<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

<Table>
<C>          <S>
 (Mark One)
    [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001



                                   OR




    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE TRANSITION PERIOD FROM           TO
</Table>

                         COMMISSION FILE NUMBER 0-22585

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

                          HEALTHCARE RECOVERIES, INC.
             (Exact Name of Registrant as Specified in its Charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      61-1141758
       (State or Other Jurisdiction of                        (I.R.S. Employer
        Incorporation or Organization)                      Identification No.)

            1400 WATTERSON TOWER,                                  40218
             LOUISVILLE, KENTUCKY                                (Zip Code)
   (Address of Principal Executive Offices)
</Table>

              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
                                 (502) 454-1340

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]

     As of November 13, 2001, 9,791,200 shares of the Registrant's Common Stock,
$0.001 par value were outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                          HEALTHCARE RECOVERIES, INC.
                                   FORM 10-Q
                               SEPTEMBER 30, 2001

                                     INDEX

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>      <C>                                                            <C>
                       PART I: FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)............................     1
         Condensed Balance Sheets as of September 30, 2001 and
         December 31, 2000...........................................     1
         Condensed Statements of Income for the three and nine months
         ended September 30, 2001 and 2000...........................     2
         Condensed Statements of Cash Flows for the nine months ended
         September 30, 2001 and 2000.................................     3
         Notes to Condensed Financial Statements.....................     4
Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................    10
Item 3.  Quantitative and Qualitative Disclosures About Market
         Risk........................................................    20

                         PART II: OTHER INFORMATION

Item 1.  Legal Proceedings...........................................    21
Item 6.  Exhibits and Reports on Form 8-K............................    25
Signatures...........................................................    27
</Table>

     THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
HEALTHCARE RECOVERIES, INC. OR MEMBERS OF ITS MANAGEMENT TEAM CONTAIN STATEMENTS
WHICH MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2
AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF HEALTHCARE RECOVERIES, INC. AND
MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. 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 IN THE SAFE
HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT
99.1 TO THE HEALTHCARE RECOVERIES, INC. ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2000, AND ARE HEREBY INCORPORATED HEREIN BY
REFERENCE. HEALTHCARE RECOVERIES, INC. UNDERTAKES NO OBLIGATION TO UPDATE OR
REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS OR
CIRCUMSTANCES, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.

                                        i
<PAGE>

                                     PART I

                             FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

                          HEALTHCARE RECOVERIES, INC.

                            CONDENSED BALANCE SHEETS
                                  (UNAUDITED)
                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<Table>
<Caption>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents.................................    $  1,253        $  1,297
  Restricted cash...........................................      14,917          21,647
  Accounts receivable, less allowance for doubtful accounts
    of $444 in 2001 and $434 in 2000........................       9,655           7,660
  Property held for sale....................................       2,981              --
  Other current assets......................................       2,269           2,153
                                                                --------        --------
         Total current assets...............................      31,075          32,757
                                                                --------        --------
Property and equipment, at cost:
  Buildings and land........................................          --           4,001
  Furniture and fixtures....................................       3,088           3,230
  Office equipment..........................................       2,027           1,992
  Computer equipment........................................       9,923           9,039
  Software..................................................       6,505           4,844
  Leasehold improvements....................................       1,467           1,308
                                                                --------        --------
                                                                  23,010          24,414
  Accumulated depreciation and amortization.................     (16,344)        (13,781)
                                                                --------        --------
         Property and equipment, net........................       6,666          10,633
                                                                --------        --------
Cost in excess of net assets acquired, net..................      29,573          29,143
Identifiable intangibles, net...............................       4,512           4,934
Other assets................................................       2,270           1,978
                                                                --------        --------
         Total assets.......................................    $ 74,096        $ 79,445
                                                                ========        ========

                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable....................................    $  1,569        $  1,231
  Accrued expenses..........................................       4,846           9,906
  Funds due clients.........................................      10,743          12,437
  Short-term borrowings expected to be refinanced...........      12,000              --
  Income taxes payable......................................         989           1,385
                                                                --------        --------
         Total current liabilities..........................      30,147          24,959
Other liabilities...........................................       2,330           2,324
Long-term borrowings........................................          --          14,000
                                                                --------        --------
         Total liabilities..................................      32,477          41,283
                                                                --------        --------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $.001 par value per share; 2,000 shares
    authorized; no shares outstanding.......................          --              --
  Common stock, $.001 par value per share; 20,000 shares
    authorized; 9,791 and 9,771 shares outstanding as of
    September 30, 2001 and December 31, 2000, respectively..          12              12
  Capital in excess of par value............................      22,750          22,637
  Other.....................................................        (957)           (912)
  Treasury stock at cost; 1,792 shares at September 30, 2001
    and 1,773 shares at December 31, 2000...................      (7,116)         (7,037)
  Retained earnings.........................................      26,930          23,462
                                                                --------        --------
         Total stockholders' equity.........................      41,619          38,162
                                                                --------        --------
         Total liabilities and stockholders' equity.........    $ 74,096        $ 79,445
                                                                ========        ========
</Table>

     The accompanying notes are an integral part of the condensed financial
                                  statements.
                                        1
<PAGE>

                          HEALTHCARE RECOVERIES, INC.

                         CONDENSED STATEMENTS OF INCOME
        FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (UNAUDITED)
                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<Table>
<Caption>
                                                         THREE MONTHS ENDED    NINE MONTHS ENDED
                                                            SEPTEMBER 30,        SEPTEMBER 30,
                                                         -------------------   -----------------
                                                           2001       2000      2001      2000
                                                         --------   --------   -------   -------
<S>                                                      <C>        <C>        <C>       <C>
Claims revenues........................................  $15,093    $15,113    $47,105   $47,628
Cost of services.......................................    7,646      7,322     23,089    23,430
                                                         -------    -------    -------   -------
          Gross profit.................................    7,447      7,791     24,016    24,198
Support expenses.......................................    3,984      3,951     12,939    12,906
Depreciation and amortization..........................    1,694      1,637      4,906     4,777
Research and development...............................      124         --        415        --
                                                         -------    -------    -------   -------
          Operating income.............................    1,645      2,203      5,756     6,515
Interest income........................................      114        300        730       847
Interest expense.......................................      192        375        742     1,004
Other -- loss on property held for sale................      980         --        980        --
Other -- Special Committee expenses....................       --         --         --        90
                                                         -------    -------    -------   -------
          Income before income taxes...................      587      2,128      4,764     6,268
(Benefit) provision for income taxes...................     (437)       883      1,296     2,601
                                                         -------    -------    -------   -------
          Net income...................................  $ 1,024    $ 1,245    $ 3,468   $ 3,667
                                                         =======    =======    =======   =======
Basic earnings per common share........................  $  0.10    $  0.12    $  0.35   $  0.34
                                                         =======    =======    =======   =======
Diluted earnings per common share......................  $  0.10    $  0.12    $  0.35   $  0.33
                                                         =======    =======    =======   =======
</Table>

     The accompanying notes are an integral part of the condensed financial
                                  statements.
                                        2
<PAGE>

                          HEALTHCARE RECOVERIES, INC.

                       CONDENSED STATEMENTS OF CASH FLOWS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (UNAUDITED)
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                              NINE MONTHS ENDED
                                                                SEPTEMBER 30,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Cash flows from operating activities:
  Net income................................................  $ 3,468   $ 3,667
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization..........................    4,906     4,777
     Deferred income taxes..................................       (2)       (3)
     Other..................................................        8        (7)
     Loss on property held for sale.........................      980        --
     Changes in operating assets and liabilities:
       Restricted cash......................................    1,594     2,010
       Accounts receivable..................................   (1,995)   (1,366)
       Other current assets.................................     (136)      710
       Other assets.........................................     (552)     (411)
       Trade accounts payable...............................      225      (990)
       Accrued expenses.....................................   (4,170)   (1,922)
       Funds due clients....................................   (1,694)   (1,801)
       Income taxes payable.................................     (396)       72
       Other liabilities....................................        6        --
                                                              -------   -------
       Net cash provided by operating activities............    2,242     4,736
                                                              -------   -------
Cash flows from investing activities:
  Acquisitions, net of cash acquired........................    2,551    (3,881)
  Disposals of property and equipment.......................       --     1,409
  Purchases of property and equipment.......................   (1,408)   (1,114)
  Capitalization of internally developed software...........   (1,410)   (1,392)
                                                              -------   -------
       Net cash used in investing activities................     (267)   (4,978)
                                                              -------   -------
Cash flows from financing activities:
  Line of credit proceeds...................................    1,500     7,700
  Line of credit repayments.................................   (3,500)   (4,200)
  Repurchase of common stock................................      (79)   (3,772)
  Issuance of common stock..................................      105        91
  Other.....................................................      (45)     (529)
                                                              -------   -------
       Net cash used in financing activities................   (2,019)     (710)
                                                              -------   -------
Net decrease in cash and cash equivalents...................      (44)     (952)
Cash and cash equivalents, beginning of period..............    1,297     1,670
                                                              -------   -------
Cash and cash equivalents, end of period....................  $ 1,253   $   718
                                                              =======   =======
</Table>

     The accompanying notes are an integral part of the condensed financial
                                  statements.
                                        3
<PAGE>

                          HEALTHCARE RECOVERIES, INC.

                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.  ORGANIZATION AND BASIS OF PRESENTATION

     Healthcare Recoveries, Inc. (hereinafter referred to as the "Company" or
"HCRI"), a Delaware corporation, was incorporated on June 30, 1988. The Company
is a leading independent provider of outsourcing of insurance subrogation and
certain other medical claims recovery and cost containment services to the
private healthcare payor industry. Its primary business is medical claims
recovery, and its primary product is subrogation recovery, which generally
entails the identification, investigation and recovery of accident-related
medical benefits incurred by its clients on behalf of their insureds, but for
which other persons or entities have primary responsibility. The Company's
clients' rights to recover the value of these medical benefits, arising by law
or contract, are generally known as the right of subrogation and are generally
paid from the proceeds of liability or workers' compensation insurance. The
Company's other medical claims recovery services include provider bill auditing,
contract compliance review and cost management consulting, coordination of
benefits and overpayments recovery services.

     The accompanying financial statements are presented in a condensed format
and consequently do not include all of the disclosures normally required by
accounting principles generally accepted in the United States of America or
those normally made in the Company's annual financial statements. Accordingly,
for further information, the reader of this Form 10-Q may wish to refer to the
Company's audited financial statements as of and for the year ended December 31,
2000, contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, filed with the Securities and Exchange Commission on
March 27, 2001.

     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. Certain financial statement amounts have been
reclassified in the prior period to conform to the current period presentation.

2.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations", which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of FAS 141
apply to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. The Company will apply the provisions of FAS 141 to any
future business combinations.

     Also, in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets", which
establishes the accounting for goodwill and other intangible assets following
their recognition. FAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. FAS
142 provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, FAS 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". FAS 142 is
effective for the Company beginning on January 1, 2002. Upon adoption, the
Company will be required to perform a transitional impairment test under FAS 142
for all goodwill recorded as of January 1, 2002. Any impairment loss recorded as
a result of completing the transitional impairment test will be treated as a
change in accounting principle. The impact of the adoption of FAS 142 on the
Company's results of operations for all periods beginning on or after January 1,
2002 will be to eliminate amortization of goodwill.
                                        4
<PAGE>
                          HEALTHCARE RECOVERIES, INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

Management of the Company has not performed a transitional impairment test under
FAS 142 and accordingly cannot estimate the impact of the adoption of FAS 142 as
of January 1, 2002.

     In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 (FAS 143), "Accounting for Asset Retirement Obligations". FAS 143 is
effective for fiscal years beginning after June 15, 2002, and provides
accounting requirements for asset retirement obligations associated with
tangible long-lived assets. The Company has not yet determined the effects of
this standard on its financial statements.

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets". FAS 144 is effective for fiscal years beginning after
December 15, 2001. This statement supersedes FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business segment. FAS 144 establishes a
single accounting model, based on the framework established in FAS 121. The
Company has not yet determined the effect of this standard on its financial
statements.

3.  CONTINGENCIES

     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 been, from time to time, 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 or
financial condition.

4.  CREDIT FACILITY

     On May 15, 2000, the Company entered into a third amendment (the
"Amendment") to its February 1, 1998 revolving credit facility with National
City Bank of Kentucky and the lenders named therein (the "Credit Facility"). The
Company's obligations under the Credit Facility are secured by substantially all
of the Company's assets, subject to certain permitted exceptions. Under the
Amendment, the maturity date was extended to April 30, 2002 from January 31,
2001, the maximum borrowing capacity decreased to $40 million from $50 million,
and certain other financial terms and covenants were amended. Principal amounts
outstanding under the Credit Facility bear interest at a variable rate based on
the Prime Rate or Eurodollar Rate, as applicable, plus the pre-determined fixed
margin. At September 30, 2001, the interest rate was 4.61%. The Credit Facility
contains customary covenants and events of default including, but not limited
to, financial tests for interest coverage, net worth levels and leverage that
may limit the Company's ability to pay dividends. It also contains a material
adverse change clause. The Credit Facility was amended in June 2000, to increase
the amount of other debt that the Company is permitted to maintain outstanding
under another of the Credit Facility's financial covenants. As of September 30,
2001, $12 million was outstanding under the Credit Facility which has been
classified as short-term borrowings expected to be refinanced on the balance
sheet. (See Note 11 -- Subsequent Events.)

5.  STOCK REPURCHASE PLAN

     HCRI's Board approved a stock repurchase plan on March 12, 1999 under which
the Company is authorized to repurchase, from time to time, up to $10 million of
HCRI Common Stock in the open market, at prices per share deemed favorable by
the Company. Shares may be repurchased using cash from operations and borrowed
funds and may continue until such time as the Company has repurchased $10
million of HCRI
                                        5
<PAGE>
                          HEALTHCARE RECOVERIES, INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

Common Stock or until it otherwise determines to terminate the stock repurchase
plan. HCRI repurchased 19,500 shares of its own stock during the three and nine
months ended September 30, 2001 at an average price of $4.02 per share. From
inception of the program through September 30, 2001, the total number of shares
repurchased was 1,792,265 at a cost of $7.1 million, or an average cost of $3.97
per share. All of the reacquired shares of Common Stock through September 30,
2001 are reflected as treasury stock on the accompanying Condensed Balance
Sheets (Unaudited).

6.  RELATED PARTY TRANSACTIONS

     On February 12, 1999, the Board of Directors approved a loan in the amount
of $350,000 to Patrick B. McGinnis, the Chairman and Chief Executive Officer of
the Company, in exchange for a full recourse promissory note in the same amount
from Mr. McGinnis. On June 30, 2000, at the direction of the Board of Directors
and in accordance with terms authorized by it, the Company loaned Mr. McGinnis
an additional $500,000. Under these terms, the $500,000 loan to Mr. McGinnis was
combined with his existing debt to the Company of $350,000 of principal and
$36,520 of accrued interest. Mr. McGinnis delivered to the Company his full
recourse promissory note in the amount of $886,520, bearing interest at a fixed
rate of 6.62% per annum, compounded annually (the "Amended Promissory Note"),
and the Company cancelled the old promissory note evidencing the prior debt. The
Amended Promissory Note provides for mandatory prepayments from certain of the
proceeds received by Mr. McGinnis from his sale of the Company's securities and
any related transactions. At September 30, 2001, the promissory note of $886,520
and accrued interest of $70,972 were outstanding. The proceeds of these loans
were to enable Mr. McGinnis to repay debts originally incurred by him to pay
income taxes related to the ordinary income deemed to have been received by him
on account of Common Stock granted to him in connection with the initial public
offering of the Company's stock in May 1997, as well as to enable him to
purchase additional stock in the initial public offering.

     On June 30, 2000, pursuant to Board authorization and in accordance with
the terms of the Amended Promissory Note, the Company and Mr. McGinnis entered
into a deferred compensation agreement (the "Agreement"). Under the Agreement,
50% of the amount otherwise payable to Mr. McGinnis under the Company's
Management Group Incentive Compensation Plan is to be deferred until the Amended
Promissory Note is paid in full, with such deferred compensation then being paid
in full to Mr. McGinnis within 30 days thereafter. The Company has full right of
set-off against any deferred compensation under the Agreement should Mr.
McGinnis default under the Amended Promissory Note. At the election of Mr.
McGinnis, the payment of the deferred compensation, upon payment of the Amended
Promissory Note, may be extended for a period of not more than ten years. At
September 30, 2001, the amount of deferred compensation was $52,648, with
accrued interest of $1,900.

                                        6
<PAGE>
                          HEALTHCARE RECOVERIES, INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

7.  EARNINGS PER COMMON SHARE

     Reconciliations of the average number of common shares outstanding used in
the calculation of earnings per common share and earnings per common share
assuming dilution are as follows (dollars and shares in thousands, except per
share results):

<Table>
<Caption>
                                                  THREE MONTHS ENDED    NINE MONTHS ENDED
                                                     SEPTEMBER 30,        SEPTEMBER 30,
                                                  -------------------   ------------------
                                                    2001       2000      2001       2000
                                                  --------   --------   -------   --------
<S>                                               <C>        <C>        <C>       <C>
Weighted average number of common shares
  outstanding...................................    9,807     10,519     9,795     10,899
Add: Dilutive stock options.....................      233        123       165         65
                                                  -------    -------    ------    -------
Number of common shares outstanding (diluted)...   10,040     10,642     9,960     10,964
                                                  =======    =======    ======    =======
Net earnings for earnings per common share
  (basic and diluted)...........................  $ 1,024    $ 1,245    $3,468    $ 3,667
                                                  =======    =======    ======    =======
Earnings per common share:
  Basic.........................................  $  0.10    $  0.12    $ 0.35    $  0.34
                                                  =======    =======    ======    =======
  Diluted.......................................  $  0.10    $  0.12    $ 0.35    $  0.33
                                                  =======    =======    ======    =======
</Table>

     Basic earnings per common share were computed based on the weighted-average
number of shares outstanding during the period. The dilutive effect of stock
options was calculated using the treasury stock method. Options to purchase
935,217 and 1,304,253 shares for the three and nine month periods ended
September 30, 2001, respectively, and 1,545,294 and 1,586,127 shares for the
comparable periods in 2000, respectively, were not included in the computation
of diluted earnings per common share because their effect would be
anti-dilutive.

8.  ACQUISITIONS

     On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related entity,
O'Donnell Leasing Co., LLP, a Wisconsin limited liability partnership ("ODL"
and, together with SAI, "Subro Audit"), for approximately $24.4 million (the
"Subro Audit Acquisition"), using available unrestricted cash. HCRI paid an
additional $5.3 million pursuant to an earn-out arrangement. The final amount of
$2.5 million was paid on June 7, 2001, and $2.8 million was paid on May 18,
2000. Approximately $4.7 million was held in escrow for the potential earn-out
and was included in restricted cash at December 31, 2000. SAI is based in
Wisconsin and provides subrogation recovery services with respect to an
installed base of lives, which are covered by insurers, HMOs and employer-funded
plans, throughout the United States of America. The Subro Audit Acquisition was
accounted for using the purchase method of accounting.

     On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap Medical Cost Management, Inc., a California corporation ("MedCap"), for
approximately $10 million, using available unrestricted cash and borrowed funds
(the "MedCap Acquisition" and, together with the Subro Audit Acquisition, the
"Acquisitions"). HCRI paid approximately $4.5 million on February 15, 2000
pursuant to an amendment to the original earn-out agreement. Pursuant to the
same amendment, through January 15, 2001, the Company was obligated to pay up to
50% of the fees collected in relation to certain negotiated contracts, less
associated expenses, as an additional amount. The final amount, which was paid
in 2000 in relation to the fees collected on those contracts, was approximately
$292,000. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
provider

                                        7
<PAGE>
                          HEALTHCARE RECOVERIES, INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

bill auditing, contract compliance review, identification of certain other
payments, and cost management consulting services. The MedCap Acquisition was
accounted for using the purchase method of accounting.

9.  LOSS ON PROPERTY HELD FOR SALE

     On June 29, 2001, the Company signed a letter of intent to sell its
building in New Berlin, WI to a Milwaukee real estate investment company. As the
agreement was subject to numerous contingencies which were not finalized until
September 2001, the Company could not estimate the final sales price or range of
expected loss until that time. HCRI acquired the building on January 25, 1999 in
the Subro Audit Acquisition. The Company expects the loss to be approximately
$980,000 ($573,000 after-tax) and has therefore reduced the carrying value of
the land and building to its estimated fair market value less the estimated
selling expenses. The assets and related accumulated depreciation have been
classified as "Property held for sale" under "Current assets" in the Condensed
Balance Sheet at September 30, 2001. Expenses related to the sale have been
recorded as "Trade accounts payable" under "Current liabilities" in the
Condensed Balance Sheet at September 30, 2001. The sale is expected to be
completed in November 2001.

10.  INCOME TAXES

     In September 2001, the Company concluded that, in light of the passage of
time with respect to the filing of the Company's tax returns for years up to and
including 1997, it was proper to reverse previously accrued taxes reducing the
tax provision for the third quarter of 2001 by $681,000, net, or approximately
$0.07 per share. This accrual related primarily to certain non-cash compensation
charges taken in connection with the initial public offering of the Company's
stock in 1997. Management believes that adequate amounts of tax and related
interest and penalties, if any, have been provided for any adjustments that may
result.

11.  SUBSEQUENT EVENTS

     On November 1, 2001, the Company entered into a revolving credit facility
with National City Bank of Kentucky and the lenders named therein (the
"Revolving Credit Facility"), and the existing Credit Facility was terminated.
(See Note 4 -- Credit Facility.) The Company's obligations under the Revolving
Credit Facility are secured by substantially all of the Company's assets,
subject to certain permitted exceptions. The Revolving Credit Facility carries a
maximum borrowing capacity of $40 million and will mature October 31, 2004.
Principal amounts outstanding under the Revolving Credit Facility will bear
interest at a variable rate based on the Prime Rate or Eurodollar Rate, as
applicable, plus a pre-determined fixed margin. At November 1, 2001, the
interest rate was 5.75% based on the Prime Rate plus the fixed margin. At
November 6, 2001, the interest rate was 4.03% based on the one-month Eurodollar
Rate plus the fixed margin. The Revolving Credit Facility contains customary
covenants and events of default including, but not limited to, financial tests
for interest coverage, net worth levels and leverage that may limit the
Company's ability to pay dividends. It also contains a material adverse change
clause. At November 1, 2001, $11 million was outstanding under the Revolving
Credit Facility.

     On November 6, 2001, HCRI entered into an interest rate swap contract to
pay 3.66% and to receive the one-month LIBOR rate on a $4 million notional
amount of the Credit Facility. HCRI uses derivative financial instruments to
manage the risk that changes in interest rates will have on the amount of its
future interest payments. Under the interest rate swap contract, HCRI agrees to
pay an amount equal to a specified fixed rate of interest times a notional
principal amount, and to receive in return an amount equal to a variable rate of
interest times the same notional principal amount. The notional amounts of the
contract are not exchanged. No other cash payments are made unless the contract
is terminated prior to maturity, in which case the amount paid or received in
settlement is to be established by agreement at the time of termination, and
represents the net present value, at current rates of interest, of the remaining
obligations to exchange payments under the terms of the contract. The interest
rate swap contract was entered into with a major financial

                                        8
<PAGE>
                          HEALTHCARE RECOVERIES, INC.

             NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

institution in order to minimize counterparty credit risk. HCRI believes the
interest rate swap transaction qualifies for hedge accounting treatment and will
be accounted for in accordance with FAS 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by FAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities -- an Amendment of
FAS 133".

                                        9
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW OF COMPANY

     HCRI is a leading independent provider of outsourcing of insurance
subrogation and certain other medical claims recovery and cost containment
services to the private healthcare payor industry. Its primary business is
medical claims recovery and its primary product is subrogation recovery, which
generally entails the identification, investigation and recovery of
accident-related medical benefits incurred by its clients on behalf of their
insureds, but for which other persons or entities have primary responsibility.
The Company's clients' rights to recover the value of these medical benefits,
arising 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's other medical claims recovery services include provider
bill auditing, contract compliance review and cost management consulting,
coordination of benefits and overpayments recovery services. HCRI offers its
services on a nationwide basis to health maintenance organizations, indemnity
health insurers, self-funded employee health plans and companies that provide
claims administration services to self-funded plans (referred to as "third-party
administrators"). The Company had 50.7 million lives under contract from its
clientele at September 30, 2001.

     The Company recently announced its entry into two new businesses. Through
TransPaC Solutions, the Company now offers subrogation outsourcing services to
the property and casualty insurance industry. Troveris, the Company's other new
business, offers to both healthcare payors and property and casualty insurers
its web-enabled subrogation recovery software. This software is sold as an
application service provider. See "Recent Developments -- Services to the
Property and Casualty Insurance Industry" and "-- Technology Development".

ACQUISITIONS

     On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit (which consisted of SAI and ODL), for approximately $24.4 million,
using available unrestricted cash. HCRI paid an additional $5.3 million pursuant
to an earn-out arrangement. The final amount of $2.5 million was paid on June 7,
2001, and $2.8 million was paid on May 18, 2000. Approximately $4.7 million was
held in escrow for the potential earn-out and was included in restricted cash at
December 31, 2000. SAI is based in Wisconsin and provides subrogation recovery
services with respect to an installed base of lives, which are covered by
insurers, HMOs and employer-funded plans, throughout the United States of
America. The Subro Audit Acquisition was accounted for using the purchase method
of accounting.

     On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap for approximately $10 million, using available unrestricted cash and
borrowed funds. The Company paid approximately $4.5 million on February 15, 2000
pursuant to an amendment to the original earn-out agreement. Pursuant to the
same amendment, through January 15, 2001, the Company was obligated to pay up to
50% of the fees collected in relation to certain negotiated contracts, less
associated expenses, as an additional amount. The final amount, which was paid
in 2000, in relation to the fees collected on those contracts was approximately
$292,000. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
provider bill auditing, contract compliance review, identification of certain
other payments, and cost management consulting services. The MedCap Acquisition
was accounted for using the purchase method of accounting.

OVERVIEW OF OPERATIONS

     For a typical new healthcare subrogation or other medical claims recovery
client, it takes up 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 providing service. At this point, the client is considered
"installed." During the installation period, the Company must also hire and
train quality staff necessary to provide contractual services. After
installation, HCRI receives files and data from the client from which it creates
an inventory of backlog.

                                        10
<PAGE>

     "Backlog" is the total dollar amount of potentially recoverable claims that
the Company is pursuing or auditing on behalf of its clients at a given point in
time. These claims are gross figures, prior to estimates of claim settlements
and rejections. Backlog increases when the Company opens new files of
potentially recoverable claims and decreases when files are recovered and closed
or, after further investigation, determined to be nonrecoverable. Backlog for a
client will range from newly identified potential recoveries to potential
recoveries that are in the late stages of the recovery process. Historically,
recoveries (the amount actually recovered for the Company's clients prior to the
Company's fee) have been produced from backlog in a generally predictable cycle.
Any group of potential recoveries, sufficiently large in number to display
statistically significant characteristics and that originates from a defined
time period, tends to produce recovery results that are comparable to other
groups having similar characteristics.

     For the most part, the Company is paid contingency fees from the amount of
claims recoveries it makes from backlog or recoveries it identifies through
other cost containment and related recovery services on behalf of its clients.
The Company's revenues are a function of recoveries and effective fee rates.
Effective fee rates vary depending on the mix between 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 the anticipated volume of services. The Company grants volume
discounts and, for its recovery services, negotiates a lower fee when it assumes
backlog from a client because the client will have already completed some of the
recovery work. Because the Company records expenses as costs are incurred and
records revenues only when a file is settled, there is a lag between the
recording of expenses and related 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 ("support expenses").
Recovery personnel must be hired and trained in advance of the realization of
recoveries and revenues. Historically, support expenses have not grown in direct
proportion to revenues.

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(1)
              (IN MILLIONS, EXCEPT FOR PERCENTAGES AND EMPLOYEES)

<Table>
<Caption>
                                                         THREE MONTHS     NINE MONTHS
                                                             ENDED           ENDED
                                                         SEPTEMBER 30,   SEPTEMBER 30,
                                                         -------------   -------------
                                                         2001     2000   2001     2000
                                                         ----     ----   ----     ----
<S>                                                      <C>      <C>    <C>      <C>
Cumulative lives sold, beginning of period.............  51.1     53.6   52.5     55.6
Lives from existing client loss, net...................  (2.6)(2) (1.8)  (8.1)(2) (4.6)(2)
Lives added from new contracts with existing clients...   0.3      0.8    1.3      0.8
Lives added from contracts with new clients............   1.9      0.6    5.0      1.4
                                                         ----     ----   ----     ----
Cumulative lives sold, end of period...................  50.7     53.2   50.7     53.2
                                                         ====     ====   ====     ====
</Table>

                                        11
<PAGE>

<Table>
<Caption>
                                               THREE MONTHS ENDED     NINE MONTHS ENDED
                                                  SEPTEMBER 30,         SEPTEMBER 30,
                                               -------------------   -------------------
                                                 2001       2000       2001       2000
                                               --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>
Lives installed, end of period...............      46.8       50.1       46.8       50.1
Backlog(3)...................................  $1,389.3   $1,214.6   $1,389.3   $1,214.6
Claims recoveries............................  $   56.7   $   56.8   $  176.3   $  177.5
Throughput(4)................................       4.2%       4.8%      13.7%      15.4%
Effective fee rate...........................      26.6%      26.6%      26.7%      26.8%
Claims revenues..............................  $   15.1   $   15.1   $   47.0   $   47.6
Employees
  Direct operations..........................       563        526        563        526
  Support....................................       142        154        142        154
                                               --------   --------   --------   --------
     Total employees.........................       705        680        705        680
                                               ========   ========   ========   ========
</Table>

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

(1) Excludes the operational results of TransPaC Solutions and Troveris, except
    number of employees. See "Recent Developments -- Services to the Property
    and Casualty Insurance Industry" and "-- Technology Development".

(2) The nine months ended September 30, 2001 and 2000 decreases include
    approximately 1.9 million and 2.4 million lives, respectively, associated
    with clients that were acquired by non-clients. The three months and nine
    months ended September 30, 2001 decreases also include approximately 2.0
    million lives associated with provider bill audit service clients who were
    not providing electronic data to the Company.

(3) Backlog is the total dollar amount of potentially recoverable claims that
    the Company is pursuing or auditing on behalf of its clients at a given
    point in time.

(4) Throughput equals claims recoveries for the period divided by the average of
    backlog at the beginning and end of the period.

                STATEMENTS OF INCOME AS A PERCENTAGE OF REVENUES

<Table>
<Caption>
                                                    THREE MONTHS         NINE MONTHS
                                                        ENDED               ENDED
                                                    SEPTEMBER 30,       SEPTEMBER 30,
                                                   ---------------     ---------------
                                                   2001      2000      2001      2000
                                                   -----     -----     -----     -----
<S>                                                <C>       <C>       <C>       <C>
Claims revenues..................................  100.0%    100.0%    100.0%    100.0%
Cost of services.................................   50.7      48.4      49.0      49.2
Support expenses.................................   26.4      26.1      27.5      27.1
Depreciation and amortization....................   11.2      10.8      10.4      10.0
Research and development.........................    0.8        --       0.9        --
Operating income.................................   10.9      14.6      12.2      13.7
Other -- loss on property held for sale..........    6.5        --       2.1        --
Other -- Special Committee expenses..............     --        --        --       0.2
Income before income taxes.......................    3.9      14.1      10.1      13.2
Net income.......................................    6.8       8.2       7.4       7.7
</Table>

  THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE AND NINE
  MONTHS ENDED SEPTEMBER 30, 2000

     Claims Revenues.  Total claims revenues for the quarter ended September 30,
2001 remained consistent with the same quarter of 2000 at $15.1 million, and for
the nine month period ended September 30, 2001 decreased 1.1% to $47.1 million
as compared with $47.6 million in the same period of 2000. Claims recoveries for
the quarter ended September 30, 2001 were $56.7 million, a slight decrease from
the same quarter of 2000

                                        12
<PAGE>

at $56.8 million. For the nine months ended September 30, 2001 claims recoveries
decreased 0.7% to $176.3 million as compared to $177.5 million in the same
period of 2000.

     The effective fee rate for the quarter ended September 30, 2001 was the
same as the prior year quarter at 26.6% and decreased to 26.7% for the nine
month period ended September 30, 2001 as compared with 26.8% in the same period
of 2000. The effective fee rate for the nine month period decreased primarily
because of the recovery mix, with relatively more recoveries coming from clients
with lower effective fee rates than in the prior year period.

     Backlog increased from September 30, 2000 by $174.7 million, or 14.4%, to
$1,389.3 million at September 30, 2001 despite a 3.3 million decrease in the
number of lives installed. The growth in the backlog is primarily related to the
provider bill audit service. Subrogation services backlog decreased about 5%
compared to the prior year period, which is consistent with the decrease in
installed lives.

     The Company had a throughput rate of approximately 4.2% and 4.8% of average
backlog during the third quarter of 2001 and 2000, respectively. The decrease in
throughput from the quarter ended September 30, 2000 is primarily due to the
fact that average provider bill audit and overpayments services backlog during
the 2001 quarter increased 97.4% from the comparable quarter of 2000 while
recoveries decreased 7%. The decrease in throughput just described was partially
offset by an increase in subrogation throughput due to a slight decrease in
subrogation backlog as recoveries remained relatively flat for the quarter ended
September 30, 2001, compared to the prior year quarter. Throughput for the nine
month period ended September 30, 2001 also decreased from 15.4% for the
comparable period of 2000 to 13.7%, for the same reasons described above. Lives
installed decreased 3.3 million from 50.1 million at September 30, 2000 to 46.8
million at September 30, 2001 because of the lives lost relating to clients
being acquired by non-clients and the removal of approximately 2.0 million lives
associated with provider bill audit service clients who were not furnishing
electronic claims data to the Company.

     Cost of Services.  Cost of services increased 4.4% for the quarter ended
September 30, 2001 to $7.6 million, from $7.3 million for the comparable period
in 2000 and was $23.1 million for the nine months ended September 30, 2001, a
decrease of 1.5% from $23.4 million for the same period in 2000. As a percentage
of claims revenues, cost of services increased to 50.7% for the quarter ended
September 30, 2001 compared to 48.4% for the prior year quarter, due to the
decrease in revenue described above and an increase in staffing levels for the
provider bill audit and overpayment recovery services related to new business
recently sold. For the nine months ended September 30, 2001 cost of services as
a percentage of claims revenues decreased to 49.0% from 49.2% in 2000. The
decrease in cost of services as a percentage of claims revenues for the
comparable nine month periods resulted from certain productivity enhancements
instituted in early 2000.

     Support Expenses.  Support expenses increased 0.8% to $3.98 million for the
quarter ended September 30, 2001 from $3.95 million for the comparable quarter
in 2000 and were $12.94 million and $12.91 million for the nine month periods
ended September 30, 2001 and 2000, respectively. Support expenses increased as a
percentage of claims revenues from 27.1% for the nine month period ended
September 30, 2000 to 27.5% for the same period in 2001. The increase in support
expenses as a percentage of claims revenues resulted from the decrease in
revenues described above and an increase in sales and marketing expenses related
to the Company's business development activities. See "Recent
Developments -- Services to the Property and Casualty Insurance Industry" and
"-- Technology Development". Support expenses typically do not vary in
proportion to revenues.

     Depreciation and Amortization.  Depreciation and amortization expense
increased 3.5% to $1.7 million for the quarter ended September 30, 2001 from
$1.6 million for the same period in 2000, and increased 2.7% to $4.9 million for
the nine months ended September 30, 2001 from $4.8 million for the comparable
period in 2000. The increases were primarily in amortization expense and were
attributable to the addition of intangible assets from the earn-out arrangements
related to the Acquisitions.

     Research and Development.  The Company incurred $124,000 and $415,000 for
the quarter and nine month period ended September 30, 2001, respectively,
related to research and development activities in

                                        13
<PAGE>

connection with the creation of new products for the insurance industry. See
"Recent Developments -- Technology Development".

     Interest Income.  Interest income decreased 62.0%, or $186,000, for the
quarter ended September 30, 2001 as compared to the same quarter in 2000. The
decrease is due to the payment of an earn-out relating to the SAI Acquisition
which occurred during the quarter ended June 30, 2001, reducing the restricted
cash balance, and lower interest rates. For the nine month period ended
September 30, 2001, interest income decreased $117,000, or 13.8%, for the same
reasons noted above.

     Interest Expense.  Interest expense totaled approximately $192,000 and
$375,000 for the quarters ended September 30, 2001 and 2000, respectively, and
approximately $742,000 and $1,004,000 for the nine months ended September 30,
2001 and 2000, respectively. The decrease in interest expense for the quarter
and nine months ended September 30, 2001, as compared with the respective
periods in 2000, is due to a decrease in borrowed funds and lower applicable
interest rates during 2001.

     Other -- Loss on Property Held for Sale.  On June 29, 2001, the Company
signed a letter of intent to sell its building in New Berlin, WI to a Milwaukee
real estate investment company. HCRI acquired the building on January 25, 1999
in the Subro Audit Acquisition. The Company expects the loss on the sale to be
approximately $980,000 and therefore has reduced the carrying value of the land
and building to its estimated fair market value less the estimated selling
expenses. The sale is expected to be completed in November 2001. (See Note
9 -- Loss on Property Held for Sale.)

     Other -- Special Committee Expenses.  In August 1999, HCRI's Board of
Directors appointed a Special Committee to evaluate strategic alternatives
available to the Company, including its possible sale. During the first quarter
of 2000, the Company incurred $90,000 of expenses related to the work of the
committee. In March 2000, the Special Committee ceased seeking a buyer for the
Company and its efforts to enhance shareholder value were assumed by the full
Board of Directors.

     Tax.  In September 2001, the Company concluded that, in light of the
passage of time with respect to the filing of the Company's tax returns for
years up to and including 1997, it was proper to reverse previously accrued
taxes reducing the tax provision for the third quarter of 2001 by $681,000, net,
or approximately $0.07 per share. This accrual related primarily to certain
non-cash compensation charges taken in connection with the initial public
offering of the Company's stock in 1997. Management believes that adequate
amounts of tax and related interest and penalties, if any, have been provided
for any adjustments that may result.

     Net Income.  Net income for the quarter ended September 30, 2001 decreased
$0.2 million, or 17.8%, to $1.0 million or $0.10 per diluted common share, from
$1.2 million or $0.12 per diluted common share for the comparable period in
2000, and for the nine months ended September 30, 2001 decreased $0.2 million,
or 5.4%, to $3.5 million, or $0.35 per diluted common share, from $3.7 million,
or $0.33 per diluted common share, for the comparable period in 2000. The
primary factors offsetting the decrease in claims revenue for the nine months
ended September 30, 2001 were the decrease in net interest expense and the
reduction in the provision for income taxes related to the reversal of the
previously accrued income taxes associated with certain non-cash compensation
charges related to the Company's initial public offering in 1997. The diluted
earnings per share increased for the nine months ended September 30, 2001 as
compared to the same period in 2000 as a result of the decrease in the number of
common shares outstanding as a result of the stock repurchase plan. (See Note
5 -- Stock Repurchase Plan.)

                                        14
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company's statements of cash flows for the nine months ended September
30, 2001 and 2000 are summarized below:

<Table>
<Caption>
                                                              NINE MONTHS ENDED
                                                                SEPTEMBER 30,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Net cash provided by operating activities...................  $ 2,242   $ 4,736
Net cash used in investing activities.......................     (267)   (4,978)
Net cash used in financing activities.......................   (2,019)     (710)
                                                              -------   -------
Net decrease in cash and cash equivalents...................  $   (44)  $  (952)
                                                              =======   =======
</Table>

     The Company had working capital of $0.9 million at September 30, 2001,
including cash and cash equivalents of $1.3 million, compared with working
capital of $7.8 million at December 31, 2000. The primary reason for the
decrease was the reclassification of the long-term borrowings that become due
within one year to short-term obligations expected to be refinanced. (See Item
1. Financial Statements (Unaudited) -- Note 4 -- Credit Facility and Note 11
-- Subsequent Events.) In addition, restricted cash decreased $4.7 million
related to the payment of the Subro-Audit Acquisition earn-out. HCRI's portion
of the restricted cash was $2.5 million, which was used to pay down long-term
borrowings.

     Net cash provided by operating activities was $2.2 million, a decrease of
$2.5 million for the nine months ended September 30, 2001, compared to the same
period in 2000, primarily as a result of the payment of $3.0 million during the
quarter ended September 30, 2001 related to the DeGarmo lawsuit that was
reported as settled in the year ended December 31, 2000.

     Net cash used in investing activities includes the $2.5 million released
back to the Company from restricted cash related to the Subro-Audit Acquisition
earn-out as discussed above. Purchases of property and equipment for the nine
months ended September 30, 2001 were approximately $2.8 million, including the
capitalization of $1.4 million of internally developed software. The Company
anticipates capital expenditures for the year to be approximately $3.5 million.

     Net cash used in financing activities for the nine months ended September
30, 2001 reflects $2.0 million in net cash payments with respect to the
Company's credit facility.

     On November 1, 2001, the Company entered into a revolving credit facility
with National City Bank of Kentucky and the lenders named therein (the
"Revolving Credit Facility"). The Company's obligations under the Revolving
Credit Facility are secured by substantially all of the Company's assets,
subject to certain permitted exceptions. The Revolving Credit Facility carries a
maximum borrowing capacity of $40 million and will mature October 31, 2004.
Principal amounts outstanding under the Revolving Credit Facility will bear
interest at a variable rate based on the Prime Rate or Eurodollar Rate, as
applicable, plus a pre-determined fixed margin. At November 1, 2001, the
interest rate was 5.75% based on the Prime Rate plus the fixed margin. At
November 6, 2001, the interest rate was 4.03% based on the one-month Eurodollar
Rate plus the fixed margin. The Revolving Credit Facility contains customary
covenants and events of default including, but not limited to, financial tests
for interest coverage, net worth levels and leverage that may limit the
Company's ability to pay dividends. It also contains a material adverse change
clause. At November 1, 2001, $11 million was outstanding under the Revolving
Credit Facility. (See Item 1. Financial Statements (Unaudited) -- Note
4 -- Credit Facility and Note 11 -- Subsequent Events.)

     At September 30, 2001 and December 31, 2000, the Company reported on its
balance sheets, as a current asset, restricted cash of $14.9 million and $21.6
million, respectively. Restricted cash at September 30, 2001 and December 31,
2000 represented claims recoveries effected by HCRI for its clients. At December
31, 2000, it also included an escrowed amount of $4.7 million for the potential
earn-out in connection with the Subro-Audit Acquisition. At September 30, 2001
and December 31, 2000, HCRI reported on its balance

                                        15
<PAGE>

sheets, as a current liability, funds due clients of $10.7 million and $12.4
million, respectively, representing claims recoveries to be distributed to
clients, net of the fee earned on such recoveries.

     In light of its acquisition strategy, the Company is currently assessing
its opportunities for capital formation. The Company believes that its available
cash resources, together with the borrowings available under the Revolving
Credit Facility and other potential sources of funding, will be sufficient to
meet its current operating requirements and acquisition and internal development
activities.

EXTERNAL FACTORS

     The business of recovering subrogation and other 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. Examples of these factors include,
but are not limited to, 1) the non-availability of recovery from such sources as
property and casualty and workers' compensation coverages, 2) law changes that
limit the use of or access to claims and medical records, or 3) the ability of
healthcare payors to recover related claims and audit medical records. Because
the Company's profitability depends in large measure upon obtaining and using
claims data and medical records, the non-availability or decrease in their
availability could have a material adverse effect on the Company.

     Moreover, because the Company's revenues are derived from the recovery of
the costs of medical treatment, material changes in such costs will tend to
affect the Company's backlog or its rate of backlog growth, as well as its
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 and the
environment for the sale or delivery of medical claims recovery and cost
containment services. 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 recovery and cost containment industry.

CONCENTRATION OF CLIENTS

     The Company provides services to healthcare plans that as of September 30,
2001 covered approximately 50.7 million lives. HCRI's clients are national and
regional healthcare payors, large third-party administrators or self-insured
corporations. HCRI's largest client is UnitedHealth Group. For the nine month
periods ended September 30, 2001 and 2000, UnitedHealth Group generated 27% and
24% of HCRI's revenues, respectively. The loss of this account could have a
material adverse effect on the Company's business, results of operations and
financial condition.

     The Company has recently become aware that the Ingenix strategic business
unit of UnitedHealth Group ("UHG") has developed a subrogation recovery
outsourcing service that competes with that of the Company. Ingenix, primarily a
health data and information company, is offering its subrogation service to
"internal clients" (i.e., health plans and self-insured employer groups served
by Uniprise, the strategic business unit of UHG that provides claims
administration) and unrelated "external" clients. The Company sells its
subrogation recovery services to UHG through Uniprise, which is the entity with
which the Company has its service contract. To date, the Company has received
termination notices from Uniprise with respect to approximately 4.6 million
lives that it believes have been awarded to Ingenix. Of those 4.6 million lives,
approximately 3.3 million lives have not yet been reported as "lost" in the Key
Operating Indicators table above, because the effectiveness of the termination
has not yet occurred. Approximately 2.4 million of the lives were covered in a
termination notice received by the Company on November 13, 2001. Year-to-date,
the Company has acquired approximately 1.6 million lives from UHG, through its
relationship with Uniprise.

     The Company is unaware of any executive-level decision at either UHG or
Uniprise to favor Ingenix as the subrogation vendor for the so-called internal
clients. However, there can be no assurance that such a decision will not be
forthcoming or that even absent such a decision, that Ingenix will not compete
away material portions of the Company's business with Uniprise's (and UHG's)
"internal clients" or with "external clients."

                                        16
<PAGE>

     HCRI's revenues are earned under written contracts with its clients that
generally provide for contingency fees from recoveries under a variety of
pricing regimes. The pricing arrangements offered by HCRI 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 HCRI's service increases and a fee
percentage that varies with HCRI's recovery performance.

     HCRI performs its services on a reasonable efforts basis and does not
obligate itself to deliver any specific result. Contracts with its customers 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. HCRI's contracts
generally provide that in the event of termination, HCRI is entitled to complete
the recovery process on the existing backlog or to receive a cash payment
designed to approximate the gross margin that would otherwise have been earned
from the recovery on the backlog of the terminating client. On September 30,
2001, HCRI had backlog of $1,389.3 million.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations", which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of FAS 141
apply to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. The Company will apply the provisions of FAS 141 to any
future business combinations.

     Also, in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets", which
establishes the accounting for goodwill and other intangible assets following
their recognition. FAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. FAS
142 provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, FAS 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". FAS 142 is
effective for the Company beginning on January 1, 2002. Upon adoption, the
Company will be required to perform a transitional impairment test under FAS 142
for all goodwill recorded as of January 1, 2002. Any impairment loss recorded as
a result of completing the transitional impairment test will be treated as a
change in accounting principle. The impact of the adoption of FAS 142 on the
Company's results of operations for all periods beginning on or after January 1,
2002 will be to eliminate amortization of goodwill. Management of the Company
has not performed a transitional impairment test under FAS 142 and accordingly
cannot estimate the impact of the adoption of FAS 142 as of January 1, 2002.

     In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 (FAS 143), "Accounting for Asset Retirement Obligations". FAS 143 is
effective for fiscal years beginning after June 15, 2002, and provides
accounting requirements for asset retirement obligations associated with
tangible long-lived assets. The Company has not yet determined the effects of
this standard on its financial statements.

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets". FAS 144 is effective for fiscal years beginning after
December 15, 2001. This statement supersedes FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business segment. FAS No. 144 establishes a
single accounting model, based on the framework established in FAS No. 121. The
Company has not yet determined the effect of this standard on its financial
statements.

                                        17
<PAGE>

RECENT DEVELOPMENTS

  APPOINTMENT OF DIRECTORS

     On August 3, 2001, the Board of Directors, through its Nominating
Committee, nominated Lauren N. Patch to the Board of Directors to fill a newly
created directorship. Mr. Patch's nomination was approved by the Board of
Directors on August 3, 2001, as permitted under the Company's Certificate of
Incorporation and Bylaws. Mr. Patch will hold office until the next succeeding
Annual Meeting, at which time his directorship will be subject to a vote of the
Company's stockholders.

     Effective October 31, 2000, Elaine J. Robinson resigned as a director of
the Company. Under the Company's Certificate of Incorporation and Bylaws, a
vacancy on the Board of Directors created by a resignation may be filled by a
majority vote of the remaining directors. A director so chosen to fill the
vacancy would hold office until the next succeeding Annual Meeting. The Board of
Directors, through its Nominating Committee, nominated Herbert A. Denton to fill
the vacant position. Mr. Denton's nomination was approved by the remaining
directors on May 11, 2001.

  SERVICES TO THE PROPERTY AND CASUALTY INSURANCE INDUSTRY

     On February 14, 2001, the Company disclosed, among other things, its entry
into the subrogation outsourcing market that serves property and casualty
("P&C") insurers. The Company is offering its services to the P&C market under
the brand name "TransPaC Solutions". The Company currently provides subrogation
outsourcing services to seven P&C clients, under various contractual
arrangements including closed claims studies, referrals and full outsourcing.
The Company has established a full-time direct sales force of three individuals
experienced in P&C sales and marketing. The Company's target market for its P&C
subrogation services is P&C insurers that have reported below average
subrogation recovery results or for various other reasons are interested in
outsourcing either all or a portion of their subrogation work.

     The Company believes that the market for P&C subrogation outsourcing in the
United States is substantial and that the potential savings from subrogation
recoveries will vary depending upon the P&C line of business. The Company
believes that total potential subrogation recoveries in the automobile insurance
market exceed $6 billion per year. Based on its research and early experience
with two clients, the Company believes that there is an opportunity to increase
total subrogation recoveries across a wide spectrum of automobile insurers. The
Company's initial marketing strategy is to offer its services to smaller,
regionally oriented automobile insurers which generally lack the resources to
maximize subrogation recoveries.

     The Company believes that it has an opportunity to leverage its healthcare
subrogation expertise and resources to provide service to the P&C markets. The
primary difference between the two markets is in the acquisition of claims data
for investigation of subrogation potential. The P&C industry does not have
standard data definitions regarding claims as does the health insurance
industry. Nevertheless, the Company used its healthcare subrogation expertise to
build data interfaces with its first two P&C customers, and it has created
proprietary business processes to acquire paper-based and/or imaged claims data
from its customers' claims adjusting offices and archives.

     The Company has assessed the competitive environment for P&C subrogation
outsourcing, and believes that the competition is fragmented and characterized
by claims adjusting companies that operate on a local or regional basis and law
firms that specialize in low volume, but legally complex, subrogation claims.
The Company has identified only one competitor that attempts to serve a national
market. It believes that this competitor has enjoyed limited success because it
is owned and controlled by a P&C insurer.

     The Company previously disclosed that it expected to incur losses from
TransPaC Solutions in 2001 of $0.05 to $0.07 per diluted share for the full year
2001, and that break-even operations would not be achieved until 2002. The
Company now estimates that it will incur losses of $0.06 to $0.07 per diluted
share for 2001 and still expects to achieve break-even operations in 2002. The
Company estimates that it will earn gross margins comparable to its healthcare
recovery services in providing P & C subrogation recovery services. The Company
cautions that the foregoing forecasts and estimates are not guarantees of future
performance and that actual results of TransPaC Solutions will be dependent upon
future facts and circumstances, many of

                                        18
<PAGE>

which are outside the control of management of the Company. See "Safe Harbor
Compliance Statement on Forward Looking Statements" included as Exhibit 99.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000 and hereby incorporated herein by reference.

  TECHNOLOGY DEVELOPMENT

     During the nine months ended September 30, 2001, the Company incurred
expenses of approximately $415,000 for research and development costs to develop
new products for the insurance industry. The Company expects to incur additional
expenses of between $1.3 million and $1.7 million for research and development
with respect to these products over the next twelve months. In addition, as of
September 30, 2001, the Company has capitalized approximately $764,000 of costs
in accordance with accounting principles generally accepted in the United States
of America for the development of software for sale to unrelated parties. The
Company expects to capitalize additional costs of approximately $750,000 for
such development over the next twelve months.

     Many participants in the health insurance market do not outsource
subrogation services. The Company currently estimates that 40% to 50% of the
private health insurance and health benefits markets do not outsource
subrogation recoveries. Public sector markets, such as Medicaid and Medicare,
have virtually no outsourcing of subrogation recoveries. These programs
typically rely on their claims administration contractors to provide subrogation
services as part of a bundled service contract. Like the health insurance
market, the Company believes that certain participants in the P&C insurance
market are less likely to outsource subrogation services. The Company believes
mutual insurers have organizational and cultural biases against outsourcing and
larger P&C insurers have sufficient resources to develop relatively
sophisticated internal departments.

     In light of these market conditions, the Company began the internal
development of a web-enabled subrogation software application. The Company will
sell these products as an application service provider ("ASP"), under the trade
name "Troveris", both to the health insurance and benefits market and to the P&C
market. During the second quarter of 2001, the Company completed and is offering
for sale a health insurance application. During the third quarter of 2001, the
Company completed and offered for sale a commercially available P&C application.

     The Troveris marketing strategy combines the opportunity for an internal
subrogation department to gain operating efficiency through the functionality of
state-of-the-art desktop software and to leverage its ability to produce
recoveries through the purchase of unbundled components of the Company's
traditional subrogation outsourcing services. The Troveris software application
allows the Company to administer these customized relationships using the same
proprietary processes as it uses for those customers who purchase turnkey
subrogation outsourcing services. An additional benefit of the Troveris software
application is that the Company believes that it will substantially reduce
future expenses for maintaining software applications that it uses to provide
turnkey outsourcing services.

     The Company anticipates that during the fourth quarter of 2001, it will
begin migrating its own subrogation operations to the Troveris application. The
Company currently expects the migration to be completed in the third quarter of
2002. At that time, the Company expects to abandon its legacy subrogation
system, thereby reducing its technology expense, net of the expense of
maintaining the Troveris application, by at least $600,000 per year. The
Troveris application will also enable the Company to expand its ability to
manage its knowledge workers via telecommuting arrangements. While the Company
believes it can achieve the foregoing transition and corresponding reduction of
expenses in the outlined timeframe, future facts and circumstances could change
these estimates. See "Safe Harbor Compliance Statement for Forward-Looking
Statements" included as Exhibit 99.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 and hereby incorporated herein by
reference.

     The Company is not aware of any competition in subrogation software in an
ASP model for the health insurance industry, and it can only identify a single
large competitor in the P&C insurance industry. This competitor is partially
owned and controlled by a major P&C insurer, and the Company believes that this
relationship will reduce the ability of the competitor to sell its services to
other P&C insurers.
                                        19
<PAGE>

  STOCK REPURCHASE PLAN

     HCRI's Board approved a stock repurchase plan on March 12, 1999 under which
the Company is authorized to repurchase, from time to time, up to $10 million of
HCRI Common Stock in the open market, at prices per share deemed favorable by
the Company. Shares may be repurchased using cash from operations and borrowed
funds and may continue until such time as the Company has repurchased $10
million of HCRI Common Stock or until it otherwise determines to terminate the
stock repurchase plan. HCRI repurchased 19,500 shares of its own stock during
the three and nine months ended September 30, 2001, at an average price of
$4.02. From inception of the program through September 30, 2001, the total
number of repurchased shares is 1,792,265 at a cost of $7.1 million, or an
average cost of $3.97 per share. All of the reacquired shares of Common Stock
through September 30, 2001 are reflected as treasury stock on the accompanying
Condensed Balance Sheets (Unaudited).

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     An element of market risk exists for the Company from changes in interest
rates related to its Revolving Credit Facility, which matures October 31, 2004.
The impact on earnings and value of any debt on the Company's balance sheets are
subject to change as a result of movements in market rates and prices as a
portion of the Revolving Credit Facility is subject to variable interest rates.
However, the Company does not expect changes in interest rates to have a
material effect on its financial position, results of operations or cash flows
in 2001. As of November 6, 2001, the Company had $11.0 million outstanding under
its Revolving Credit Facility. Through the interest rate swap contract the
Company has entered into, the Company has fixed the interest rate on $4 million
of the Revolving Credit Facility at 5.41% or 5.66% (contingent on the status of
a financial ratio). The remaining $7 million outstanding had an interest rate of
4.03%. See Part I. Financial Statements. Note 11 -- Subsequent Events and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".

                                        20
<PAGE>

                                    PART II

                               OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

OVERVIEW AND LITIGATION HISTORY

     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. Moreover, management of the Company has
observed that, in parallel with widely-reported legislative concerns with the
healthcare payment system, there also has occurred an increase in litigation,
actual and threatened, including class actions brought by nationally prominent
attorneys, directed at healthcare payors and related parties.

     The Company has, since its founding in 1988, been involved with many
litigation matters related to its subrogation business, sometimes as a defendant
and sometimes on behalf of its defendant client. Plaintiffs' attorneys
attempting to defeat the clients' subrogation liens often threaten litigation
against the Company and its clients as a negotiating tactic. Most of the
lawsuits that have been filed against the Company or its clients concern the
entitlement to recover a specific, individual subrogation claim or the amount of
the subrogation claim. Typically, these actions do not ask for punitive damages,
are not pled as class actions, and do not have wide implications with respect to
the Company's ongoing business practices.

     To date, however, the Company has encountered seven noteworthy instances in
addition to the lawsuits described under "-- Current Litigation", in which
lawsuits were filed against it or its clients that sought punitive damages, were
pled as class actions or otherwise made claims or requested relief that could
have materially affected the Company's business practices. The risk profile for
this sort of business practices litigation includes not only the usual
considerations of the potential amount, effect, and likelihood of loss, but also
specifically the potential for punitive damages and class certification, the
possible effects of an adverse verdict on the Company's business practices, and
the likelihood of specific plaintiffs' attorneys bringing similar actions in
other jurisdictions.

     Each of these cases has been completely resolved, by decision of a court or
settlement by the parties, but prior to resolution the Company did not regard
all of these cases as being material in and of themselves. In management's
opinion, these seven cases share a common profile with each other and with the
lawsuits described below under the caption "-- Current Litigation".

     Four of the seven lawsuits named the Company as a defendant and were pled
as class actions. Two of the cases, one filed in federal court and the other in
state court, alleged that the Company violated state and federal laws on fair
debt collection practices. In the state court action, the court granted the
Company's motion for summary judgment on all claims in the complaint, which the
court of appeals affirmed. In the federal court action, the Company settled the
matter, prior to the court's ruling on the Company's motion for summary
judgment, for a nominal amount.

     The two other lawsuits, both filed in federal court, charged the Company
with a variety of violations of laws and sought punitive damages. The complaints
alleged, among other things, that the Company committed negligence, fraud and
breach of its duties under ERISA by attempting to recover and actually
recovering, by subrogation, the reasonable value of medical benefits which were
provided by the Company's clients under capitation or discounted-fee-for-service
arrangements. One of these lawsuits was settled, after the court denied class
certification, for a nominal amount paid by the Company's client, a co-defendant
in the case. The other case, DeGarmo et al. v. Healthcare Recoveries, Inc., was
settled in mid-July 2001 for $3 million and nonmonetary terms that management
regards as immaterial to the Company's ongoing business.

     Although the Company was not named as a defendant in any of them, there
have been three other lawsuits involving the Company's clients that implicated
the Company's business practices. The complaints in these cases alleged, among
other things, violation of state law with respect to the payment of plaintiffs'
attorneys' fees and unfair trade practices, violation of the federal Health
Maintenance Organization Act of

                                        21
<PAGE>

1973, misrepresentation of the rightful amounts of subrogation claims, and
impermissible enforcement of recovery rights. Two of these cases resulted in
judgments in favor of the Company's clients after litigation of the merits
before trial and appellate courts. The other case was settled for an immaterial
amount.

     Management believes that the lawsuits described above will not, as a
general matter, have precedential value for either the cases described below
under the caption "-- Current Litigation" or for any future litigation matters
(all these cases being referred to as the "Pending and Potential Cases").
Indeed, the courts hearing the Pending and Potential Cases may not even become
aware of the outcomes in the seven lawsuits described above. Management expects
that each of the Pending and Potential Cases will be decided on its own merits
under the relevant state and federal laws, which will vary from case to case and
jurisdiction to jurisdiction. The descriptions of the outcomes in the seven
cases dealing with business practices have been included in order to describe
the contexts for this kind of litigation and the Company's relative successes in
handling past business practices litigation, but are not necessarily predictive
of the outcomes of any of the Pending and Potential Cases.

     Moreover, there can be no assurance that the Company will not be subject to
further class action litigation similar to that described below under the
caption "-- Current Litigation", that existing and/or future class action
litigation against the Company and its clients will not consume significant
management time and/or attention or that the cost of defending and resolving
such litigation will not be material.

CURRENT LITIGATION

     On October 1, 1999, a First Amended Class Action Complaint ("Amended
Complaint") was filed against HCRI in the United States District Court for the
Southern District of Florida, in a putative class action brought by William
Conte and Aaron Gideon, individually and on behalf of all others similarly
situated. In that complaint, Conte v. Healthcare Recoveries, Inc., No. 99-10062,
plaintiffs assert that HCRI'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 Florida Consumer Collection Practices Act. The
Complaint also seeks a declaratory judgment that HCRI, as the subrogation agent
for various healthcare payors, is not entitled to assert and recover upon
subrogation or reimbursement liens it asserts on settlements obtained from third
party tortfeasors when the settlement is in an amount less than the amount
required to fully compensate (or "make whole") the injured party for all
elements of damage caused by the tortfeasor. Plaintiffs purport to represent a
class consisting of all participants or beneficiaries of ERISA plans nationwide
whose net recovery of damages through judgments, settlements or otherwise
against liable third parties has been reduced or potentially reduced by HCRI's
alleged assertion and/or recovery of unlawful subrogation/reimbursement rights
of its clients. Each count of the Complaint seeks compensatory and/or statutory
damages as well as exemplary and punitive damages. Plaintiffs also seek
injunctive relief, prejudgment interest, costs and attorneys' fees.

     On November 5, 1999, HCRI filed a motion to dismiss the Amended Complaint.
On June 29, 2001, the court issued a decision dismissing plaintiffs' common law
claims for fraud and unjust enrichment as well as plaintiffs' claims under the
federal Fair Debt Collection Practices Act and the Florida Consumer Collection
Practices Act. The court did not, however, dismiss the remaining count of the
Complaint, which seeks a declaratory judgment and damages under ERISA based on
HCRI's alleged violation of the "make whole" rule. On July 16, 2001, HCRI filed
a motion for reconsideration or reargument with respect to that portion of the
court's June 29, 2001 opinion on the motion to dismiss that sustained, as a
pleading matter, Count I of the complaint. Plaintiffs' motion to certify a
nationwide class, which HCRI opposed, has been fully briefed and remains pending
before the court.

     On October 20, 1999, a class action complaint ("Baker Complaint") was filed
against HCRI and one HCRI client in the Circuit Court of Jefferson County,
Alabama, Darrell DeWayne Baker v. Healthcare Recoveries, Inc., United Healthcare
of Alabama, and Fictitious Party Defendants A, B, C et al. On December 6, 1999,
the defendants removed the lawsuit to the United States District Court for the
Northern District of Alabama, Southern Division. On January 3, 2000, a First
Amended Complaint was filed, retaining all counts from the original complaint
and seeking an additional declaratory judgment that the health plan and

                                        22
<PAGE>

HCRI have a right to recover through subrogation only the actual benefits paid
to medical providers on behalf of the class. The Baker Complaint, as amended,
asserts claims on behalf of two putative subclasses, both consisting of members
nationwide of the client health plan, who either: (1) allegedly paid inflated
subrogation claims due to alleged failure by the health plan or by HCRI to
disclose discounts in the health plan's payments to medical providers; or (2)
allegedly were denied coverage of certain claims by the health plan. The
plaintiffs assert claims against HCRI under a variety of theories including
unjust enrichment, breach of contract, breach of fiduciary duty and violations
of RICO. Plaintiffs demand, on behalf of the putative classes, compensatory
damages, punitive damages, treble damages under RICO, and reasonable attorneys'
fees.

     On January 27, 2000, the defendants filed a motion to dismiss the Amended
Complaint, which remains pending. The court has not yet addressed the question
of whether to certify the putative class.

     On October 28, 1999, a class action Plaintiff's Original Petition
("Petition") was filed against HCRI and one HCRI client in the District Court
for the 150th Judicial District, Bexar County, Texas, Joseph R. Cajas, on behalf
of himself and all others similarly situated v. Prudential Health Care Plan,
Inc. and Healthcare Recoveries, Inc. The plaintiff asserts that HCRI's
subrogation recovery efforts on behalf of its client Prudential Health Care
Plan, Inc. ("Prudential") violated a number of common law duties, as well as the
Texas Insurance Code and the Texas Business and Commerce Code. The Petition
alleges that HCRI, as the subrogation agent for Prudential, made fraudulent
misrepresentations in the course of unlawfully pursuing subrogation and
reimbursement claims that plaintiffs assert are unenforceable because (1)
prepaid medical service plans may not exercise rights of subrogation and
reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount
Prudential paid for medical goods and services. HCRI was served with the
Petition in early November 1999, and has answered, denying all allegations. The
court has not yet addressed the question of whether to certify the putative
class.

     In late 1999, the Cajas plaintiff's counsel filed two lawsuits in Texas and
South Carolina that raise issues similar to those in the Cajas lawsuit. On
December 7, 1999, a class action complaint ("Complaint") was filed against HCRI
and one HCRI client in the United States District Court for the Western District
of Texas, San Antonio Division, Timothy Patrick Franks, on behalf of himself and
similarly situated persons v. Prudential Health Care Plan, Inc. and Healthcare
Recoveries, Inc. The Complaint asserted claims on behalf of members of ERISA
governed health plans and alleged that HCRI's subrogation recovery efforts on
behalf of its client Prudential violated a number of common law duties, as well
as the terms of certain ERISA plan documents, RICO, the federal Fair Debt
Collection Practices Act, the Texas Insurance Code and the Texas Business and
Commerce Code. The Complaint alleged that HCRI, as the subrogation agent for
Prudential, made fraudulent misrepresentations in the course of unlawfully
pursuing subrogation and reimbursement claims that plaintiffs assert are
unenforceable because (1) prepaid medical service plans may not exercise rights
of subrogation and reimbursement; (2) the subrogation and reimbursement claims
asserted by the Company are not supported by contract documents that provide
enforceable recovery rights and/or do not adequately describe the recovery
rights; and (3) the sums recovered pursuant to such claims unlawfully exceed the
amount Prudential paid for medical goods and services. The Complaint further
alleged that HCRI unlawfully pursued subrogation and reimbursement claims by (1)
failing to pay pro rata attorney's fees to attorneys who represented purported
class members with respect to tort claims underlying the subrogation and
reimbursement claims; and (2) recovering subrogation and reimbursement claims
from purported class members who have not been fully compensated for their
injuries. Plaintiffs, on behalf of the purported class, demanded compensatory
damages, punitive damages, and treble damages under RICO, costs and reasonable
attorneys' fees. On January 18, 2000, the defendants filed a motion to dismiss
the Complaint.

     In response to the defendants' motion, on February 28, 2001, the court
rendered its opinion and entered an order dismissing all of the plaintiff's
claims with the exception of the plaintiff's claim for attorney fees, which
remains pending before the court for disposition. On March 14, 2001, HCRI filed
an answer to the Complaint denying all of the plaintiff's allegations. Also on
March 14, 2001, the plaintiff filed a motion to alter or amend the court's
ruling on the motion to dismiss. The court has ordered additional discovery
related to the motion but has not yet ruled on the motion, nor has the court
addressed the issue of class certification.
                                        23
<PAGE>

     On December 22, 1999, a purported class action complaint ("Complaint") was
filed against HCRI and one HCRI client in the Court of Common Pleas of Richland
County, South Carolina, Estalita Martin et al. vs. Companion Health Care Corp.,
and Healthcare Recoveries, Inc. On January 21, 2000, defendant Companion
Healthcare Corp. ("CHC") filed an Answer and Counterclaim and plaintiff Martin
filed a First Amended Complaint ("Amended Complaint"). The Amended Complaint
asserts that HCRI's subrogation recovery efforts on behalf of its client CHC
violated a number of common law duties, as well as the South Carolina Unfair
Trade Practices Act. The Amended Complaint alleges that HCRI, as the subrogation
agent for CHC, made fraudulent misrepresentations in the course of unlawfully
pursuing subrogation and reimbursement claims that plaintiffs assert are
unenforceable because (1) prepaid medical service plans may not exercise rights
of subrogation and reimbursement; (2) the subrogation and reimbursement claims
asserted by the Company are not supported by contract documents that provide
enforceable recovery rights and/or do not adequately describe the recovery
rights; and (3) the sums recovered pursuant to such claims unlawfully exceed the
amount CHC was entitled to collect for such medical goods and services. The
Amended Complaint further alleges that HCRI and CHC unlawfully pursued
subrogation and reimbursement claims by (1) failing to pay pro rata costs and
attorney's fees to attorneys who represented purported class members with
respect to tort claims underlying the subrogation and reimbursement claims; and
(2) failing to include in subrogation and reimbursement claims all applicable
discounts that CHC received for such medical goods and services. Plaintiffs, on
behalf of the purported class, demand compensatory damages, punitive damages,
and treble damages, disgorgement of unjust profits, costs, and prejudgment
interest and attorneys' fees. HCRI was served with the original Complaint in
late December 1999 and answered denying all allegations. HCRI filed a motion to
dismiss in August 2000. By an order dated June 6, 2001, the court dismissed all
claims in the suit with prejudice. Plaintiff moved for a reconsideration of the
dismissal. On June 27, 2001, the court denied the motion for reconsideration.
Plaintiff filed a notice of appeal on July 20, 2001.

     On March 12, 2001, a Complaint ("Complaint") was filed against HCRI in the
United States District Court for the Eastern District of Louisiana, in a
putative class action brought by Kyle M. Hamilton. In that action, Hamilton v.
Healthcare Recoveries, Inc., No. 01-650, plaintiff asserts that HCRI's
subrogation recovery efforts on behalf of its clients violate certain Louisiana
state laws, the federal Fair Debt Collection Practices Act and the Louisiana
Unfair Trade Practices Act. The Complaint alleges that HCRI intentionally and
negligently interfered with the plaintiff's and the putative class members'
rights to settle certain personal injury claims. The Complaint further alleges
that HCRI unlawfully pursued subrogation and reimbursement claims that plaintiff
asserts are unenforceable because the clauses in HCRI's clients' coverage
documents that create such recovery rights are rendered null and void by
Louisiana statutes that generally prohibit coordination of benefits with
individually underwritten insurance coverages. Plaintiff purports to represent a
class consisting of all persons covered under group health policies that were
issued or delivered in the State of Louisiana and who received any communication
from HCRI attempting to enforce any clauses that allegedly were rendered null
and void by Louisiana law. Plaintiff seeks on behalf of the purported class
compensatory and statutory damages, interest, costs, attorneys' fees and such
additional damages and relief as may be allowed by any applicable law. On July
17, 2001, the court granted a Motion for Summary Judgment filed by HCRI as
concerned the plaintiff's Fair Debt Collection Practices Act claim, dismissing
those claims with prejudice. The Court denied HCRI's Motion for Summary
Judgment, without prejudice to the right of HCRI to reassert its Motion, with
respect to the plaintiff's state law claims. The Court ordered that the parties
submit Memoranda addressing whether the Court still had subject matter
jurisdiction, given dismissal of the federal claim. On August 21, 2001, the
Court ruled that it lacked subject matter jurisdiction, thus dismissing the
remaining claims, without prejudice. On August 31, 2001, the plaintiff filed a
Motion for Reconsideration of the Court's Ruling with regard to subject matter
jurisdiction and also filed a Motion for Leave of Court to file an Amended
Complaint, seeking to add new theories of recovery against HCRI based upon state
law. On October 3, 2001, the Court denied both motions. Plaintiff recently filed
an appeal to the 5th Circuit United States Court of Appeals.

     In addition to filing the appeal in federal court, the Hamilton plaintiff
on October 1, 2001 filed a new complaint in the Civil District Court for the
Parish of Orleans, Louisiana, in a putative class action styled Hamilton v.
Healthcare Recoveries, Inc., 2001-15989. This state court action asserts claims
substantially similar to those in the federal court action. HCRI has not yet
filed a response to the Complaint.
                                        24
<PAGE>

     The Cajas, Franks, Baker and Martin lawsuits, or any one of them, if
successful, could prevent the Company from recovering the "reasonable value" of
medical treatment under discounted fee for service ("DFS"), capitation and other
payment arrangements. The Conte, Cajas, Franks, Baker and Martin lawsuits, or
any one or more of them, if successful, could require the Company to refund, on
behalf of its clients, recoveries in a material number of cases. In addition, an
adverse outcome in any of the above referenced lawsuits could impair materially
HCRI's ability to assert subrogation or reimbursement claims on behalf of its
clients in the future.

     In terms of the Company's business practices and the allegations underlying
the Cajas, Franks, Baker and Martin cases, at the end of 1993 HCRI had ceased
the practice of recovering the "reasonable value" of medical treatment provided
by medical providers under DFS arrangements with HCRI's clients. From that date,
the Company's policy has been not to recover the "reasonable value" of medical
treatment in DFS arrangements. However, HCRI 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
potentially applicable in these cases. As a result, and taking into account the
underlying facts in each of these cases, the Company believes it has meritorious
grounds to defend these lawsuits, it intends to defend the cases vigorously, and
it believes that the defense and ultimate resolution of the lawsuits should not
have a material adverse effect upon the business, results of operations or
financial condition of the Company. Nevertheless, if any of these lawsuits or
one or more other lawsuits seeking relief under similar theories were to be
successful, it is likely that such resolution would have a material adverse
effect on the Company's business, results of operations and financial condition.

     Management of the Company has observed that, in parallel with
widely-reported legislative concerns with the healthcare payment system, there
also has occurred an increase in litigation, actual and threatened, including
class actions brought by nationally prominent attorneys, directed at healthcare
payors and related parties. As a result of the foregoing, there can be no
assurance that the Company will not be subject to further class action
litigation, that existing and/or future class action litigation against the
Company and its clients will not consume significant management time and/or
attention or that the cost of defending and resolving such litigation will not
be material.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

     The following list of Exhibits includes both exhibits submitted with this
Form 10-Q as filed with the Commission and those incorporated by reference to
other filings:

<Table>
<C>   <S>  <C>
  2.1 --   Asset Purchase Agreement, dated as of December 4, 1998, by
           and among the Registrant, MedCap Medical Cost Management,
           Inc. and Marcia Deutsch (incorporated by reference to
           Exhibit 2.1 of Registrant's Current Report on Form 8-K,
           filed December 11, 1998, File No. 0-22585).
  2.2 --   Amendment to Asset Purchase Agreement, dated as of December
           8, 1999, by and among the Registrant, MedCap Medical Cost
           Management, Inc. and Marcia Deutsch (incorporated by
           reference to Exhibit 2.1 of Registrant's Current Report on
           Form 8-K, filed December 20, 1999, File No. 0-22585).
  2.3 --   Asset Purchase Agreement, dated as of January 3, 1999, by
           and among the Registrant, Subro-Audit, Inc., O'Donnell
           Leasing Co., LLP, Kevin O'Donnell and Leah Lampone
           (incorporated by reference to Exhibit 2.1 of Registrant's
           Current Report on Form 8-K, filed January 11, 1999, File No.
           0-22585).
  2.4 --   Amendment to Asset Purchase Agreement by and among the
           Registrant, Subro-Audit, Inc., O'Donnell Leasing Co., LLP,
           Kevin O'Donnell and Leah Lampone, dated as of January 25,
           1999 (incorporated by reference to Exhibit 2.2 of
           Registrant's Current Report on Form 8-K, filed February 3,
           1999, File No. 0-22585).
</Table>

                                        25
<PAGE>
<Table>
<C>   <S>  <C>
  3.1 --   Amended and Restated Certificate of Incorporation of the
           Registrant (incorporated by reference to Exhibit 3.1 of
           Registrant's Amendment No. 2 to Registration Statement on
           Form S-1, File No. 333-23287).
  3.2 --   Amended and Restated Bylaws of the Registrant (incorporated
           by reference to Exhibit 3.2 of Registrant's Annual Report on
           Form 10-K for the fiscal year ended December 31, 2000).
  4.1 --   Specimen Common Stock Certificate (incorporated by reference
           to Exhibit 4.1 of Registrant's Amendment No. 1 to
           Registration Statement on Form S-1, File No. 333-23287).
  4.2 --   Rights Agreement, dated February 12, 1999, between the
           Registrant and National City Bank of Kentucky, as Rights
           Agent, which includes as Exhibit A the Form of Certificate
           of Designations of the Preferred Stock, as Exhibit B the
           Form of Right Certificate and as Exhibit C the Summary of
           Rights to Purchase Preferred Stock (incorporated by
           reference to Exhibit 4.1 of Registrant's Form 8-A, filed
           February 16, 1999, File No. 0-22585).
 99.1 --   Healthcare Recoveries, Inc. Private Securities Litigation
           Reform Act of 1995 Safe Harbor Compliance Statement for
           Forward-Looking Statements (incorporated by reference to
           Exhibit 99.1 of Registrant's Annual Report on Form 10-K for
           the fiscal year ended December 31, 2000).
</Table>

     (b) Reports on Form 8-K

<Table>
<Caption>
                                                   FINANCIAL
                                                   STATEMENTS
ITEM REPORTED                                        FILED      DATE OF REPORT      FILE DATE
-------------                                      ----------   --------------   ---------------
<S>                                                <C>          <C>              <C>
Item 5 -- Text of South Carolina Litigation Press
  Release........................................      No        July 16, 2001     July 17, 2001
Item 5 -- Text of Earnings Release and Slide Show
  Presentation...................................      No       August 7, 2001   August 13, 2001
</Table>

                                        26
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                          HEALTHCARE RECOVERIES, INC.

<Table>
<S>                                                <C>
          Date: November 14, 2001                            /s/ PATRICK B. MCGINNIS
--------------------------------------------       --------------------------------------------
                                                               Patrick B. McGinnis
                                                             Chairman, President and
                                                             Chief Executive Officer

          Date: November 14, 2001                             /s/ DOUGLAS R. SHARPS
--------------------------------------------       --------------------------------------------
                                                                Douglas R. Sharps
                                                   Executive Vice President and Chief Financial
                                                    Officer Principal Financial and Accounting
                                                                     Officer
</Table>

                                        27