-Based Rate becomes applicable thereto
until the end of the applicable LIBOR-Based Rate Period on the unpaid principal
balance of such LIBOR-Based Rate Segment at the LIBOR-Based Rate on an
Actual/360 Basis. Upon and after the occurrence of an Event of Default, each
LIBOR-Based Rate Segment shall bear interest from the date of such Event of
Default until payment in full at a per annum rate (computed on an Actual/360
Basis) equal to two percent (2) in excess of the LIBOR-Based Rate that would
otherwise have been applicable.

SECTION 3.05. Termination of LIBOR-Based Rate; Increase in LIBOR-Based
Rate; Reduction of Return.

(a) If at any time the Lender shall determine (which determination
shall be final, conclusive and binding upon all parties) that:

(i) by reason of any changes arising after
Closing Date affecting the London interbank market or affecting the
position of the Lender in such market, adequate and fair means do not
exist for ascertaining the LIBOR-Based Rate by reference to the LIBOR
Quote with respect to a LIBOR-Based Rate Segment; or

(ii) the continuation by the Lender of LIBOR-Based
Rate Segments at the LIBOR-Based Rate or the funding thereof in the
London interbank market would be unlawful by reason of any law,
governmental rule, regulation, guidelines or order; or

(iii) the continuation by the Lender of LIBOR-Based
Rate Segments at the LIBOR-Based Rate or the funding thereof in the
London interbank market would be impracticable as a result of a
contingency occurring after the Closing Date that materially and
adversely affects the London interbank market;

then, and in any such event, the Lender shall on such date give notice (by
telephone and confirmed in writing) to Health Care Recoveries, Inc. of such
determination. The obligation of the Lender to make or maintain LIBOR-Based
Rate Segments so affected or

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<PAGE> 18

to permit interest to be computed thereon at the LIBOR-Based Rate,
as the case may be, shall be terminated, and interest shall thereafter be
computed on the affedted Segment or Segments at the then applicable Base Rate.

(b) It is the intention of the parties hereto that the LIBOR-Based Rate
shall accurately reflect the cost to the Lender of maintaining any LIBOR-Based
Rate Segment during the applicable LIBOR-Based Rate Period. Accordingly, if by
reason of any change after the date hereof in any applicable law or
governmental rule, regulation or order (or any interpretation thereof and
including the introduction of any new law, governmental rule, regulation,
guideline or order), including any change in the LIBOR Reserve Requirement, the
cost to Lender of maintaining any LIBOR- Based Rate Segment or funding the same
by means of a London interbank market time deposit, as the case may be, shall
increase, the LIBOR-Based Rate applicable to such LIBOR-Based Rate Segment
shall be adjusted as necessary to reflect such change in cost to the Lender,
effective as of the date on which such change in any applicable law,
governmental rule, regulation, guideline or order becomes effective.

(c) If the Lender shall have determined that the adoption after the
Closing Date of any law, governmental rule, regulation, guideline or order
regarding capital adequacy, or any change in any of the foregoing or in the
interpretation or administration of any of the foregoing by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Lender (or any lending office of
the Lender) or the Lender's holding company with any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
Governmental Authority, central bank or comparable agency, has or would have
the effect of reducing the rate of return on the Lender's capital or on the
capital of the Lender's holding company, as a consequence of the Lender's
obligations under this Agreement or the Advances made by the Lender pursuant
hereto to a level below that which the Lender or the Lender's holding company
could have achieved but for such adoption, change or compliance (taking into
consideration the Lender's guidelines with respect to capital adequacy) by an
amount deemed by the Lender to be material, then from time to time the
Borrowers shall pay to the Lender such additional amount or amounts as will
compensate the Lender or the Lender's holding company for any such reduction
suffered.

SECTION 3.06. Compensation. The Borrowers shall compensate the
Lender for all losses, expenses and liabilities (including any interest paid by
the Lender to lenders on funds borrowed by the Lender to make or carry any
LIBOR-Based Rate Segment and any loss sustained by the Lender in connection
with the re-employment of such funds), that the Lender may sustain: (a) if for
any reason (other than a default by the Lender) following agreement between
Health Care Recoveries, Inc. and the Lender as to the LIBOR-Based

<PAGE> 19

Rate applicable to the LIBOR-Based Rate Segment, Health Care Recoveries, Inc.
fails to accept such LIBOR-Based Rate Segment, (b) as a consequence of any
authorized action taken or default by the Borrowers in the repayment of any
LIBOR-Based Rate Segment when required by the terms of this Agreement, or (c)
as a consequence of the prepayment of any LIBOR-Based Rate Segment pursuant to
Section 2.04. A certificate as to the amount of any additional amounts payable
pursuant to this section or Section 3.05(c) (setting forth in reasonable detail
the basis for requesting such amounts) submitted by the Lender to Health Care
Recoveries, Inc. shall be conclusive, in the absence of manifest error. The
Borrowers shall pay to the Lender the amount shown as due on any such
certificate delivered by the Lender within 30 days after receipt of the same by
Health Care Recoveries, Inc.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

The Borrowers represent and warrant to the Lender as follows:

SECTION 4.01. Organization, Powers, Existence. etc. Each Borrower
and each Consolidated Entity is duly organized, validly existing and in good
standing under the laws of the state in which it is incorporated or formed.
Each Borrower and each Consolidated Entity (a) has the power and authority to
own its properties and assets and to carry on its business as being conducted
at the Closing Date, (b) has the power to execute, deliver and perform the Loan
Documents to which it is a party, (c) is duly qualified to do business in each
state in which it is required to be so qualified and with respect to which the
failure to be so qualified would have a material adverse effect on its
properties or business and (d) except as set forth in Schedule 4.01 hereto, has
not done business under any other name, trade name or otherwise within the five
years immediately preceding the Closing Date.

SECTION 4.02. Authorization of Borrowings, etc. The execution, delivery and
performance of the Loan Documents by the Borrowers and the borrowings
thereunder by the Borrowers (a) have been duly authorized by all requisite
action (including any required shareholder action) and (b) will not violate any
Governmental Requirement, the articles or certificate of incorporation or
by-laws of the Borrowers, or any indenture, agreement or other instrument to
which the Borrowers or any Consolidated Entity is a party, or by which the
Borrowers or any Consolidated Entity or any of their respective properties and
assets are bound, or be in conflict with, result in a breach of or constitute
(with due notice or lapse of time or both) a default under, any such indenture,
agreement or other instrument, or result in the creation or position of any
Lien upon any of the properties or assets of the Borrowers or any Consolidated
Entity, except as required by the terms of this Agreement and the other Loan
Documents.

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SECTION 4.03. Financial Condition. The Borrowers have furnished to
the Lender a copy of the consolidated balance sheet and the Consolidated
Entities as of March 31, 1997, and related consolidated statements of
operations, stockholders' equity and cash flows, as of March 31, 1997. Such
financial statements have been prepared in conformity with generally accepted
accounting principles applied consistently throughout the period involved, are
in accordance with the books and records of the Borrowers and the Consolidated
Entities, are correct and complete and present fairly the financial condition,
assets, liabilities and stockholders' equity of the Borrowers and the
Consolidated Entities as of the date of such balance sheet, and the results of
operations for the periods covered by such related statements, and, since March
31, 1997, no material adverse change in the financial condition, business or
operations of the Borrowers or any of the Consolidated Entities has occurred.
Neither the Borrowers nor any Consolidated Entity has any Liabilities,
Guaranteed Obligations or other obligations or liabilities, direct or
contingent, that are material in amount, other than the Liabilities reflected
in such balance sheet and the notes thereto.

SECTION 4.04. Taxes. The Borrowers and each Consolidated Entity has
filed or caused to be filed all federal, state and local tax returns that are
required to be filed and has paid all taxes as shown on said returns or on any
assessment received by the Borrowers or any Consolidated Entity to the extent
that such taxes have become due.

SECTION 4.05. Litigation. Except as set forth in Schedule 4.05
hereto, there are no actions, suits or proceedings (whether or not purportedly
on behalf of the Borrowers or any Consolidated Entity) pending or, to the best
knowledge of the Borrowers, threatened against or affecting the Borrowers or
any Consolidated Entity, at law or in equity, by or before any Governmental
Authority that involve any of the transactions provided for in this Agreement
or the possibility of any judgment or liability that may result in a material
adverse change in the operations or financial condition of the Borrowers or any
of the Consolidated Entities; and neither the Borrowers nor any Consolidated
Entity is in default with respect to any material Governmental Requirement.

SECTION 4.06. Agreements. Neither the Borrowers nor any Consolidated
Entity is a party to any agreement or instrument, or subject to any charter,
partnership agreement or other corporate or partnership restriction, that
materially and adversely affects its business, properties or assets, operations
or condition, financial or otherwise, or is in default in the performance,
observance or fulfillment of any of the obligations contained in any agreement
or instrument to which it is a party, which default could have a material
adverse effect upon the operations or financial condition of the Borrowers or
any of the Consolidated Entities.

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SECTION 4.07. Use of Proceeds. The Borrowers do not intend to use any
part of the proceeds of the Advances to purchase or carry, or to reduce or
retire or refinance any credit incurred to purchase or carry, any Margin Stock,
or to extend credit to others for the purpose of purchasing or carrying any
Margin Stock, or for any other purpose not permitted under Section 6.13.

SECTION 4.08. ERISA. (a) The execution, delivery and performance of
the Loan Documents will not involve any prohibited transaction within the
meaning of ERISA or Section 4975 of the Internal Revenue Code, as amended, with
respect to any employee benefit plan (as defined in Section 3(3) of ERISA)
maintained by the Borrowers and each ERISA Affiliate, (b) as of the Closing
Date the Borrowers and each ERISA Affiliate have fulfilled their respective
obligations under the minimum funding standards imposed by ERISA and are in
compliance in all material respects with the applicable provisions of ERISA,
and (c) as of the Closing Date neither the Borrowers nor any of the ERISA
Affiliates maintains any plan subject to Title IV of ERISA.

SECTION 4.09. Investment Company Act. The Borrowers are not an
"investment company," or a company "controlled" by an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.

SECTION 4.10. Subsidiaries. The Borrowers have no direct or indirect
equity ownership in any person other than Controlled Partnerships and
Subsidiaries, all of which are either Participating Partnerships or
Participating Subsidiaries, except for equity ownerships that constitute
Permitted Investments. None of the Subsidiaries or Controlled Partnerships has
any direct or indirect equity ownership in any person other than Consolidated
Entities, except for equity ownerships that constitute Permitted Investments.
The Stock of and the Partnership Interest in each Subsidiary and Controlled
Partnership is free and clear of all Liens, warrants, options, rights to
purchase and other interests of any person, except as set out in Schedule 2
hereto. All shares of Capital Stock of the Subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable. All
now-existing Subsidiaries and Controlled Partnerships are listed in Schedule
4.10 hereto.

SECTION 4.11. Principal Place of Business. The principal place of
business and chief executive office of the Borrowers is at their addresses
shown in Schedule 4.11 and will not be changed from each such address unless,
prior to such change, the Borrowers shall have notified the Lender of the
proposed change, and in no event will the Borrowers' principal places of
business or chief executive offices be located outside of Jefferson County,
Kentucky.

SECTION 4.12. Environmental Laws. Except as set forth in Schedule
4.12 hereto (a) the Borrowers and all Consolidated

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<PAGE> 22
Entities are in material compliance with all applicable Governmental
Requirements relating to air, Borrowers nor any Consolidated Entity has ever
caused or permitted any Hazardous Substance to be placed, held, located,
released or disposed of in violation of any Governmental Requirement on, under
or at any facility legally or beneficially owned by the Borrowers or any
Consolidated Entity; (c) neither the Borrowers nor any Consolidated Entity has
received notice that any Hazardous Substance has been placed, held, located,
released or disposed of in violation of any Governmental Requirement on, under
or at any facility or any other real property legally or beneficially owned,
leased or operated by the Borrowers or any Consolidated Entity; (d) no facility
or any other real property legally or beneficially owned, leased or operated by
the Borrowers or any Consolidated Entity has ever been used by the Borrowers or
any Consolidated Entity as a dump site or permanent or temporary storage site,
in violation of any Governmental Requirement, for any Hazardous Substance; and
(e) neither the Borrowers nor any Consolidated Entity has any Liabilities with
respect to Hazardous Substances, and no facts or circumstances exist that could
give rise to any such Liabilities. None of the matters set forth in the
documents listed in Schedule 4.12 individually or in the aggregate, has caused
or will cause a material adverse change in the financial condition, business
or affairs of the Borrowers and the Consolidated Entities.

SECTION 4.13. Licenses. All material certificates of need, licenses,
permits, accreditation and approvals required by all Governmental Authorities
necessary in order for the Borrowers to conduct its business have been obtained
and are in full force and effect.

SECTION 4.14. Title to Properties. The Borrowers and the Consolidated
Entities have good and marketable title to all their properties and assets, and
all such properties and assets are free and clear of all Liens, other than
Permitted Encumbrances and except as otherwise permitted or required by the
provisions of the Loan Documents.

SECTION 4.15. Enforceability. This Agreement and each of the other
Loan Documents, when duly executed and delivered by the Borrowers in accordance
with the provisions of this Agreement, will constitute the legal, valid and
binding, joint and several, obligations of the Borrowers, enforceable in
accordance with their respective terms, subject to the effect of bankruptcy,
insolvency, reorganization, receivership, moratorium and similar laws affecting
the rights and remedies of creditors generally.

SECTION 4.16. Consents, Registrations, Approvals. etc. No
registration with or consent or approval of, or other action by, any
Governmental Authority is required for the execution, delivery

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<PAGE> 23

and performance of this Agreement or the other Loan Documents, or the
borrowings under this Agreement, by the Borrowers.

SECTION 4.17. Solvency. The Borrowers is Solvent, and the Borrowers
will not, as a result of the transactions provided for herein (i) become not
Solvent, (ii) be left with unreasonably small capital, (iii) incur debts beyond
its ability to pay them as they mature or (iv) have Liabilities (including
reasonable contingencies) in excess of the fair saleable value of its assets.

SECTION 4.18. Compliance with Laws. The Borrowers and all
Consolidated Entities are in material compliance with all applicable
Governmental Requirements, other than Governmental Requirements covered by
Section 4.12.

SECTION 4.19. Disclosure. To the best knowledge of the Borrowers, no
financial statement, document, certificate or other written communication
furnished to the Lender by or on behalf of the Borrowers in connection with any
Loan Document contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading. There is no fact known to the Borrowers that
materially adversely affects the business or condition of the Borrowers or any
Consolidated Entity that has not been disclosed herein or in such financial
statements, other than economic trends or other factors that affect or may
affect the health care industry as a whole.

SECTION 4.20. Consummation of Initial Public Offering. Health Care
Recoveries, Inc. shall have closed on the sale of its common stock in its
initial public offering. As of the time immediately preceding the consummation
of the initial public offering of stock of Health Care Recoveries, Inc., the
Borrowers shall have had a Net Worth of at least $500,000.

ARTICLE V

CONDITIONS OF MAKING ADVANCES

The Lender's obligation to make each Advance hereunder are each subject
to the following conditions precedent:

SECTION 5.01. Representations and Warranties. On the date of each
Advance hereunder, and on the date the Borrowers presents to the Lender each
Request for Advances, the representations and warranties set forth in this
Agreement and in all other Loan Documents shall be true and correct in all
material respects on and as of each such date with the same effect as though
such representations and warranties had been made on the date of the Advance or
on the date the Borrowers presents to the Lender a Request for Advances. Each
such warranty and representation shall be deemed to be continuing in effect so
long as this Agreement remains in effect. The presentation by the Borrowers of
each Request for Ad-

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<PAGE> 24

vances shall constitute a representation and warranty by the Borrowers to
the Lender that no material adverse change in the financial condition of the
Borrowers and the Consolidated Entities, as reflected in the financial
statements referred to in Section 4.03 and each financial statement submitted
by the Borrowers pursuant to Section 4.03 has occurred since the date of such
financial statements.

SECTION 5.02. No Default. On the date of each Advance hereunder, the
Borrowers shall be in compliance with all the terms and conditions set forth in
this Agreement on their part to be observed or performed, and no Default or
Event of Default shall have occurred and be continuing. The presentation by
the Borrowers of each Request for Advances shall constitute a representation
and warranty by the Borrowers to the Lender that no Default or Event of Default
has occurred and is continuing.

SECTION 5.03. Supporting Documents.

(a) The Lender shall have received on the Closing Date (i) a copy
of resolutions of the Board of Directors of the Borrowers, certified as in full
force and effect on the Closing Date by the Secretary of the Borrowers,
authorizing the execution, delivery and performance of the Loan Documents and
authorizing designated officers of the Borrowers to execute and deliver the
Loan Documents on behalf of the Borrowers and to execute and deliver to the
Lender Requests for Advances; (ii) a certificate of the Secretary of the
Borrowers, dated the Closing Date, certifying the incumbency and specimen
signatures of the designated officers referred to in clause (i) above; (iii) a
copy of the Certificate of Incorporation and By-laws of the Borrowers,
certified as true and correct on and as of the date on which Loan Documents are
executed and delivered; (iv) Opinion of Counsel to the Borrowers in
substantially the same form as attached hereto as Exhibit D; (v) Certificate of
the Secretary of Healthcare Recoveries, Inc., and copies of Cross- Receipts
evidencing that Healthcare Recoveries, Inc., has closed on the sale of its
common stock in its initial public offering; and (vi) such additional
supporting documents as the Lender may request.

(b) The Lender shall also have received on or before the date on
which a Subsidiary becomes a Participating Subsidiary (i) a copy of resolutions
of the Board of Directors and, if necessary, the shareholders of such
Subsidiary certified as in full force and effect on the date thereof by the
Secretary of such Subsidiary, authorizing such Subsidiary's execution, delivery
and performance of, the Loan Documents and all other agreements and instruments
that this Agreement requires to be executed, delivered and performed by such
Subsidiary; (ii) a copy of the Certificate of Incorporation or Articles of
Incorporation, as the case may be, and By-laws of such Subsidiary, certified as
true and correct on and as of the date on which loan documents are executed and
delivered by such Subsidiary; (iii) certificates of good standing with respect
to

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<PAGE> 25

such Subsidiary from the appropriate Governmental Authorities in the
jurisdiction under the laws of which such Subsidiary is incorporated; (iv) an
Opinion of Counsel to such Subsidiary consistent with the form of the Opinions
of Counsel to the Borrowers delivered pursuant to subsection (a) of this
Section 5.03 (with such changes therein as are appropriate in the
circumstances) as to the execution and delivery by such Subsidiary of the Loan
Documents and other matters related thereto; (v) fully executed copies of all
Loan Documents that this Agreement requires to be executed or delivered (or
both) by such Subsidiary (including a fully executed Assumption Agreement, in
the case of any Subsidiary that becomes a Participating Subsidiary after the
Closing Date); and (vi) such additional supporting documents as the Lender or
its counsel may request.

(c) The Lender shall also have received on or before the date on
which a Controlled Partnership becomes a Participating Partnership (i) a copy
of the partnership agreement (and a copy of the relevant certificate of limited
partnership, if such Controlled Partnership is a limited partnership) under
which such Controlled Partnership was formed, certified as true and correct on
and as of the date of which Loan Documents are executed and delivered by such
Controlled Partnership; (ii) if such Controlled Partnership is a limited
partnership, certificates of good standing from the appropriate Governmental
Authorities in the jurisdiction under the laws of which such Controlled
Partnership was formed; (iii) an Opinion of Counsel to such Controlled
Partnership consistent with the form of the Opinion of Counsel to the Borrowers
delivered pursuant to subsection (a) of this Section 5.03 (with such changes
therein as are appropriate in the circumstances) as to the execution and
delivery by such Controlled Partnership of the Loan Documents and other matters
related thereto; (iv) fully executed copies of all Loan Documents that this
Agreement requires to be executed or delivered (or both) by such Controlled
Partnership (including a fully executed Assumption Agreement; and (v) such
additional supporting documents as the Lender may request.

(d) All documents delivered to the Lender under this Section 5.03
shall be in form and substance satisfactory to the Lender and its counsel.

SECTION 5.04. No Liens. On the date of each advance, the Borrowers
should have good and marketable title to all their properties and assets (which
includes all accounts maintained with the Lender), and all such properties and
assets shall be free and clear of all liens, other than Permitted Encumbrances
and except as otherwise permitted or required by the provisions of the Loan
Documents.

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<PAGE> 26

ARTICLE VI

COVENANTS OF BORROWERS

The Borrowers covenant and agree that, from the Closing Date until
payment in full of the Credit Obligations and the termination in writing of
this Agreement, except to the extent the Lender may otherwise agree in writing:

SECTION 6.01. Existence, Properties, etc. The Borrowers shall, and
(to the extent of its right to do so) shall cause each other Consolidated
Entity to (a) do or cause to be done all things necessary to preserve and keep
in full force and effect its existence, rights and franchises and comply with
all Governmental Requirements applicable to it and (b) at all times maintain,
preserve and protect all franchises and trade names and preserve all of its
property used or useful in the conduct of its business and keep the same in
good repair, working order and condition, and from time to time make, or cause
to be made, all needful and proper repairs, renewals and replacements,
betterments and improvements thereto, so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
and at all times keep its insurable properties adequately insured and maintain
(i) insurance on its properties to such extent and against such risks,
including fire, as is customary with companies the same or a similar business,
(ii) necessary workmen's compensation insurance and (iii) such other insurance
(including liability insurance) as may be required by law or as may otherwise
be customarily maintained by companies in the same or a similar business.

SECTION 6.02. Payment of Indebtedness, Taxes, etc. The Borrowers
shall, and (to the extent of its right to do so) shall cause each other
Consolidated Entity to (a) pay its Liabilities in accordance with normal terms
and (b) pay and discharge or cause to be paid and discharged promptly all
taxes, assessments and other charges or levies of Governmental Authorities
imposed upon it or upon its income and profits or upon any of its properties,
real, personal or mixed before the same shall become in default, as well as all
lawful claims for labor, materials and supplies or otherwise, which, if unpaid,
might become a Lien upon such properties or any part thereof; provided,
however, that the Borrowers and the other Consolidated Entities shall not be
required to pay and discharge or cause to be paid and discharged any such tax,
assessment, charge, levy or claim so long as the validity thereof shall be duly
pursued and contested in good faith by appropriate proceedings and the
Borrowers and the other Consolidated Entities shall maintain adequate reserves
for such taxes, assessments, charges or levies during the pendency of such
proceedings.

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SECTION 6.03. Financial Statements, Reports, etc.

The Borrowers shall furnish and deliver to the Lender:

(1) not later than 30 days after the end of each month that is not
the end of a fiscal quarter and not later than 45 days after the end of each
month that is the end of a fiscal quarter, a balance sheet and a statement of
revenues and expenses of the Borrowers and its Consolidated Entities on a
consolidated and consolidating basis for such month and for the period
beginning on the first day of the fiscal year and ending on the last day of
such month and certified by the President, chief financial officer or chief
accounting officer of the Borrowers, and such other information and
documentation contained in a sample delivered by the Borrowers to the Lender
prior to the Closing Date);

(2) not later than 120 days after the end of each fiscal year,
financial statements (including a balance sheet, a statement of operations, a
statement of changes in stockholders' equity and a statement of cash flows) of
the Borrowers and its Consolidated Entities on a consolidated basis (including
consolidating entries) for such fiscal year in sufficient detail to indicate
the Borrowers' and each other Consolidated Entity's compliance with the
financial covenants set forth in this Article, together with statements in
comparative form for the preceding fiscal year, and accompanied by an opinion
of certified public accountants acceptable to the Lender, which opinion shall
state in effect that such financial statements (A) were audited using generally
accepted auditing standards, (B) were prepared in accordance with generally
accepted accounting principles applied on a consistent basis, and (C) present
fairly the financial condition and results of operations of the Borrowers and
its Consolidated Entities for the periods covered;

(3) not later than 45 days after the end of each fiscal quarter, a
compliance certificate duly executed by the President, chief financial officer
or chief accounting officer of the Borrowers in a form acceptable to the Lender
("Compliance Certificate");

(4) promptly upon receipt thereof, copies of all reports,
management letters and other documents submitted to the Borrowers or any other
Consolidated Entity by independent accountants in connection with any annual or
interim audit of the books of the Borrowers or other Consolidated Entity made
by such accountants;

(5) contemporaneously with the distribution thereof to the
stockholders or partners of the Borrowers or other Consolidated Entity (or the
filing thereof with the Securities and Exchange Commission), as the case may
be, copies of all statements, reports, notices and filings distributed by the
Borrowers or other Consolidated Entity to its stockholders or partners (or
filed with the

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Securities and Exchange Commission, including reports on SEC Forms l0-K,
l0-Q and 8-k);

(6) promptly after the Borrowers know or have reason to know of
the occurrence of any "reportable event" under Section 4043 of ERISA applicable
to the Borrowers or other ERISA Affiliate, a certificate of the president or
chief financial officer of the Borrowers setting forth the details as to such
"reportable event" and the action that the Borrowers or other ERISA Affiliate
has taken or will take with respect thereto, and promptly after the filing or
receiving thereof, copies of all reports and notices respecting such reportable
event that the Borrowers or other ERISA Affiliate files under ERISA with the
Internal Revenue Service, the Pension Benefit Guaranty Corporation or the
United States Department of Labor;

(7) promptly after the Borrowers or any other Consolidated Entity
becomes aware of the commencement thereof, notice of any investigation, action,
suit or proceeding before any Governmental Authority involving the condemnation
or taking under the power of eminent domain of any of its property or the
revocation or suspension of any permit, license, certificate of need or other
Governmental Requirement;

(8) within ten (10) days of the receipt by the Borrowers or any
other Consolidated Entity, copies of (A) all notices of default or breach under
any subrogation and recovery services agreement; and (B) all other material
notices of noncompliance, adverse reports issued by any Governmental Authority
or private insurance company pursuant to a subrogation and recovery services
agreement, which, if not promptly complied with or cured, could result in the
suspension or forfeiture of any license or certification, necessary for the
Borrowers to carry on its business as then conducted or the termination of any
subrogation and recovery services agreement;

(9) on the Closing Date and at any time the Lender requests,
copies of certificates of insurance issued by the insurers for all insurance
maintained by the Borrowers and its Consolidated Entities and, if the Lender
shall so request, copies of the policies providing such insurance; provided,
however, the Borrowers shall promptly notify the Lender of any material change
in insurance coverages; and

(10) as soon as practicable, such other information regarding the
business affairs, financial condition or operations of the Borrowers or its
Consolidated Entities (including a detailed listing of subrogation and recovery
services agreements and a summary aging of accounts receivable of the Borrowers
and its Consolidated Entities) as the Lender shall request from time to time or
at any time.

The Lender shall have no obligation to make Advances if at any time at
which the Borrowers is delinquent in the preparation

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and delivery of any of the items described above, whether or not such
delinquency constitutes an Event of Default.

SECTION 6.04. Litigation Notice. The Borrowers shall, immediately,
and in no event later than ten (10) days, after the same shall have become
known to any officer of the Borrowers, notify the Lender in writing of any
action, suit or proceeding at law or in equity or by or before any Governmental
Authority that, if adversely determined, might impair the ability of the
Borrowers or any other Consolidated Entity to perform its obligations under
this Agreement or any other loan Document or the ability of the Borrowers or
other Consolidated Entity to carry on its business substantially as now
conducted, or might materially and adversely affect the business, operations,
properties and assets or condition, financial or other, of the Borrowers or
other Consolidated Entity.

SECTION 6.05. Default Notice. Immediately, and in no event later than
three (3) days, after the Borrowers or any officer of the Borrowers becomes
aware of the existence of an Event of Default under any of the Loan Documents
or an event of default under any instrument evidencing or securing any other
indebtedness or contingent liability of the Borrowers or any Consolidated
Entity, or the occurrence and continuation of any event that, with notice or
lapse of time or both, would constitute an Event of Default under any of the
Loan Documents or an event of default under any instrument evidencing or
securing any other indebtedness or contingent liability of the Borrowers or any
Consolidated Entity, if the aggregate amount of indebtedness involved in all
such instruments in default exceeds $150,000, the Borrowers will deliver to the
Lender a written notice specifying the nature and period of existence thereof
and the action being taken and proposed to be taken with respect thereto.

SECTION 6.06. Further Assurances. The Borrowers shall at their cost
and expense, upon the request of the Lender, duly execute and deliver, or cause
to be duly executed and delivered, such further instruments and do and cause to
be done such further acts as may be necessary or proper in the opinion of the
Lender or its counsel to carry out more effectively the provisions and purposes
of the Loan Documents.

SECTION 6.07. Insurance. The Borrowers and each Consolidated Entity
shall at all times maintain in force, and pay all premiums and costs related
to, insurance coverages comparable to the coverages reviewed by the Lender
prior to the Closing Date and any other coverages required under applicable
Governmental Requirements.

SECTION 6.08. Cash Deposits. All cash of the Borrowers (excluding
deposits in transit) shall be consolidated no less frequently than once a week
in an account or accounts maintained with the Lender.

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<PAGE> 30

SECTION 6.09. Covenants Regarding Financial Condition. Except as
otherwise expressly provided in this Section 6.09, the Borrowers shall also
cause and require each of the Consolidated Entities to observe and perform each
of the covenants and agreements of this section to be observed and performed by
the Borrowers, whether or not a specific reference is made to the Consolidated
Entities in each such covenant.

The Borrowers covenant and agree that:

(1) Minimum Net Worth. Net Worth shall not at any time be less
than the sum of (A) the Net Worth of the Borrowers on the Closing Date plus (B)
80% of Consolidated Net Income (if positive), after taxes, for the period from
closing through the date of determination, determined on a quarterly basis,
plus (C) the aggregate amount of all increases, if any, in its capital accounts
resulting from the issuance of capital stock or other securities properly
classified as equity in accordance with generally accepted accounting
principles from closing through the date of determination.

(2) Interest Coverage Ratio. The ratio of (A) Consolidated Net
Income plus Interest Expense and income taxes for the immediately preceding
period of four (4) consecutive quarters to (B) Interest Expense for the
Borrowers and the Consolidated Entities on a consolidated basis for such period
shall not at any time be less than 2.25 to 1.0.

(3) Capital Expenditures. The Borrowers and the Consolidated
Entities on a consolidated basis may, without the necessity for obtaining the
consent of the Lender, make in the aggregate in any consecutive 12-month period
Capital Expenditures that do not exceed $2,000,000.

(4) Debt. The Borrowers and the Consolidated Entities on a
consolidated basis will not incur, create, assume or permit to exist, or
otherwise be or become liable with respect to, any Debt other than (A) the
Credit Obligations and Debt reflected on the Borrowers' consolidated balance
sheet as of March 31, 1997, delivered to the Lender after the Closing Date
(other than Debt to be paid with the proceeds of Advances), and (B) Debt
arising under the endorsement of negotiable instruments in the ordinary course
of business for collection.

(5) Investments and Loans. The Borrowers and the Consolidated
Entities on a consolidated basis will not, directly or indirectly, purchase or
otherwise acquire any stock, security, obligation or evidence of indebtedness
of, make any capital contribution to, own any equity interest in, or make any
loan or advance to, any other person; provided, however, that it may make loans
to its employees in the aggregate amount outstanding at any time not to exceed
$100,000 and hold (A) all Stock of Partnership Interests in the persons that
constitute Consolidated Entities

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<PAGE> 31

on the Closing Date; (B) Stock of, Partnership Interests in, and assets
of, Participating Partnerships and Participating Subsidiaries acquired
subsequent to the Closing Date with the approval of the Lender; and (C)
Permitted Investments.

(6) Disposition of Assets; Merger. The Borrowers and the
Consolidated Entities on a consolidated basis will not (A) sell, lease,
transfer, swap, exchange or otherwise dispose of, in a single transaction or a
series of related transactions, all or substantially all of its business or
assets; or (B) liquidate, wind up or dissolve, or enter into any consolidation,
merger, syndication or other combination or engage in any other reorganization
or recapitalization; provided, however, that (i) any Consolidated Entity
hereafter created or acquired may sell, lease, transfer or otherwise dispose of
all or any portion of its business or assets to the Borrowers or any other
Consolidated Entity or Consolidated Entities or merge into or consolidate with
the Borrowers or one or more other Consolidated Entities, so long as the entity
to which such business or assets are sold, leased, transferred or disposed of
or which survives or results from any such merger or consolidation is the
Borrowers, a Participating Subsidiary or a Participating Partnership; and (ii)
any Consolidated Entity, whether now existing or hereafter created or acquired
(the "Transferring Consolidated Entity") may sell, lease, transfer or otherwise
dispose of all or any portion of its business or assets to, or merge into, the
Borrowers or any other Consolidated Entity that directly or indirectly controls
the Transferring Consolidated Entity. The Borrowers may sell, lease, transfer
or otherwise dispose of furniture, fixtures and equipment in an amount not to
exceed $250,000 in any twelve month period.

(7) Liens. The Borrowers will not, and will not permit any
Consolidated Entity to, incur, create, assume or permit to exist any Lien upon
any of its accounts receivable, contract rights, chattel paper, inventory,
equipment, instruments, documents, general intangibles or other personal or
real property of any character, whether now owned or hereafter acquired, other
than Liens that constitute Permitted Encumbrances.

(8) Dividends and Distributions of Consolidated Entities. The
Borrowers will not permit any Consolidated Entity to be or become subject to
any restriction on the ability of such Consolidated Entity to pay dividends or
to make partnership distributions.

(9) Restricted Payments. The Borrowers will not, directly or
indirectly, declare, pay any dividend, or make any distribution, of any kind or
character (whether in cash, property or securities) on or with respect to any
class of its Capital Stock now or hereafter outstanding or to the holders of
any class of its Capital Stock now or hereafter outstanding (including pursuant
to a merger or consolidation of the Borrowers, but excluding any dividends or
distributions payable solely in shares of its Common

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<PAGE> 32

Stock), or apply, or permit any Consolidated Entity to apply, any of its funds,
property or assets to the purchase, redemption or other retirement of any class
of the Borrowers' Capital Stock, now or hereafter outstanding.

(10) Material Adverse Change. The Borrowers will not permit a
material adverse change in the financial condition (as reflected in the
financial statements referred to in Section 4.03 since the date of such
financial statements), business or operations of the Borrowers or any of the
Consolidated Entities to occur.

SECTION 6.10. Continuation of Current Business. Neither the Borrowers
nor any other Consolidated Entity will change its primary business of providing
health care subrogation and other recovery services under contract.
Notwithstanding the foregoing, nothing contained in this Section 6.10 shall
prohibit the Borrowers or any Consolidated Entity from acquiring any health
care business so long as, after giving effect to such Acquisition, not less
than 90% of the net operating revenues of the Borrowers and the Consolidated
Entities on a consolidated basis can reasonably be expected to be derived from
providing health care subrogation and recovery services.

SECTION 6.11. Management Contracts. Neither the Borrowers nor any
other Consolidated Entity will enter into any agreement whereby the management,
supervision or control of its business as a whole shall be delegated to or
placed in any persons other than its governing body and officers, the Borrowers
or a Consolidated Entity.

SECTION 6.12. Cooperation; Inspection of Properties. The Borrowers
shall, and shall cause the Consolidated Entities to, permit the Lender and its
representatives to inspect the Borrowers' and the Consolidated Entities'
properties and assets, and to inspect, review and audit the Borrowers' and the
Consolidated Entities' books and records from time to time and at any time.

SECTION 6.13. Use of Proceeds. The Borrowers shall use the proceeds
of Advances exclusively to provide financing for general corporate and other
capital needs for expenditures or Acquisitions, or both. None of the proceeds
of the Advances shall be used to purchase or carry, or to reduce or retire or
refinance any credit incurred to purchase or carry, any Margin Stock, or to
extend credit to others for the purpose of purchasing or carrying any Margin
Stock. If requested by the Lender, the Borrowers will complete and sign Part I
of a copy of Federal Reserve Form U-1 referred to in Regulation U and deliver
such copy to the Lender.

SECTION 6.14. Additional Consolidated Entities. The Borrowers will
cause each Consolidated Entity that is hereafter acquired or created, promptly
(but in no event more than 30 days) after such Consolidated Entity is acquired
or created, to become a

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<PAGE> 33

Participating Subsidiary or Participating Partnership by execution of an
Assumption Agreement, and all other documents necessary to cause it to become
jointly and severally liable for the Credit Obligations (subject to the
limitations provided in the Assumption Agreement).

SECTION 6.15. Sale of Receivables. Neither the Borrowers nor any
other Consolidated Entity will sell, assign or discount, or grant or permit to
exist any Lien on, any of its accounts receivable or any promissory note held
by it, with or without recourse, other than the discount of notes in the
ordinary course of business for collection, and Liens in favor of the Lender.

SECTION 6.16. Transactions with Affiliates. Neither the Borrowers nor
any other Consolidated Entity will, directly or indirectly, enter into any
lease or other transaction with any Affiliate (other than the Borrowers or
another Consolidated Entity) on terms that are less favorable to the Borrowers
or Consolidated Entity entering into such lease or other transaction than those
that might be obtained at the time from persons who are not Affiliates of the
Borrowers or other Consolidated Entity.

SECTION 6.17. Non-Scheduled Redemption of Preferred Stock, etc. The
Borrowers will not (a) give any notice of election to redeem the outstanding
shares of its preferred stock or make or permit to be made any dividend on
account of, or repurchase, redeem or otherwise retire (whether at the option of
the holder or otherwise), or make or permit to be made any other payment of any
nature with respect to any of the preferred stock.

ARTICLE VII

EVENTS OF DEFAULT AND REMEDIES

SECTION 7.01. Events of Default. The following shall constitute
Events of Default under this Agreement:

(a) the Borrowers shall fail to pay when due any principal or
interest payable under the terms of the Note or any other amount payable under
this Agreement or any other of the Credit Obligations or any other amount owed
to the Lender or in connection with any of the Loan Documents; or

(b) the Borrowers shall default in the observance or performance
of any provision in Sections 6.09, 6.10, 6.11, 6.13, 6.14, 6.15, 6.16, or 6.17;
or

(c) the Borrowers shall default in the performance or observance
of any provision of this Agreement, except those covered by clauses (a) and (b)
above, and shall not cure such default within 30 days after the first to occur
of (i) the date the Lender gives

<PAGE> 34

written or telephonic notice of the default to the Borrowers or (ii) the date
the Borrowers otherwise has actual notice thereof; or

(d) the Lender shall determine that any statement, certification,
representation or warranty contained herein, or in any of the other Loan
Documents or in any report, financial statement, certificate or other
instrument delivered to the Lender by or on behalf of the Borrowers, was
misleading or untrue in any material respect at the time it was made; or

(e) default shall be made with respect to any Debt or obligations
(other than the Credit Obligations) of the Borrowers or of any other
Consolidated Entity to the Lender, and the Borrowers or other Consolidated
Entity or Affiliate shall not cure such default within 30 days (including any
days of grace available under the documents with respect to which such Debt or
obligations were incurred) after the first to occur of (i) the date the Lender
gives written or telephonic notice of the default to the Borrowers or (ii) the
date the Borrowers otherwise has actual notice thereof; or

(f) default shall be made with respect to any Debt (other than
Debt to the Lender) of the Borrowers or of any other Consolidated Entity when
due or the performance of any other obligation incurred in connection with any
Debt of the Borrowers or other Consolidated Entity, if the effect of such
default is to accelerate the maturity of such Debt or to permit the holder
thereof to cause such Debt to become due prior to its stated maturity, or any
such Debt shall not be paid when due, if the aggregate amount of all such Debt
involved exceeds $150,000; or

(g) an Event of Default, as therein defined, shall occur under any
of the other Loan Documents; or

(h) the Borrowers or any other Consolidated Entity shall (i) apply
for or consent to the appointment of a receiver, trustee, liquidator or other
custodian of it or any of its properties or assets, (ii) fail or admit in
writing its inability to pay its debts generally as they become due, (iii) make
a general assignment for the benefit of creditors, (iv) suffer or permit an
order for relief to be entered against it in any proceeding under the federal
Bankruptcy Code, or (v) file a voluntary petition in bankruptcy, or a petition
or an answer seeking an arrangement with creditors or seeking to take advantage
of any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law or statute, or an answer admitting the material
allegations of a petition filed against it in any proceeding under any such law
or statute, or if corporate or partnership action shall be taken by the
Borrowers or any other Consolidated Entity for the purpose of effecting any of
the foregoing; or

(i) a petition shall be filed, without the application, approval
or consent of the Borrowers or any other Consolidated Entity, in any court of
competent jurisdiction, seeking bankruptcy,

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<PAGE> 35

reorganization, rearrangement, dissolution or liquidation of the Borrowers or
other Consolidated Entity or of all or a substantial part of the properties or
assets of the Borrowers or other Consolidated Entity, or seeking any other
relief under any law or statute of the type referred to in clause (v) of
paragraph (h) above against the Borrowers or other Consolidated Entity, or the
appointment of a receiver, trustee, liquidator or other custodian of the
Borrowers or any other Consolidated Entity or of all or a substantial part of
the properties or assets of the Borrowers or any other Consolidated Entity, and
such petition shall not have been dismissed within 30 days after the filing
thereof; or

(j) any final judgment for the payment of money shall be rendered
against the Borrowers or any other Consolidated Entity and the same shall
remain undischarged for a period of 30 days during which execution shall not be
effectively stayed, unless such judgment is adequately covered by valid and
collectible insurance, which coverage is approved by the Lender; or

(k) there shall occur the insolvency, dissolution, liquidation or
suspension of business of the Borrowers or any other Consolidated Entity or the
issuance of a writ of execution, attachment or garnishment against the assets
of the Borrowers or any other Consolidated Entity, and such writ of execution,
attachment or garnishment shall not be dismissed, discharged or quashed within
30 days of issuance; or

(l) the Borrowers or any other Consolidated Entity shall default
under any agreement material to the operation of its business as conducted on
the Closing Date or proposed to be conducted;

(m) either (i) any person or any persons, other than persons
holding capital stock or options on the capital stock of either Borrower on the
date hereof, acting together that would constitute a "group" (a "Group") for
purposes of Section 13(d) of the Exchange Act, or any successor provision
thereto, together with any Affiliates or Related Persons thereof, other than
any trust for the employee stock ownership plans of the Borrowers or any of the
Consolidated Entities, shall beneficially own (as defined in Rule 13d-3 of the
Exchange Act or any successor provision thereto) at least 50% of the aggregate
voting power of all classes of Voting Stock of the Borrowers; or (ii) any
person or Group, together with any Affiliates or Related Persons thereof, shall
succeed in having its or their nominees elected to the Board of Directors of
the Borrowers such that such nominees, when added to any existing directors
remaining on the Board of Directors of the Borrowers after such election who is
an Affiliate or Related Person of such person or Group, shall constitute a
majority of the Board of Directors of the Borrowers; or

(n) enactment of health care reform legislation that has, in the
opinion of the Lender, an adverse effect on the collection of (or reduce the
ability to collect) the amounts under the Contracts

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<PAGE> 36

entered into prior to the date of such health care reform legislation.

SECTION 7.02. Remedies. Upon the occurrence of an Event of Default
and at any time thereafter, if such Event of Default shall then be continuing:

(a) either or both of the following actions shall be taken by the
Lender, at its sole option: (i) the Lender shall terminate any obligation to
make further Advances, whereupon the obligation of the Lender to make further
Advances hereunder shall terminate immediately, and/or (ii) the Lender shall
declare by notice to the Borrowers any or all of the Credit Obligations to be
immediately due and payable, and the same, including all interest accrued
thereon and all other obligations of the Borrowers to the Lender, shall
forthwith become immediately due and payable without presentment, demand,
protest, notice or other formality of any kind, all of which are hereby
expressly waived, anything contained herein or in any instrument evidencing the
Credit Obligations to the contrary notwithstanding; provided, however, that
notwithstanding the above, if there shall occur an Event of Default under
clause (h) or (i) of Section 7.01, then the obligation of the Lender to lend
hereunder shall automatically terminate and any and all of the Credit
Obligations shall be immediately due and payable without the necessity of any
action by the Lender or notice to the Lender; and

(b) the Lender may exercise any and all rights and remedies
available to the Lender under the Loan Documents and applicable law.

SECTION 7.03. No Election of Remedies. In case any one or more Events
of Default shall occur and be continuing, the Lender may proceed to protect and
enforce its rights or remedies either by suit in equity or by action at law, or
both, whether for the specific performance of any covenant, agreement or other
provision contained herein or in any other Loan Document, or to enforce the
payment of the Credit Obligations or any other legal or equitable right or
remedy.

SECTION 7.04. Rights Cumulative. No right or remedy herein conferred
upon the Lender is intended to be exclusive of any other rights or remedies
contained herein or in any other Loan Document, and every such right or remedy
shall be cumulative and shall be in addition to every other such right or
remedy contained herein and therein or now or hereafter existing at law or in
equity or by statute or otherwise.

SECTION 7.05. Allocation of Proceeds. If an Event of Default has
occurred and is continuing, and the maturity of the Note has been accelerated
pursuant to Section 7.02, all payments received by the Lender hereunder with
respect to any principal of or interest on the Credit Obligations or any other
amounts payable

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<PAGE> 37

by the Borrowers hereunder shall be applied by the Lender in the following
order:

(i) amounts due to the Lender pursuant to Section 2.05(b);

(ii) payments of interest, to be applied in accordance with
Section 2.09;

(iii) payments of principal, to be applied in accordance
with Section 2.09; and

(iv) payments of all other amounts due under this
Agreement, if any, to be applied in accordance with the outstanding principal
balance of the Lender's Loans.

ARTICLE VIII

MISCELLANEOUS

SECTION 8.01. Notices.

(a) Any request, demand, authorization, direction, notice,
consent, waiver or other document provided or permitted by this Agreement or
the other Loan Documents to be made upon, given or furnished to, or filed with,
the Borrowers or the Lender must (except as otherwise provided in this
Agreement or the other Loan Documents) be in writing and be delivered by one of
the following means: (1) by personal delivery at the hand delivery address
specified below, (2) by first-class, registered or certified mail, postage
prepaid and addressed as specified below, or (3) if facsimile transmission
facilities for such party are identified below or pursuant to a separate notice
from such party, sent by facsimile transmission to the number specified below
or in such notice.

(b) The hand delivery address, mailing address and (if applicable)
facsimile transmission number for receipt of notice or other documents by such
parties are as follows:

If to the Borrowers at:

1400 Watterson Tower
Louisville, Kentucky 40218
Attn: Douglas R. Sharps, Esq.
Executive Vice President-Finance
and Administration, Chief Financial
Officer and Secretary
Facsimile: (502) 454-1350

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<PAGE> 38

If to the Lender at:

101 South Fifth Street
Louisville, Kentucky 40202
Attn: Deroy Scott, Vice President
Facsimile: (502) 581-4424

with a copy to:

Robert B. Vice
Reed Weitkamp Schell Cox & Vice
2400 Citizens Plaza
Louisville, Kentucky 40202
Facsimile: (502) 562-2200

Any of such parties may change its address or facsimile transmission number for
receiving any such notice or other document by giving notice of the change to
the other parties named in this Section 8.01.

(c) Any such notice or other document shall be deemed delivered
when actually received by an officer, director, partner or other legal
representative of the party) at the address or number specified pursuant to
this Section 8.01, or, if sent by mail, three Business Days after such
notice or document is deposited in the United States mail, addressed as
provided above.

(d) Five Business Days' written notice to the Borrowers as
provided above shall constitute reasonable notification to the Borrowers when
notification is required by law; provided, however, that nothing contained in
the foregoing shall be construed as requiring five Business Days' notice if,
under applicable law and the circumstances then existing, a shorter period of
time would constitute reasonable notice.

SECTION 8.02. Survival; Successors and Assigns. All covenants,
agreements, representations and warranties made in this Agreement or in any of
the other Loan Documents and in the certificates delivered pursuant to any of
the Loan Documents shall survive the making by the Lender of each Advance and
the execution and delivery to the Lender of the Loan Documents and shall
continue in full force and effect so long as any of the Credit Obligations are
outstanding and unpaid and this Agreement has not been terminated by the Lender
and the Borrowers in writing. Whenever in any Loan Document a party is
referred to, such reference shall be deemed to include the successors and
assigns of such party, except that the Borrowers may not assign or transfer any
Loan Document without the prior written consent of the Lender. All covenants,
promises and agreements by or on behalf of the Borrowers that are contained in
any Loan Document shall bind the Borrowers' successors and assigns and shall
inure to the benefit of the respective successors and assigns of the Lender.
Notwithstanding any other provision set forth in this Agreement, the Lender may
at any time (i) create a

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<PAGE> 39

security interest in all or any portion of its rights under this Agreement
(including the Advances owing to it and the Note held by it) in favor of any
Federal Reserve Board in accordance with Regulation A of the Board of Governors
of the Federal Reserve System or (ii) assign or transfer its interests and
rights under this Agreement or any of the other Loan Documents, in whole or in
part, to any Affiliate of the Lender.

SECTION 8.03. Expenses. The Borrowers shall promptly pay all fees and
expenses (including reasonable legal fees and expenses of counsel for the
Lender, insurance premiums, recording, filing and transfer fees and taxes, and
other costs and expenses related to the Credit Obligations or required by any
of the Loan Documents. If the Borrowers fail to pay any such cost or expense,
the Lender may, but shall have no obligation to, pay the same from the Lender's
funds or by making an Advance for such purpose, without notice to the
Borrowers. The Borrowers shall reimburse the Lender on demand for, and
shall indemnify and hold the Lender harmless from and against, all such costs
and expenses paid by the Lender and all other costs and expenses (including the
reasonable fees and disbursements of the Lender's counsel) of every kind
incurred by the Lender in connection with (i) the making or collection of the
Credit Obligations, (ii) the preparation and review of the Loan Documents
(whether or not the transactions provided for in this Agreement shall be
consummated) and any other documents related thereto, (iii) the enforcement of
any of the Loan Documents, the protection of the Lender's rights in any
collateral and the defense of any claim, cross-claim or counterclaim asserted
against the Lender by the Borrowers or any other person that relates to the
Credit Obligations or the Loan Documents, and (iv) the transactions provided
for in the Loan Documents. Any amount paid or advanced by the Lender under
this section or the other Loan Documents shall bear interest until paid at a
rate equal to two percent (2%) in excess of the Base Rate in effect from time
to time, or the highest rate permitted by law, whichever is less. The
Borrowers shall pay all costs and expenses of performing and satisfying their
obligations under this Agreement. The Borrowers' obligations under this
Section 8.03 shall survive the payment in full of the Credit Obligations and
the termination of this Agreement.

SECTION 8.04. Indemnification. The Borrowers agree to indemnify and
hold harmless the Lender, and its employees, officers, directors and other
representatives (the "Indemnified Parties") from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever
(including attorneys' fees) (the "Indemnified Obligations") that may at any
time (including at any time following the termination of this Agreement) be
imposed on, incurred by or asserted against any of the Indemnified Parties in
any way relating to or arising out of this Agreement or any of the other Loan
Documents or the transactions provided for herein or therein or any action
taken or omitted

39
<PAGE> 40

by any of the Indemnified Parties under or in regulations with respect to
Hazardous Substances and other environmental matters), or as a result of any
inaccurate representation made by the Borrowers in this Agreement or any other
Loan Document (including any inaccurate representation with respect to
Hazardous Substances and other environmental matters) or any breach of any of
the warranties or obligations of the Borrowers under this Agreement or any
other Loan Document (including any breach of any warranty or obligation with
respect to Hazardous Substances or other environmental matters) provided,
however, that no Indemnified Party shall be indemnified for any Indemnified
Obligation arising from its own gross negligence or willful misconduct as
finally determined by a court of competent jurisdiction.

SECTION 8.05. Governing Law. This Agreement and the other Loan
Documents shall be construed in accordance with and governed by the laws of the
Commonwealth of Kentucky.

SECTION 8.06. Non-Waiver. No failure or delay on the part of the
Lender in exercising any right, power or privilege under this Agreement or any
of the other Loan Documents shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise or
the exercise of any other right, power or privilege. Without limiting the
generality of the foregoing, the Lender may waive or not enforce any
requirements or condition applicable to the making of any Advance without
waiving the right to require strict compliance with such requirement or
condition in connection with other Advances.

SECTION 8.07. Non-Business Days. If any payment with respect to the
Credit Obligations becomes due and payable on a day that is not a Business Day,
the maturity thereof shall be extended to the next succeeding Business Day, and
in the case of a payment of principal, interest shall be payable thereon at the
then applicable rate specified in this Agreement during such period of
extension.

SECTION 8.08. Modification. etc. Subject to the provisions of
Section 8.02, no modification, amendment or waiver of any provision of this
Agreement or any of the other Loan Documents, and no consent to any departure
by the Borrowers therefrom, shall be effective unless the same shall be in
writing and signed by an authorized officer of the Lender, and then such waiver
or consent shall be effective only in the specific instance and for the purpose
for which given. No notice to or demand on the Borrowers not otherwise
expressly required hereby in any case shall entitle the Borrowers to any other
or further notice or demand in the same, similar or other circumstances.

SECTION 8.09. Set-off. Upon the occurrence and during the
continuance of any Event of Default the Lender is hereby autho-

<PAGE> 41

rized at any time and from time to time, without notice to the Borrowers
(any such notice being expressly waived by the Borrowers) to set off and apply
any and all deposits (general or special, time or demand, provisional or final
but not deposits of "Restricted Cash" so designated on Schedule 8.09 by the
Borrowers to the Lender and as amended and updated by the Borrowers in the
Compliance Certificate) at any time held and other indebtedness at any time
owing to the Lender (including any branches, agencies or Affiliates of the
Lender, wherever located) to or for the credit or the account of the Borrowers
against any and all of the obligations of the Borrowers now or hereafter
existing under any of the Loan Documents, irrespective of whether or not any
demand shall have been made under the Loan Documents and although such
obligations may be unmatured prior to any acceleration of the maturity date.
The Lender agrees promptly to notify the Borrowers after any such set-off and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application or impose any liability on the Lender.
The rights of the Lender under this Section 8.09 are in addition to all other
rights and remedies (including other rights of set- off or pursuant to any
banker's lien) that the Lender may have.

SECTION 8.10. Severability. Any provision of any of the Loan
Documents that is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
thereof or affecting the validity or enforceability of such provision in any
other jurisdiction.

SECTION 8.11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original, but when taken
together all such counterparts shall constitute but one agreement, and any
party may execute this Agreement by executing any one or more of such
counterparts.

SECTION 8.12. Participation. The Borrowers understands that the
Lender may from time to time enter into a participation agreement or agreements
with one or more other participants pursuant to which each such participant
shall be given a participation in the Lender's Note, Loans and interest in the
Credit Obligations and the Loan Documents and that any such participant may
from time to time similarly grant to one or more subparticipants
subparticipations in the Note, Loans and interest in the Credit Obligations and
the Loan Documents; provided, however, that all communications with the
Borrowers shall be solely with the Lender and not with any participant. The
Borrowers agree that any participant or subparticipant (including any branches,
agencies or Affiliates thereof, wherever located) may exercise any and all
rights of banker's lien or set-off with respect to the Borrowers, as fully as
if such participant or subparticipant had made a loan directly to the Borrowers
in the amount of the participation or subparticipation given to such
participant or subparticipant in the Credit Obligations and the Loan Documents.
For purposes of this Section 8.12

41
<PAGE> 42
only, the Borrowers shall be deemed to be directly obligated to each
participant or subparticipant in the amount of its participating interest in
the amount of the principal of, and interest on, the Credit Obligations.
Nothing contained in this section shall affect the Lender's right of set-off
(under Section 8.09 or applicable law) with respect to the entire amount of the
Credit Obligations, notwithstanding any such participation or subparticipation.
The Lender may divulge to any participant or subparticipant all information,
reports, financial statements, certificates and documents obtained by the
Lender from the Borrowers or any other person under any provisions of this
Agreement or the other Loan Documents or otherwise.

SECTION 8.13. Termination. This Agreement shall continue until the
Credit Obligations shall have been paid in full and the Lender shall have no
obligation to make any further Advances or extend any other credit hereunder.
This Agreement, and the obligations of the Borrowers hereunder, shall continue
to be effective, or be automatically reinstated, as the case may be, if at any
time payment in whole or in part of any payment made with respect to the Credit
Obligations is rescinded or must otherwise be restored or returned to the
person making such payment upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of such person, or upon or as a result of the
appointment of a custodian, receiver, trustee or other officer with similar
powers with respect to such person or with respect to any part of the property
thereof, or otherwise, all as though such payment had not been made.

SECTION 8.14. Obligations of the Borrowers Absolute. The Borrowers
hereby agree that its obligations and liabilities with respect to the Credit
Obligations are continuing, absolute and unconditional. Without limiting the
generality of the foregoing, the obligations and liabilities of the Borrowers
with respect to the Credit Obligations shall not be released, discharged,
impaired, modified or in any way affected by (a) the invalidity or
unenforceability of any Loan Document executed by any other person with respect
to the Credit Obligations, (b) the failure of the Lender to give the Borrowers
a copy of any notice given to any other person, (c) any modification, amendment
or supplement of any obligation, covenant or agreement contained in any Loan
Document executed by any other person with respect to the Credit Obligations,
(d) any compromise, settlement, release or termination of any obligation,
covenant or agreement in any Loan Document executed with respect to the Credit
Obligations, (e) any waiver of payment, performance or observance by or in
favor of any Participating Subsidiary or Participating Partnership of any
obligation, covenant or agreement under any Loan Document, (f) any consent,
extension, indulgence or other action or inaction, or any exercise or
non-exercise of any right, remedy or privilege with respect to any Loan
Document executed by any other person with respect to the Credit Obligations,
(g) the extension of time for payment or performance of any Credit Obligation
by any Participating Subsidiary or Participating Partnership, or (h) the
release or discharge of the Lender's claims

42
<PAGE> 43

against any collateral now or at any time hereafter securing any of the Credit
Obligations, or any Participating Subsidiary or Participating Partnership by
operation of law or otherwise.

IN WITNESS WHEREOF, the Borrowers and the Lender have caused this
Credit Agreement to be executed and delivered by their duly authorized
corporate officers as of the day and year first above written.

HEALTHCARE RECOVERIES, INC.

By:
-----------------------------------
Title:
--------------------------------

NATIONAL CITY BANK OF KENTUCKY

By:
-----------------------------------
Deroy Scott
Vice President

<PAGE> 1

Exhibit 15

May 19, 1997

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Healthcare Recoveries, Inc.
Registration Statement on Form S-1
File No. 333-23287

We are aware that our report dated May 19, 1997 on our reviews of interim
financial information of Healthcare Recoveries, Inc. as of March 31, 1997 and
for the quarters ended March 31, 1996 and 1997 is included in this registration
statement. Pursuant to Rule 436(c) under the Securities Act of 1933, this
report should not be considered a part of the registration statement prepared
or certified by us within the meaning of Sections 7 and 11 of that Act.

COOPERS & LYBRAND L.L.P.

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-1 of our
report dated February 28, 1997, except for Note 10, as to which the date is
May 19, 1997, on our audits of the financial statements of Healthcare
Recoveries, Inc. as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996. We also consent to the reference
to our firm under the caption "Independent Public Accountants."

COOPERS & LYBRAND L.L.P.

Louisville, Kentucky

May 19, 1997

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