<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                               FORM 10-K/A No. 1


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

For the Fiscal Year Ended December 31, 1997       Commission file number 0-25062



                                ENVOY CORPORATION
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)



           Tennessee                                            62-1575729
----------------------------------                          --------------------
  (State or Other Jurisdiction                                (I.R.S. Employer
of Incorporation or Organization)                            Identification No.)

 
    15 Century Boulevard, Suite 600 
         Nashville, Tennessee                                           37214
-----------------------------------------------                       ----------
 (Address of Principal Executive Offices)                             (Zip Code)



       Registrant's Telephone Number, Including Area Code: (615) 885-3700

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, No Par Value
--------------------------------------------------------------------------------
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

The aggregate market value of the voting stock held by non-affiliates of the 
Registrant as of February 27, 1998, was approximately $803,720,000. The market 
value calculation was determined using the closing sale price of the 
Registrant's common stock on February 27, 1998, as reported on The Nasdaq Stock 
Market.

The number of shares outstanding of the Registrant's common stock as of 
February 27, 1998 was 21,009,962.


                      DOCUMENTS INCORPORATED BY REFERENCE

 Part of            Documents from which Portions are
Form 10-K           Incorporated by Reference
---------           -------------------------

Part III            Portions of the Proxy Statement relating to the Annual
                    Meeting of Shareholders held on June 4, 1998 are
                    incorporated by reference into Items 10, 11, 12 and 13.




                                        
<PAGE>   2
         This Annual Report on Form 10-K/A amends and supersedes, to the extent
set forth herein, the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 previously filed on March 9, 1998 (the "Form 10-K"). As more
particularly set forth below, the following financial and related information
has been updated in connection with the filing of the restated financial 
statements included herein.

                                    PART II

<TABLE>
<CAPTION>

                                                                     PAGE NUMBER
DESCRIPTION                                                           IN REPORT
-----------                                                           ---------
<S>      <C>                                                          <C>

ITEM 6.  SELECTED FINANCIAL DATA.                                              3

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.                                  4

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
         ON FORM 8-K.

</TABLE>

(a)      1.   Financial Statements:*

          
         The Registrant has restated certain of its historical fiscal 
year end audited financial statements and the related financial 
statement schedule to: (a) reflect the Registrant's February 1998 
business combinations with the XpiData, Inc., Professional Office 
Services, Inc. and Automated Revenue Management, Inc. (sometimes 
hereinafter referred to collectively as the "ExpressBill Companies") 
consistent with the accounting treatment for a pooling of interests; 
(b) reflect a change in the methods used to value acquired in-process 
technology recorded and written off in connection with the Registrant's 
1996 acquisition of National Electronic Information Corporation ("NEIC") 
and 1997 acquisitions of Healthcare Data Interchange Corporation ("HDIC") 
and Diverse Software Solutions, Inc. ("DSS"); and (c) give retroactive
effect to a change in accounting for convertible securities having a 
beneficial conversion feature. Listed below are the consolidated financial 
statements, the financial statement schedule and related information which 
are responsive to Item 8 and Item 14 of Form 10-K.

                Reports of Independent Auditors                               21
                Consolidated Balance Sheets                                   24
                Consolidated Statements of Operations                         26
                Consolidated Statements of Shareholders' Equity               28
                Consolidated Statements of Cash Flows                         29
                Notes to Consolidated Financial Statements                    31

2.  Schedule II - Valuation and Qualifying Accounts*                          57

    All schedules, except those set forth above, have been omitted 
    since the information required is included in the Consolidated
    Financial Statements or Notes thereto, or they have been omitted
    as not applicable or not required

3.  The following exhibits are being filed herewith as a result of
    the restatement of the Company's audited financial statements:

    Exhibits:

            23.1 Consent of Ernst & Young LLP

            23.2 Consent of Arthur Andersen LLP

            27   Financial Data Schedule (for SEC use only)
-----------

* The financial statements and schedule included herein supercede and replace
  the financial statements located on pages F-1 through F-26 and the
  supplemental financial schedule on page S-1 of the Form 10-K.



                                       2
<PAGE>   3


ITEM 6.  SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                       ------------------------------------------------------------------------
                                                        1997(1)       1996(2)         1995(3)          1994(3)        1993(3)
                                                       ------------------------------------------------------------------------
                                                                        (In thousands, except per share data)
<S>                                                    <C>            <C>             <C>             <C>             <C>
STATEMENTS OF OPERATIONS DATA:
Revenues                                               $137,605       $ 90,572        $ 34,197        $ 26,114        $ 18,063
Operating Income (Loss)                                  (2,600)       (18,739)           (117)            491          (1,259)
Income (Loss) from Operations Before Income            
  Taxes and Loss in Investee                             (2,865)       (20,579)           (396)            520          (1,252)
Income Tax (Expense) Benefit                             (6,333)        (1,717)             50              61             510
Loss in Investee                                              0              0          (1,776)              0               0
                                                       ------------------------------------------------------------------------
Income (Loss) from Continuing Operations               $ (9,198)      $(22,296)       $ (2,122)       $    581        $   (742)
                                                       ========================================================================
Net Income (Loss) per Common Share from 
  Continuing Operations (4)                            $  (0.47)      $  (2.25)       $  (0.14)       $   0.04        $  (0.05)
                                                       ========================================================================
BALANCE SHEET DATA (AT PERIOD END): 
Working Capital of Continuing Operations               $ 18,027       $ 47,541        $ 10,671        $  7,302        $   2,298 
Assets of Continuing Operations                         166,625        156,368          33,949          23,171           12,805 
Total Assets                                            166,625        156,368          33,949          59,240           50,743 
Long-Term Debt and Deferred Taxes                        11,269         10,914          10,687             928              845 
Preferred Stock                                          55,021         55,021              --              --               --
Shareholders' Equity of Continuing Operations           125,082        124,425          15,300          17,227            7,654 
</TABLE>

Notes:   (1)   The 1997 results include expenses of $6.6 million for the
               write-off of acquired in-process technology associated with the
               DSS and HDIC acquisitions. (See Notes 2 and 4 of Notes to the
               Consolidated Financial Statements).

         (2)   The 1996 results include expenses of $8.7 million related to the
               write-off of acquired in-process technology and $4.7 million
               relating to the reorganization plan approved in conjunction with
               the NEIC and Teleclaims, Inc. acquisitions. (See Notes 2, 4 and 6
               of Notes to the Consolidated Financial Statements).

         (3)   The above amounts reflect the impact of the merger of the 
               Company's predecessor with First Data Corporation in June 1995.
               (See Notes 1 and 3 of Notes to the Consolidated Financial
               Statements).

         (4)   Net loss per common share for the year ended December 31, 1996 
               includes the effect of the beneficial conversion feature of the 
               Company's Series B Convertible Preferred Stock, which resulted 
               in the recognition of a preferred dividend of $14.9 million (See 
               Notes 2 and 13 of Notes to the Consolidated Financial 
               Statements). 





                                       3
<PAGE>   4


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

           The following discussion and analysis should be read in conjunction
with, and is qualified in its entirety by, the Company's consolidated financial
statements, including the notes thereto, included herein.

           Except for historical information contained herein, this Current
Report contains forward-looking statements as defined in Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements are subject to
various risks and uncertainties that could cause actual results to differ
materially from those projected in the forward- looking statements. These risks
and uncertainties are discussed in more detail in the Company's periodic reports
and other documents filed by the Company with the Securities and Exchange
Commission (the "Commission"), as such may be amended from time to time, and
under the caption entitled "Risk Factors" herein. These forward-looking
statements can be generally identified as such because the content of the
statements will usually contain such words as the Company or management
"believes," "anticipates," "expects," "hopes," and words of similar import.
Similarly, statements that describe the Company's future plans, objectives,
goals or strategies are forward-looking statements.

OVERVIEW

           ENVOY Corporation ("ENVOY" or the "Company") is a leading provider of
electronic data interchange ("EDI") and transaction processing services to
participants in the health care market, including pharmacies, physicians,
hospitals, dentists, billing services, commercial insurance companies, managed
care organizations, state and federal government agencies and others.

           On February 27, 1998, the Company completed business combinations
with the ExpressBill Companies pursuant to separate agreements and plans of
merger for an aggregate of 3.5 million shares of the Company's Common Stock (the
"Common Stock"). These combinations have been accounted for as poolings of
interests, and the historical financial statements of the Company for all
periods have been restated to include the accounts and results of operations of
the ExpressBill Companies.

           The Company also has made several acquisitions since the beginning of
1996, including the acquisitions of National Electronic Information Corporation
("NEIC") and several other businesses in 1996 (collectively, the "1996 Acquired
Businesses") and Healthcare Data Interchange Corporation ("HDIC") and Diverse
Software Solutions, Inc. ("DSS") in 1997 (collectively, the "1997 Acquired
Businesses"). The 1996 Acquired Businesses and 1997 Acquired Businesses are
sometimes collectively referred to herein as the "Acquired Businesses." These
acquisitions were accounted for under the purchase method of accounting and, as
a result, the Company has recorded the assets and liabilities of the Acquired
Businesses at their estimated fair values, with the excess of the purchase price
over these amounts being recorded as goodwill. In connection with the allocation
of purchase price for these Acquired Businesses, valuations of all identified
intangible assets of these Acquired Businesses were made. The intangible assets
of the Acquired Businesses included in-process technology projects, among other
assets, which were related to research and development that had not reached
technological feasibility and for which there was no alternative future use.
Pursuant to applicable accounting pronouncements, the amounts of the purchase
price allocated to these projects were expensed. In previously issued financial
statements, the Company recorded write-offs for acquired in-process technology
of $30.7 million in 1996 and $38.0 million in 1997 in connection with certain of
the Acquired Businesses, including NEIC, DSS and HDIC. After discussions with
the Staff of the Commission, the Company has reduced the amount of the
write-offs for acquired in-process technology to $8.7 million in 1996 and $6.6
million in 1997. These reductions have been reallocated to goodwill and to other
intangible assets and the Company's consolidated financial statements have been
restated to reflect such adjustments as described below and in Note 2 of the
Notes to Consolidated Financial Statements. See also "--Acquired In-Process
Technology." The financial statements for all periods reflect the operations of
the Acquired Businesses for the periods after their respective dates of
acquisition.


                                        4
<PAGE>   5
           On September 16, 1997, the Company completed the sale of
substantially all of the assets related to the Company's hunting and fishing
licenses and electronic benefit transfer business (collectively, "the Government
Services Business") for (i) $500,000 payable in the form of a promissory note
due and payable in full on August 31, 1999 and (ii) certain contingent payment
amounts based upon the achievement of specified future operating results of the
Government Services Business. The results of operations of the Government
Services Business are included in the Company's consolidated statements of
operations through the date of disposition, and includes revenues for 1997 of
approximately $466,000. Accordingly, the sale of the Government Services
Business is not expected to have a material impact on the Company's future
results of operations.

           The Company's revenues principally have been derived from EDI and
transaction processing services to the health care market which generally are
paid for by the health care providers or third-party payors. Revenues generally
are earned on a per transaction basis. In addition, total revenues include
non-transaction based revenues derived from the ExpressBill Companies and some
of the Acquired Businesses. This revenue includes maintenance, licensing and
support activities, as well as the sale of ancillary software and hardware
products and, in the case of the ExpressBill Companies, certain printing
services.

           The Company's revenues generally are comprised of the following types
of EDI and transaction processing services: (i) pharmacy EDI, (ii) medical and
other EDI and (iii) patient statements. The table below shows the number of
transactions processed by the Company for the periods presented:



<TABLE>
<CAPTION>
                                         YEAR ENDED DECEMBER 31,
                               1995              1996               1997
                           ---------------------------------------------------
                                                          (in thousands)

<S>                        <C>                 <C>             <C>
Pharmacy EDI.............        363,084          478,526              597,609
Medical and other EDI....         15,308          132,724              215,437
Patient statements.......         24,582           54,251               99,823
                           -------------      -----------      ---------------
           Totals........        402,974          665,501              912,869
                           =============      ===========      ===============
</TABLE>


The transactions reflected above include the transactions of the Acquired
Businesses from the date of acquisition, and include the transactions of the
ExpressBill Companies for all periods.

           While pharmacy EDI transactions currently represent a majority of the
Company's total transactions, the fees associated with these transactions are
significantly less on a per transaction basis than those received for medical
EDI and patient statement transactions. As a result, pharmacy EDI revenue
constituted less than 19% of the Company's total revenues in 1997. For 1997, the
pharmacy EDI business grew at a rate of approximately 25%, less than half of the
rate experienced in the Company's other businesses based on the number of
transactions processed. The Company believes the limited growth in the Company's
pharmacy EDI revenues as compared to the Company's medical EDI and patient
statement revenues primarily is the result of two factors. First, the
acquisitions of the Acquired Businesses have contributed significantly to the
growth of the medical EDI and patient statement business, and the Company has
not made any acquisitions in the pharmacy EDI business. In addition, the Company
believes that growth in the pharmacy EDI business has not been as great as in
the medical EDI and patient statement business because of the larger market
penetration in the more mature pharmacy EDI business. As a result, the Company
expects its pharmacy EDI business as presently conducted to represent a
decreasing portion of the Company's total revenues in the future. As the mix of
the Company's business changes, a decline in the growth rates associated with
the Company's medical EDI and patient statement business could have a material
adverse effect on the financial condition and operating results of the Company.
There can be no assurance that the mix of the Company's business or growth rates
will continue at their current level.

           The Company receives a large number of medical EDI transactions from
practice management system ("PMS") vendors and other claims clearinghouses.
These third parties aggregate medical EDI transactions from health care
providers, but require a clearinghouse (such as ENVOY) with direct connections
to payors in order to complete the processing of the transactions. ENVOY
typically receives revenue from payors on these transactions, and pays rebates
based on volume to exclusive and preferred vendors as an inducement to use ENVOY
as the clearinghouse for these transactions. If the mix of transaction volume
continues to shift to large PMS vendors or claims clearinghouses, the 


                                        5
<PAGE>   6
Company's business may increasingly become dependent on the Company's ability to
maintain or establish successful relationships with such third parties. In the
event the Company is not able to maintain or establish relationships with major
third party PMS and claims clearinghouse vendors to induce them to continue to
send transactions to ENVOY, the Company's business, operating results or
financial condition may be adversely affected.

           The Company continues to actively pursue the acquisition of health
care information businesses and other companies complementary to its business.
The Company's ability to successfully negotiate and close acquisitions will
materially impact the financial condition and operating results of the Company.
There can be no assurance that the Company will find attractive acquisition
candidates, be able to successfully finance and complete the acquisitions,
consolidate and integrate such businesses following the acquisition or
successfully operate them on a going forward basis.

RESULTS OF OPERATIONS

           The following table presents, for the periods indicated, the
percentage relationship certain statements of operations items bear to revenues.



<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                            1995                      1996                      1997
                                                       -------------------------------------------------------------------
<S>                                                    <C>                      <C>                       <C>
Revenues........................................            100.0%                    100.0%                    100.0%
Cost of revenues................................             55.5                      48.0                      46.7
Selling, general and administrative expenses....             32.6                      27.2                      23.8
Research and development expenses...............              4.3                       2.0                       1.6
Depreciation and amortization expenses..........              8.0                      28.2                      25.0
Merger and facility integration costs...........            ---                         5.2                     ---
Write-off of acquired in-process technology.....            ---                         9.6                       4.8
EMC losses......................................            ---                         0.6                     ---
                                                       ---------------          ----------------          ----------------
Operating income (loss).........................             (0.3)                    (20.7)                     (1.9)
Interest income.................................              1.1                       1.1                       1.0
Interest expense................................             (1.9)                     (3.2)                     (1.2)
                                                       ---------------          ----------------          ----------------
Income (loss) from continuing operations before
           income taxes and loss in investee....              (1.2)                    (22.7)                     (2.1)
Provision (benefit) from income taxes...........              (0.2)                      1.9                       4.6
Loss in investee................................              (5.2)                    ---                       ---
                                                       ---------------          ----------------          ----------------
Income (loss) from continuing operations........              (6.2)%                   (24.6)%                    (6.7)%
                                                       ===============          ================          ================
</TABLE>

FISCAL YEAR 1997 AS COMPARED WITH 1996

           Revenues. Revenues for the year ended December 31, 1997 were $137.6
million compared to $90.6 million for the same period last year, an increase of
$47.0 million or 51.9%. The increase in revenue is primarily due to a 37.2%
increase in transactions in 1997 compared to 1996. Transaction growth was
derived from both internal growth and the Acquired Businesses. Without the
increased transaction volume from the Acquired Businesses, transaction growth
would have been 32.3%. In addition, the acquisition of DSS provided additional
revenues of $2.8 million from software licensing, maintenance and support
activities.

           Cost of Revenues. Cost of revenues includes the cost of
communications, computer operations, operating supplies, product development and
customer support, as well as the cost of hardware sales and rebates to third
parties for transaction processing volume. Cost of revenues for 1997 was $64.2
million compared to $43.5 million for 1996, an increase of $20.7 million or
47.6%. The dollar increase is attributable to the additional costs associated
with the increased transaction volume, the inclusion of the Acquired Businesses
following the date of acquisition and increases in rebates paid to third parties
in connection with medical EDI transactions. These third parties aggregate
medical EDI transactions from health care providers, but require a clearinghouse
(such as ENVOY) with direct connections to payors in order to complete the
processing of the transactions. ENVOY typically receives revenue from payors on
these transactions, and pays rebates based on volume to certain of these third
parties as an inducement to use ENVOY as their clearinghouse for these
transactions. The increase in rebates to third parties was approximately $4.7
million, and primarily results from an increase in the volume of claims received
from certain large third party vendors and claim 


                                        6
<PAGE>   7
clearinghouses. If the mix of revenues continues to shift toward larger vendors
and claim clearinghouses, the Company expects rebates to represent an increasing
portion of its costs of revenues. As a percentage of revenues, cost of revenues
improved to 46.7% in 1997 compared to 48.0% in 1996. The improvement primarily
is attributable to the Company's ability to spread certain fixed costs of
revenue over a larger base of revenues.

           Selling, General and Administrative Expenses. Selling, general and
administrative expenses include marketing, finance, accounting and
administrative costs. Selling, general and administrative expenses for 1997 were
$32.7 million compared to $24.6 million in 1996, an increase of 32.9%. The
dollar increase is the result of the inclusion of the Acquired Businesses
following the date of acquisition and the required infrastructure to support the
larger base of revenues. As a percentage of revenues, selling, general and
administrative expenses decreased to 23.8% for 1997 compared to 27.2% for 1996.
The improvement is attributable to a larger base of revenues and the elimination
of certain duplicative costs realized in connection with the Acquired Businesses
following the date of acquisition.

           Research and Development Expenses. Expenses related to research and
development of new products are expensed as incurred until technological
feasibility is established for the product. Thereafter, all development costs
are capitalized until the products are available for general use by customers.
Research and development expenses for the year ended December 31, 1997 were $2.2
million compared to $1.8 million in 1996.

           Depreciation and Amortization Expenses. Depreciation and amortization
expense relates primarily to host computers, communications equipment and
goodwill and identifiable intangible assets related to acquisitions.
Depreciation and amortization expenses for 1997 were $34.4 million compared to
$25.5 million for 1996. The increase in 1997 is primarily the result of the
amortization of $28.3 million in goodwill and identifiable intangible assets
related to the Acquired Businesses, compared with $20.6 million in 1996.
Depreciation and amortization increased further as the result of the additional
investment in host computer systems and software to expand the Company's
transaction processing capabilities. At December 31, 1997, the Company had net
goodwill of $67.0 million associated with the Acquired Businesses remaining to
be amortized over periods of three to 15 years following the acquisitions. In
addition, the Company had net identifiable intangible assets of $27.4 million
remaining to be amortized over two to ten year time periods, as applicable.
See "--Acquired In-Process Technology."

           Merger and Facility Integration Costs. The Company recognized merger
and facility integration costs in 1996 of $4.7 million related primarily to the
NEIC and Teleclaims, Inc. ("Teleclaims") acquisitions. These charges represent
costs incurred as a direct result of the plan to integrate NEIC and Teleclaims.
The Company estimates that no future costs will be charged to merger and
facility integration costs related to NEIC and Teleclaims.

           Write-off of Acquired In-Process Technology. The Company recorded
write-offs of acquired in-process technology of $6.6 million and $8.7 million in
1997 and 1996, respectively. The 1997 write-offs related to the HDIC and DSS
acquisitions, and the 1996 write-offs related to the NEIC and Teleclaims
acquisitions. These amounts represent an allocation of purchase price to
projects that primarily included: (i) projects aimed at facilitating the ease of
participation of health care providers into clearinghouse technologies and
ensuring compliance with regulatory and other industry standards; (ii) the
development of new transaction sets which would allow health care providers to
submit additional health care transactions electronically; and (iii) the
development of additional interfaces and functionality for accounts receivable
management service offerings provided by DSS. Such amounts were charged to
expense because the projects related to research and development that had not
reached technological feasibility and for which there was no alterative future
use. See "--Acquired In-Process Technology."

           Net Interest Expense. The Company recorded a net interest expense of
$265,000 for 1997 compared to net interest expense of $1.8 million for 1996.
Interest income increased to $1.3 million in 1997 compared to $1.0 million in
1996, primarily because of an increase in the amount of cash available for
investment during 1997. In this regard, operating activities provided cash of
$22.0 million in 1997 compared to $3.2 million in 1996, and the Company's August
1996 public offering of 3,320,000 shares of Common Stock provided cash of
approximately $83.0 million. The proceeds from this public offering were used,
in part, to retire indebtedness under a $25 million term loan and $12.9 million
outstanding under the Company's revolving credit facility. Primarily as a result
of these debt repayments, interest expense decreased to $1.6 million in 1997
compared to $2.9 million in 1996.



                                        7
<PAGE>   8
           Income Tax Provision (Benefit). The Company's income tax provision 
for 1997 was $6.3 million compared to $1.7 million in 1996. The tax benefit
recorded in 1997 reflects a deferred income tax benefit of $2.3 million
associated with the $6.0 million charge for the write-off of acquired in-process
technology related to the HDIC acquisition. Amortization of certain goodwill and
identifiable intangible assets is not deductible for income tax purposes.

FISCAL YEAR 1996 AS COMPARED WITH 1995

           Revenues. Revenues for the year ended December 31, 1996 were $90.6
million compared to $34.2 million for the same period in 1995, an increase of
$56.4 million or 165%. This increase is primarily attributable to additional
revenues generated from the 1996 Acquired Businesses following the date of
acquisition and a 31.8% increase in pharmacy EDI transactions over 1995.

           Cost of Revenues. Cost of revenues in 1996 was $43.5 million compared
to $19.0 million in 1995, an increase of 129%. The dollar increase is
attributable to the inclusion of results of the 1996 Acquired Businesses
following the date of acquisition and increased transaction volume in the
Company's pre-acquisition business. As a percentage of revenues, cost of
revenues was 48.0% in 1996 compared to 55.5% in 1995. The improvement is
attributable to the inclusion of results of the 1996 Acquired Businesses
following the date of acquisition, which historically experienced higher gross
profit margins than those of the Company's pre-acquisition business.

           Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 were $24.6 million compared to $11.2 million in
1995, an increase of 120%. These expenses increased due to the inclusion of
results of the 1996 Acquired Businesses following the date of acquisition and
the additional costs associated with such acquisitions. As a percentage of
revenues, selling, general and administrative expenses decreased to 27.2% for
1996 compared to 32.6% for 1995. The improvement is attributable to a larger
base of revenues, as well as the elimination of certain duplicative costs
realized in connection with the 1996 Acquired Businesses following the date of
acquisition.

           Research and Development Expenses. Research and development expenses
for the year ended December 31, 1996 were $1.8 million, compared to $1.5 million
in 1995.

           Depreciation and Amortization Expenses. Depreciation and amortization
expenses for 1996 were $25.5 million compared to $2.7 million for 1995. The
increase is the result of the amortization of goodwill and identifiable
intangible assets during 1996 of $20.6 million primarily related to the 1996
Acquired Businesses. See "--Acquired In-Process Technology." Depreciation and
amortization increased further as the result of the additional investment in
host computer systems during 1996 to expand the Company's transaction processing
capabilities.

           Merger and Facility Integration Costs. The Company recognized merger
and facility integration costs in 1996 of $4.7 million related to the NEIC and
Teleclaims acquisitions.

           Write-off of Acquired In-Process Technology. The Company recorded a
write-off of acquired in-process technology of $8.7 million in 1996 related to
the NEIC and Teleclaims acquisitions. These amounts represent an allocation of
purchase price to projects that primarily were aimed at facilitating the ease of
participation of health care providers into clearinghouse technologies and
ensuring compliance with regulatory and other industry standards. Such amounts
were charged to expense because the projects related to research and development
that had not reached technological feasibility and for which there was no
alternative future use. See "--Acquired In-Process Technology."

           EMC Losses. In January 1995, ENVOY acquired a 17.5% interest in
EMC*Express, Inc. ("EMC"). In connection therewith, the Company also entered
into an agreement for the management of EMC, which required the Company to fund
certain of EMC's operating costs in the form of advances, and acquired an option
to purchase the remaining 82.5% interest in EMC for approximately $2.7 million.
At December 31, 1995, the Company determined it would terminate the management
agreement and would not exercise its option to purchase the remaining 82.5%
interest in EMC, principally as a result of similar products and technology
being available to the Company through the acquisition of NEIC, EMC's poor
operating performance and the belief that operating losses at EMC likely would
continue. As such, the Company determined that it was probable an impairment of
its equity investment in EMC as of 


                                        8
<PAGE>   9
December 31, 1995 had occurred and recorded an adjustment to recognize an
impairment in the carrying value of its investment, including writing off
advances and providing for future commitments to EMC at the time when the
Company's investment was recorded at net realizable value of zero. As a result,
the Company recognized losses in 1996 of $540,000 relating to the funding of EMC
operating losses through the termination date of the management agreement in
March 1996. Based upon the Company's decision to terminate the management
agreement, the Company discontinued the equity method of accounting for EMC and
began accounting for the investment on a cost basis. Accordingly, the loss
related to EMC has been charged to operating expense. Following the termination
of the management agreement and option, certain shareholders of EMC filed a
lawsuit against the Company asserting claims for breach of contract and
negligent conduct. In October 1996, the Company acquired the remaining 82.5%
interest in EMC for $2.0 million in cash and settled the related lawsuit for
$300,000. In connection with the Company's acquisition of the remaining 82.5%
interest in EMC, the Company recorded identifiable intangible assets of
approximately $1.9 million related to the customer base acquired from EMC.

           Net Interest Expense. The Company recorded net interest expense in
1996 of $1.8 million compared to $279,000 of net interest expense for 1995.
Interest income increased to $1.0 million in 1996 compared to $380,000 in 1995,
primarily because of an increase in the amount of cash available for investment
following the Company's August 1996 public offering of 3,320,000 shares of
Common Stock. Interest expense increased to $2.9 million in 1996 compared with
$659,000 in 1995, primarily as a result of borrowings under the Convertible
Notes and borrowings under the Company's bank credit facilities.

         Income Tax Provision (Benefit). The Company's income tax provision in
1996 was $1.7 million compared to an income tax benefit of $50,000 in 1995.

ACQUIRED IN-PROCESS TECHNOLOGY

           In connection with the purchases of certain of the Acquired
Businesses, including NEIC, DSS and HDIC, the Company made allocations of the
purchase price to acquired in-process technology. These amounts were expensed as
non-recurring charges on the respective acquisition dates of the Acquired
Businesses because the acquired in-process technology had not yet reached
technological feasibility and had no future alternative uses. In previously
issued financial statements, the Company recorded write-offs for acquired
in-process technology of $30.7 million in 1996 and $38.0 million in 1997 in
connection with such acquisitions. The Staff of the Commission, in its review of
a registration statement filed by the Company in May 1998 relating to a proposed
underwritten public offering by certain shareholders of the Company, commented
on the valuation of the in-process research and development costs for the NEIC,
DSS and HDIC acquisitions. After further discussions with the Staff of the
Commission, the Company has reduced the amount of the write-offs for acquired
in-process technology to $8.7 million in 1996 and $6.6 million in 1997. These
reductions have been reallocated to goodwill or other intangible assets to
reflect such adjustments as more particularly set forth below.

           Since the respective dates of acquisition, the Company has used the
acquired in-process technology to develop new health care EDI and transaction
processing product and service offerings, which have or will become part of the
Company's suite of products when completed. The nature of the efforts required
to develop the acquired in-process technology into commercially viable products
principally relate to the completion of all planning, designing and testing
activities that are necessary to establish that the product or service can be
produced to meet its design requirements, including functions, features and
technical performance requirements. The Company currently expects that the
acquired in-process technology will be successfully developed, but there can be
no assurance that commercial viability of these products will be achieved.
Furthermore, future developments in the health care EDI and transaction
processing industry, changes in EDI and transaction processing technology,
changes in other product and service offerings or other developments may cause
the Company to alter or abandon these plans. Failure to complete the development
of these projects in their entirety, or in a timely manner, could have a
material adverse impact on the Company's operating results, financial condition
and results of operations.



                                        9
<PAGE>   10
           A description of the acquired in-process technology and the estimates
made by the Company for each of NEIC, DSS and HDIC is set forth below.

           NEIC

           The in-process technology acquired in the NEIC acquisition consisted
of five significant research and development projects. These projects were all
aimed at facilitating the ease of participation of healthcare providers into
clearinghouse technologies and ensuring compliance with regulatory and other
industry standards. After acquiring NEIC, the Company continued the development
of these in-process projects.

           At the time of the NEIC acquisition, the Company assigned a value of
$30.0 million to the NEIC in-process technology with the assistance of an
independent valuation prepared at such time. In an effort to facilitate the
completion of the Commission's review of its registration statement, the Company
engaged a second appraisal firm to conduct additional valuation analyses, which
indicated a value of $28.9 million. Based on further discussions with the Staff
of the Commission, the Company has determined to value the related in-process
research and development projects at $8.0 million. In arriving at this value,
the Company considered the previously-obtained independent appraisals, the
Staff's views on in-process research and development as set forth in its
September 15, 1998 letter to the American Institute of Certified Public
Accountants ("AICPA Letter"), and the Staff's comments for the Company to
consider (i) the stage of completion of the in-process technology at the date of
acquisition, (ii) other contributions of the Company's own distinct and unique
proprietary advantages, and (iii) the estimated total project costs of the
in-process research and development in arriving at the valuation amount.

           A brief description of the five in-process projects is set forth
below:

           - UniClaim. This product is a PC based claims processing system that
           extracts Health Care Financing Administration 1500 claim formats from
           practice management systems ("PMS"), performs edits and transports
           the file to a host system where EDI formatting is completed for
           delivery to payors. The Company estimates this project, which was
           completed in the second quarter of 1996, was approximately 40%
           complete at the date of the NEIC acquisition.

           - GTEDS. This product is a computerized system for the collection,
           validation and distribution of claims from various sources to claims
           receivers. The Company estimates this project, which was completed in
           the fourth quarter of 1996, was approximately 45% complete at the
           date of the NEIC acquisition.

           - On-Line. This product is an application that performs "screen
           scraping" (i.e., it captures data from a screen presentation and
           creates an American National Standards Institute 270 eligibility
           request.) The Company estimates this project, which was approximately
           75% complete at December 31, 1997 and is expected to be completed
           during the second quarter of 1998, was approximately 35% complete at
           the date of the NEIC acquisition.

           - SmartPost. This product is an application to populate a physician
           PMS with remittance data for automatic posting to the PMS. In the
           first quarter of 1997, the Company completed the acquisition of DSS,
           which already had a Receivables Management product that included
           substantially the same functionality as the SmartPost product, and
           determined to abandon further development of SmartPost. The Company
           estimates this project was approximately 55% complete at the date of
           the NEIC acquisition.

           - Expect. This product is an application for screen scraping at payor
           locations. In the first quarter of 1997, the Company identified an
           existing software application with the same capabilities as Expect,
           and made a decision to license that software and abandon the Expect
           project. The Company estimates this project was approximately 35%
           complete at the date of the NEIC acquisition.


                                        10
<PAGE>   11
At the time of the NEIC valuation, the expected total costs of all such projects
were approximately $4.0 million. As of March 1998, approximately $1.8 million
had been incurred since the date of the NEIC acquisition for these projects, and
there were no additional expected costs to complete the research and development
projects acquired from NEIC.

           DSS

           The in-process technology acquired in the DSS acquisition consisted
primarily of projects related to DSS's Receivables Management product line and
four peripheral products expected to be used as add-on features to the
Receivables Management product. DSS's Receivables Management product line works
with existing hospital information system ("HIS") and PMS software and provides
claims and receivables management, including billings, collections and cash
applications, among other functions. At the time of acquisition, DSS was selling
versions of the Receivables Management product to work with certain HIS and PMS
products; however, the Company noted that there was still substantial
development work required in order to complete versions which were adapted to
other major HIS and PMS products. The Company estimates this project, which was
completed during the fourth quarter of 1997, was approximately 35% complete at
the date of the DSS acquisition.

           At the time of the DSS acquisition, the Company assigned a value of
$3.0 million to the DSS in-process technology with the assistance of an
independent valuation prepared at such time. In an effort to facilitate the
completion of the Commission's review of its registration statement, the Company
engaged a second appraisal firm to conduct additional valuation analyses, which
indicated a value of $2.8 million. Based on further discussions with the Staff
of the Commission, the Company has determined to value the related in-process
research and development projects at $600,000. In arriving at this value, the
Company considered the previously-obtained independent appraisals, the
Commission's views on in-process research and development as set forth in the
AICPA Letter, and the Staff's comments for the Company to consider (i) the stage
of completion of the in-process technology at the date of acquisition, (ii)
other contributions of the Company's own distinct and unique proprietary
advantages, and (iii) the estimated total project costs of the in-process
research and development in arriving at the valuation amount.

           A brief description of each of the four add-on features is set forth
below:

           - Materials Management. This product incorporates certain customized
           features into licensed software to allow for online transaction
           processing of inventory data. The Company estimates this project,
           which was completed during the third quarter of 1997, was
           approximately 50% complete at the date of the DSS acquisition.

           - Billing and 72-Hour Compliance. This product processes all
           emergency room billings and collections, in addition to tracking
           patients throughout the emergency/casualty process. The Company
           estimates this project was approximately 50% complete at the date of
           the DSS acquisition. This project was 90% complete at December 31,
           1997 and is expected to be completed during the first quarter of
           1998.

           - Registration. This product facilitates access to patient records,
           as well as providing basic patient information to payors. The Company
           estimates this project was approximately 25% complete at the date of
           the DSS acquisition. The Company estimates that this project was
           approximately 35% complete as of December 31, 1997, and is expected
           to be completed during the fourth quarter of 1998.

           - Collections. This product assists the health care provider's HIS or
           PMS system in the management of receivables. In the fourth quarter of
           1997, management placed further development of this project on hold
           while it evaluates alternative technologies and development
           strategies. The Company estimates this project was approximately 20%
           complete at the date of the DSS acquisition. At the time that the
           project was placed on hold, the Company estimates that this project
           was approximately 60% complete.

At the time of the DSS valuation, the expected total costs of all such projects
totaled approximately $300,000. Approximately $150,000 had been incurred since
the date of the DSS acquisition for these projects through March 31, 1998, and
the Company estimates that approximately $50,000 will be required to complete
the remaining research and 


                                       11
<PAGE>   12
development projects. The remaining efforts to complete the Registration and
Collections products include the selection of appropriate sites for testing and
completion of the work necessary to develop and test the working prototypes.

           HDIC

           The in-process technology acquired in the HDIC acquisition consisted
of seven significant research and development projects associated with HDIC's
product line. At the time of acquisition, HDIC had developed on-line, real-time
claims transaction technology which permitted Aetna U.S. Healthcare Inc.
("AUSHC") to receive real-time EDI transactions, and was in the process of
developing new transaction sets which would allow health care providers to
submit additional health care transactions electronically. After acquiring HDIC,
the Company modified the Company's existing front-end transaction platforms to
accommodate HDIC's technology and continued the development of seven in-process
projects. The Company believes that the resulting technology has given, and will
continue to give, the Company a competitive advantage in the marketplace by
significantly enhancing the Company's existing EDI and transaction processing
capabilities with additional transaction sets.

           At the time of the HDIC acquisition, the Company assigned a value of
$35.0 million to the HDIC in-process technology with the assistance of an
independent valuation prepared at such time. In an effort to facilitate the
completion of the Commission's review of its registration statement, the Company
engaged a second appraisal firm to conduct additional valuation analyses, which
indicated a value of $32.9 million. Based on further discussions with the Staff
of the Commission, the Company has determined to value the related in-process
research and development projects at $6.0 million. In arriving at this value,
the Company considered the previously-obtained independent appraisals, the
Commission's views on in-process research and development as set forth in the
AICPA Letter, and the Staff's comments for the Company to consider (i) the stage
of completion of the in-process technology at the date of acquisition, (ii)
other contributions of the Company's own distinct and unique proprietary
advantages, and (iii) the estimated total project costs of the in-process
research and development in arriving at the valuation amount.

           A brief description of each of the seven in-process projects is set
forth below:

           - Real-time referrals. This product is designed to allow batch or
           on-line real-time transaction processing for referral authorization
           and the ability to receive or confirm acknowledgment through the
           Company's network that a valid referral is on file with the primary
           care provider ("PCP"). The Company estimates this project was
           approximately 25% complete at the date of the HDIC acquisition. This
           project was approximately 65% complete at December 31, 1997, and is
           expected to be completed during the second quarter of 1998.

           - Vision claims. This product is designed to provide the capability
           for health care providers to submit vision claims and vision related
           information electronically. The Company estimates this project was
           approximately 35% complete at the date of the HDIC acquisition. The
           Company estimates that the project was approximately 85% complete as
           of December 31, 1997, and is expected to be completed during the
           third quarter of 1998.

           - Lab utilization/results. This product is designed to allow
           electronic transmission of lab testing requests and reporting of lab
           results. The Company estimates this project was approximately 50%
           complete at the date of the HDIC acquisition. The Company estimates
           that the project was approximately 70% complete as of December 31,
           1997, and is expected to be completed during the third quarter of
           1998.

           - Provider directories. This product is designed to allow for the
           maintenance of reference information related to health care providers
           and provider networks. The Company estimates this project was
           approximately 15% complete at the date of the HDIC acquisition. The
           Company estimates that the project was approximately 55% complete as
           of December 31, 1997, and is expected to be completed in the fourth
           quarter of 1998.

           - Real-time encounters/claims. This product is designed to allow
           batch or on-line real-time transaction processing for the
           transmission of encounter data from the PCP or a capitated specialist
           to the insurer, and the 

                                       12
<PAGE>   13
           subsequent acknowledgment of receipt. The Company estimates this
           project was approximately 45% complete at the date of the HDIC
           acquisition. The Company estimates that the project was approximately
           70% complete as of December 31, 1997, and is expected to be completed
           during the first quarter of 1999.

           - Electronic pre-certifications. This product is designed to allow
           batch or real-time batch transaction processing for the request and
           authorization to perform non-capitated procedures or hospital
           admissions. This transaction is initiated from the PCP, specialist
           hospital or other delivery system. The Company estimates this project
           was approximately 35% complete at the date of the HDIC acquisition.
           The Company estimates that the project was approximately 40% complete
           as of December 31, 1997, and is expected to be completed during the
           second quarter of 1999.

           - Rosters through the Internet. This product is designed to use the
           Internet as a means to deliver to health care providers managed care
           program eligibility status and capitated payment information. The
           Company estimates this project was approximately 50% complete at the
           date of the HDIC acquisition. The Company estimates that the project
           was approximately 75% complete as of December 31, 1997, and is
           expected to be completed during the third quarter of 1999.

At the time of the HDIC valuation, the expected total costs of all such projects
was approximately $3.0 million. Approximately $400,000 has been incurred since
the date of the HDIC acquisition for these projects through March 31, 1998, and
the Company estimates that approximately $1.4 million will be required to
complete the remaining research and development projects. The remaining efforts
to complete these projects include the processes of planning and coding the
primary applications and customer interfaces, testing such coding and
interfaces, and introducing such processes into production environments at
Company and customer locations.

LIQUIDITY AND CAPITAL RESOURCES

           The Company has incurred operating losses in recent years primarily
as a result of substantial non-cash depreciation and amortization charges,
together with the write-off of acquired in-process technology related to the
Acquired Businesses. During these periods, however, operations have generated
positive cash flows of $1.8 million in 1995, $3.2 million in 1996 and $22.0
million in 1997.

           Investing activities consist primarily of payments for acquired
businesses and purchases of property and equipment. Investing activities used
$13.3 million in 1995, $94.0 million in 1996 and $51.2 million in 1997.

           Financing activities consist primarily of proceeds from the issuance
of capital stock, and proceeds from and payments on debt. Financing activities
provided $7.4 million in 1995, $127.2 million in 1996 and $1.0 million in 1997.

           The Company purchases additional computer hardware and software
products from time to time as required to support the Company's business. The
Company incurred capital expenditures of $8.7 million and $5.4 million for 1997
and 1996, respectively, primarily for computer hardware and software products.
The Company currently estimates that total capital expenditures for 1998 will be
approximately $8 to $9 million.

           The Company is expensing as incurred all costs associated with system
changes related to its Year 2000 compliance project. The Company estimates that
the total cost of the Year 2000 expenses will be approximately $4.0 million, of
which approximately $2.5 million will be incurred during 1998. These costs are
being funded with available cash. See "Risk Factors--Year 2000 Compliance."

           At February 28, 1998, the Company had no amounts outstanding under
its $50 million revolving credit facility. Any future borrowings made under the
credit facility would bear interest at a rate equal to the Base Rate (as defined
in the credit facility) or an index tied to LIBOR. Any future borrowings under
the credit facility would be due and payable in full on June 30, 2000. The
credit facility contains financial covenants applicable to the Company and its
subsidiaries, including ratios of debt to capital, annualized EBITDA to
annualized interest expense and certain other financial 

                                       13
<PAGE>   14
covenants customarily included in a credit facility of this type. The Company
and its subsidiaries also are subject to certain restrictions relating to
payment of dividends to shareholders of the Company, acquisitions, incurrence of
debt and other restrictive provisions; however, there are no restrictions on the
ability of the Company's subsidiaries to transfer funds to the Company in the
form of dividends, loans or advances. The credit facility is secured by
substantially all of the assets of the Company and its subsidiaries.

           In February 1998, the Company issued 3.5 million shares of Common
Stock in connection with the ExpressBill Companies' business combinations. Also
in February 1998, 930,233 shares of the Series B Preferred Stock were converted
into an equal number of shares of Common Stock. As a result of these
transactions, the number of shares of Common Stock outstanding increased by
approximately 4.4 million shares, or 27%, to 21.1 million shares.

           From time to time, the Company has engaged and will continue to
engage in acquisition discussions with health care information businesses and
other companies complementary to its business. In the event the Company engages
in such acquisitions in the future, its currently available capital resources
may not be sufficient for such purposes and the Company may be required to incur
additional indebtedness or issue additional capital stock, which could result in
increased interest expense or dilution to existing investors.

           Based on current operations, anticipated capital needs to fund known
expenditures and current acquisitions, the Company believes its available cash,
cash flow from operations and the $50.0 million revolving credit facility will
provide the capital resources necessary to meet its liquidity and cash flow
requirements over the next 12 months, including the Company's current short-term
obligations. The Company believes that present funding sources will provide the
ability to meet long-term obligations as they mature. As of December 31, 1997,
the Company's long-term obligations totaled $11.3 million, and consisted of
$527,000 in long-term debt net of current portion, $1.6 million in non-current
deferred income tax liabilities, and $9.2 million in long-term obligations
related to unfavorable contracts assumed in connection with the HDIC
acquisition. Such amounts relate primarily to the Company's obligations under
the AUSHC services agreement to assume a portion of the transaction processing
fees related to certain secondary Medicare transactions, and existing agreements
assumed by the Company with several businesses that served as claims
clearinghouses for AUSHC prior to the HDIC acquisition. The Company's available
cash is invested in interest bearing securities with maturities of up to 30
days.

SEASONALITY

           ENVOY's business is to some extent seasonal, with more revenues being
generated from September through March as a result of a greater number of health
care transactions arising in those months, while operating expenses tend to
remain relatively constant over the course of the year.

IMPACT OF INFLATION

           Inflation has not had a significant impact on ENVOY's results of
operations to date.

RISK FACTORS

           ENVOY's business is subject to numerous risks and uncertainties which
may affect its results of operations in the future and may cause such future
results to differ materially and adversely from projections included in or
underlying any forward-looking statements made by or on behalf of the Company.
Among the factors that may adversely affect the Company's business are:

           Limited Operating History; Recent Losses. The health care EDI and
transaction processing industry is relatively new, and the Company's operating
history is relatively limited. ENVOY has experienced substantial net losses in
recent years, including a net loss of approximately $9.2 million for the year
ended December 31, 1997, and had an accumulated deficit of approximately $51.8
million as of December 31, 1997. In order to achieve long-term profitability,
the 

                                       14
<PAGE>   15
Company must successfully implement its business strategy and increase its
revenues, while controlling expenses. There can be no assurance that the Company
will achieve long-term profitability.

           Financial Impact of Recent Acquisitions. The Company has recently
completed several acquisitions, which have created a significant expansion of
ENVOY's overall business. As a result of the accounting treatment for these
acquisitions, including the acquisitions of NEIC in March 1996 and HDIC in
August 1997, the Company's results of operations have been negatively impacted.
A brief description of significant terms of the NEIC and HDIC acquisitions
follows:

                     NEIC. The Company acquired NEIC for approximately $94.3
           million, including fees, expenses and other costs associated with the
           acquisition. In connection with the acquisition, the Company
           recognized a write-off of acquired in-process technology of
           approximately $8.0 million. As a result of the NEIC acquisition, the
           Company is amortizing $59.6 million of goodwill over a three year
           period, and such amortization will adversely affect the Company's
           results of operations through March 1999.

                     HDIC. The Company completed the acquisition of HDIC for
           approximately $36.4 million in cash and the assumption of
           approximately $14.8 million of liabilities. In addition, the Company
           and AUSHC simultaneously entered into a long-term services agreement
           under which AUSHC agreed to use the Company as its single source
           clearinghouse and EDI network for all AUSHC electronic health care
           transactions. The Company recorded approximately $45.1 million of
           goodwill and identifiable intangible assets related to the HDIC
           acquisition and is amortizing the related goodwill of $38.1 million
           over a period of 15 years. Also recorded as part of the HDIC
           acquisition was a write-off of acquired in-process technology of $6.0
           million.

Amortization expense related to acquisitions is expected to be approximately
$28.3 million in 1998 and $10.8 million in 1999, including $5.6 million in the
three months ended March 31, 1999. The consummation of additional acquisitions
may significantly increase amortization costs and result in significant
write-offs of acquired in-process technology. The amounts allocated under
purchase accounting to developed technology and in-process technology in those
acquisitions involve valuations utilizing estimations of future revenues,
expenses, operating profit and cash flows. The actual revenues, expenses,
operating profit and cash flows from the acquired technology recognized in the
future may vary materially from such estimates.

           Acquisition Strategy; Impact on Operating Results; Need for Capital.
The Company's strategy includes acquisitions of related health care information
businesses and other companies complementary to its business. The success of any
such acquisition will depend on many factors, including the Company's ability to
identify suitable acquisition candidates, the purchase price, the availability
and terms of financing, and management's ability to integrate effectively the
acquired services, technologies (including different transaction processing
systems) or businesses into the Company's operations. Significant competition
for acquisition opportunities exists in the health care EDI and transaction
processing industry, which may significantly increase the costs of and decrease
the opportunities for acquisitions. Although ENVOY is actively pursuing
potential acquisitions, there can be no assurance that any acquisition will be
consummated. Further, to the extent that the Company is able to consummate an
acquisition, no assurance can be given that the Company will be able to operate
any acquired business profitably or otherwise successfully implement its
expansion strategy. In that regard, the Company has, in the past, experienced
temporary declines in customer service due to computer down time and
inexperienced customer service representatives in connection with the
integration of certain acquired businesses. Although the Company believes that
it has resolved such problems and that there has been no material adverse effect
in the Company's operating results to date, there can be no assurance that the
Company will not experience temporary declines in customer service in the
future, which could materially adversely affect the Company's business,
operating results or financial condition. ENVOY may finance future acquisitions
through borrowings or the issuance of debt or equity securities. Although the
Company historically has obtained financing on reasonable terms, there can be no
assurances that future lenders will extend credit, or extend credit on favorable
terms. Further, any issuance of equity securities could have a dilutive effect
on the holders of Common Stock. Such acquisitions may result in the recognition
by the Company of significant goodwill and other intangible assets, increases in
the amount of depreciation and amortization expense and write-offs of acquired
in-process technology, all of which could adversely 


                                       15
<PAGE>   16
affect the Company's operating results in future periods. The amounts allocated
under purchase accounting to developed technology (which must be amortized) and
in-process technology (which must be expensed) involve valuations utilizing
estimations of future revenues, expenses, operating profit and cash flows. The
actual revenues, expenses, operating profit and cash flows from such technology
may vary materially from such estimates.

           Customer Concentration. Primarily as a result of the HDIC
acquisition, the Company has one customer, AUSHC, that accounted for
approximately 12% of the Company's consolidated revenues for 1997. Prior to
1997, no customer accounted for more than 10% of the Company's revenues.
Concurrently with the HDIC acquisition, the Company and AUSHC entered into a ten
year services agreement which requires AUSHC to use the Company as its single
source clearinghouse and EDI network for all AUSHC electronic health care
transactions, and contains fixed fee pricing for the first five years of the
agreement. The AUSHC services agreement specifies performance criteria for the
Company requiring the Company to maintain certain minimum transaction volumes
and service levels, and to perform marketing services designed to increase the
use of the Company's services by AUSHC providers. In the event of an uncured
material default by either party, the AUSHC services agreement can be terminated
by the non-defaulting party prior to the expiration of its term on 180 days'
notice. The Company believes that it is currently in compliance in all material
respects with the terms of the AUSHC services agreement.

           Further consolidation in the health care industry is likely to
increase customer concentration and may increase the Company's dependency on a
limited number of customers. In that regard, the Company receives a large number
of medical EDI transactions from PMS vendors and other claims clearinghouses.
These third parties aggregate medical EDI transactions from health care
providers, but require a clearinghouse (such as ENVOY) with direct connections
to payors in order to complete the processing of the transactions. ENVOY
typically receives revenue from payors on these transactions, and pays rebates
based on volume to exclusive and preferred vendors as an inducement to use ENVOY
as the clearinghouse for these transactions. If the mix of transaction volume
continues to shift to large PMS vendors or claims clearinghouses, the Company's
business may increasingly become dependent on the Company's ability to maintain
or establish successful relationships with such third parties. In the event the
Company is not able to maintain or establish relationships with major third
party PMS and claims clearinghouse vendors to induce them to continue to send
transactions to ENVOY, the Company's business, operating results or financial
condition may be adversely affected. In addition, a significant portion of
NEIC's revenues has been generated by five major insurance company payors who
were shareholders of NEIC before its acquisition by ENVOY. Although each of
these carriers has continued to use the Company's services after the acquisition
of NEIC, they have no minimum transaction commitment to the Company in the
future, and there can be no assurance that the volume of business generated by
these payors will not decline or terminate. The termination of the AUSHC
services agreement or the loss of one or more other significant customers could
have a material adverse effect on the Company's business, operating results or
financial condition.

           Year 2000 Compliance. The Year 2000 issue is primarily the result of
many computer programs and data structures' failure to include the century when
storing the representation for a year. During 1997, the Company developed and
began implementing a plan to ensure its computer systems will be Year 2000
compliant. An inventory of all relevant software and hardware was taken to
determine the state of compliance. Some systems require no changes because they
already conform to the 4-digit-year configuration which is the basis for the
Year 2000 issue. The Company intends to replace or modify the remaining systems
as needed to properly display dates and perform date arithmetic. The Company
anticipates commencing testing with customers and other third parties in the
second quarter of 1998 with completion expected in June 1999. In addition to
validating the Company's internal program changes, this testing will determine
the readiness of the Company's customers to deal with the Year 2000 issue in
their own systems. Where warranted, the Company may assist customers in dealing
with the changes required to be compliant to ensure successful information
processing for all parties. Because of the nature of the Company's business, the
success of the Company's efforts may depend on the success of providers, payors
and others in dealing with the Year 2000 issue. Total costs of the Company's
Year 2000 project is estimated to be $4.0 million and is being funded through
operating cash flows. The Company is expensing all costs associated with these
system changes as the costs are being incurred. The Company estimates that Year
2000 expense for 1998 will be approximately $2.5 million. There can be no
assurance, however, that actual costs necessary to deal with these issues will
not exceed estimated amounts. If the Company or third parties 

                                       16
<PAGE>   17
with which it interacts are unable to deal successfully with the Year 2000
issue, such inability could have a material adverse effect on the Company's
business, results of operation or financial condition.

           Reliance on Data Centers. ENVOY's real-time EDI transaction
processing services depend on its host computer system which is contained in a
single data center facility. In addition, the Company's primary batch claims
processing capacity is outsourced to GTE Data Services Incorporated, located in
Tampa, Florida ("GTEDS"), which processes claims through a single computer
center. The contractual arrangement between the Company and GTEDS requires GTEDS
to maintain 24 hours a day, seven days a week processing capability and a "hot
site" disaster recovery system. The Company's current contract with GTEDS
expires in December 1998. Any failure to renew this contract, or the failure to
renew the contract on favorable terms, could have a material adverse effect on
the Company's business, operating results or financial condition. The Company
also operates a batch claims processing center which is contained in a single
data center facility in Oklahoma City, Oklahoma for the processing of Blue
Cross, Blue Shield, Medicare and Medicaid claims. Although ENVOY is currently
evaluating certain disaster recovery alternatives, neither the real-time host
computer system nor the Oklahoma City batch claims center have a remote backup
data center. Furthermore, while the Company has insurance coverage for the
Company's host computer system and data centers, there can be no assurance that
fire or other disaster affecting such data centers would not disable the
Company's respective systems or otherwise have a material adverse effect on the
Company's business, financial condition or results of operations. In addition, a
disruption in service due to service problems, delays or outages from GTEDS
providing batch claims processing services to the Company could have a material
adverse effect on the Company's business, operating results or financial
condition.

           Development of Electronic Processing in the Health Care Industry.
ENVOY's strategy anticipates that electronic processing of health care
transactions, including transactions involving clinical as well as financial
information, will win market acceptance and that providers and third-party
payers increasingly will use EDI and transaction processing networks for the
processing and transmission of data. Electronic transmission of health care
transactions is still developing, and complexities in the nature and types of
transactions which must be processed has hindered to some degree the development
and acceptance of electronic processing in this market. In addition, while the
multiplicity of claims forms and formats used by the many different third-party
payers fostered the development of EDI and transaction processing
clearinghouses, the standardization of these claims formats, whether due to
consolidation in the industry or otherwise, could reduce the use of EDI and
transaction processing clearinghouses. There can be no assurance that continued
conversion from paper-based transaction processing to electronic transaction
processing in the health care market will occur or that, to the extent it does
occur, health care providers and payers will use independent networks such as
those being developed by the Company.

           Competition. ENVOY faces significant competition in the health care
sector of the EDI and transaction processing market from companies that are
similarly specialized, including former regional partners of the Company that
have direct provider relationships, and also from companies that are involved in
other, more highly developed sectors of the EDI and transaction processing
market. The Company also faces competition from other companies, such as vendors
of provider information management systems, which have added or may add their
own proprietary transaction processing systems to existing or future products.
As a result of such competition, the Company may be pressured to reduce per
transaction prices or eliminate per transaction prices altogether. If electronic
transaction processing becomes the standard for claims and information
processing, a number of larger and better capitalized entities may elect to
enter the industry and further increase competitive pricing pressures. Many of
the Company's existing and potential competitors are larger and have
significantly greater financial, marketing, technological and other resources
than the Company.

           Availability of Direct Links. Certain third-party payors provide
electronic data transmission systems to health care providers that establish a
direct link between the provider and the payer, bypassing third-party processors
such as the Company. Any significant increase in the utilization of direct links
between health care providers and payers would have a material adverse effect on
the Company's business, operating results and financial condition.

           Uncertain Regulatory Environment and Consolidation in the Health Care
Industry. The health care industry is subject to changing political, economic
and regulatory influences that may affect the procurement practices and

                                       17
<PAGE>   18
operations of health care industry participants. Federal and state legislatures
periodically consider programs to modify or amend the United States health care
system at both the federal and state level. These programs may contain proposals
to increase governmental involvement in health care, lower reimbursement rates
or otherwise change the environment in which health care industry participants
operate. Health care industry participants may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments,
including investments in the Company's services and products.

           In addition, many health care providers are consolidating to create
larger health care delivery organizations. This consolidation reduces the number
of potential customers for the Company's services, and the increased bargaining
power of these organizations could lead to reductions in the amounts paid for
the Company's services. Industry developments are increasing the amount of
capitation-based health care and reducing the need for providers to make claims
of reimbursement for products or services. Other health care information
companies, such as billing services and practice management vendors, which
currently utilize the Company's services, have developed or acquired transaction
processing and networking capabilities and may cease utilizing the Company's
services in the future. The impact of these developments in the health care EDI
and transaction processing industry is difficult to predict and could have a
material adverse effect on the Company's business, operating results or
financial condition.

           Health Care Data Legislation. The Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") mandates the use of standard transactions,
standard identifiers, security and other provisions, the use of which is
currently scheduled to occur as early as the year 2000. HIPAA specifically names
clearinghouses as the compliance facilitators for providers and payors.
Clearinghouses are given the freedom to utilize non-standard transactions and
convert them to the mandated standards on behalf of their clients. The Company
is preparing to comply with the mandated standards within three to six months
after their publication; however, the success of the Company's compliance
efforts may be dependent on the success of providers, payors and others in
dealing with the standards.

           Legislation which would impose restrictions on the ability of
third-party processors to transmit certain patient data without specific patient
consent also recently has been introduced in the U.S. Congress. Such
legislation, if adopted, could adversely affect the ability of third-party
processors to transmit certain data, including treatment and clinical data. The
impact of the foregoing or other legislation is difficult to predict and could
materially adversely affect the Company's business, operating results or
financial condition.

           Evolving Industry Standards and Rapid Technological Changes. The
market for the Company's business is characterized by rapidly changing
technology, evolving industry standards and frequent introduction of new and
enhanced products and services. ENVOY's success will depend upon its continued
ability to enhance its existing products and services, to introduce new products
and services on a timely and cost effective basis to meet evolving customer
requirements, to achieve market acceptance for new products and services and to
respond to emerging industry standards and other technological changes. There
can be no assurance that the Company will be able to respond effectively to
technological changes or new industry standards. Moreover, there can be no
assurance that competitive products and services will not be developed, or that
any such competitive services will not have an adverse effect upon the Company's
business, operating results or financial condition.

           Dependence on Technology; Risk of Infringement. ENVOY's ability to
compete effectively depends to a significant extent on its ability to protect
its proprietary information. The Company relies primarily on copyright, trade
secret and patent laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company generally enters into
confidentiality agreements with its consultants and employees and generally
limits access to and distribution of its technology, software and other
proprietary information. Although the Company intends to defend its intellectual
property, there can be no assurance that the steps taken by ENVOY to protect its
proprietary information will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. ENVOY is also subject to the risk of alleged infringement by ENVOY
of the intellectual property rights of others. Although the Company is not
currently aware of any pending or threatened infringement claims with respect to
the Company's current or future products, there can be no assurance that third
parties will not assert such claims. Any such claims could require 


                                       18
<PAGE>   19
the Company to enter into license arrangements or could result in protracted and
costly litigation, regardless of the merits of such claims. No assurance can be
given that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms. Furthermore,
litigation may be necessary to enforce ENVOY's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results or financial condition.

           Increasing Dependence on Medical EDI and Patient Statement
Transaction Revenues. The Company's medical EDI and patient statement
transaction revenues constituted approximately 70% of the Company's total
revenues in 1997, and approximately 75% of the Company's total revenues in the
first quarter of 1998. Although pharmacy EDI transactions currently represent a
majority of the Company's total transactions, the fees associated with these
transactions are significantly less on a per transaction basis than those
received for medical EDI and patient statement transactions. As a result,
pharmacy EDI revenue constituted less than 19% of the Company's total revenues
in 1997. For 1997, the Company's pharmacy EDI business grew at less than half
the rate experienced in the Company's other businesses based on the number of
transactions processed. Because of the significant penetration and lower per
transaction prices already existing in the more mature pharmacy EDI sector, the
Company believes that its pharmacy EDI business as presently conducted will
continue to represent a decreasing portion of the Company's total revenues in
the future. As the mix of the Company's business changes, a decline in growth
rates associated the Company's medical EDI and patient statement services
business could have a material adverse effect on the Company's business,
operating results or financial condition. There can be no assurance that the mix
of the Company's business or growth rates will continue at their current level.

           Dependence on Key Executives. The Company's success depends upon the
continued contributions of its senior management. The Company believes that its
continued future success also will depend upon its ability to attract, motivate
and retain highly-skilled technical, managerial and marketing personnel. The
loss of the services of certain of the Company's key executives or technical
personnel, particularly Fred C. Goad, Jr. and Jim D. Kever, or the inability to
hire and retain qualified personnel could have a material adverse effect upon
the Company's business, operating results or financial condition.

           Unauthorized Access to Data Centers. Unauthorized access to the
Company's data centers and misappropriation of ENVOY's proprietary information
could have a material adverse effect on ENVOY's business, operating results or
financial condition. While ENVOY employs what it believes to be appropriate
security measures to protect against unauthorized access to its data centers and
misappropriation of its proprietary information, there can be no assurance that
such unauthorized access or misappropriation could not occur. Likewise, no
assurances can be made as to the security measures, if any, established by third
parties for whom ENVOY processes or transmits health care information.

           Certain Anti-takeover Provisions. The charter, bylaws and
shareholders' rights plan of the Company, and Tennessee law, contain certain
provisions that may have the effect of inhibiting a non-negotiated merger or
other business combination involving the Company. Such provisions are intended
to encourage any person interested in acquiring the Company to negotiate with
and obtain the approval of the Company's Board of Directors (the "Board of
Directors") in connection with any such transaction. These provisions include a
staggered Board of Directors, blank check preferred stock supermajority voting
provisions, the ability to issue stock purchase rights, and the application of
Tennessee law provisions on business combinations. Certain of these provisions
may discourage a future acquisition of the Company not approved by the Board of
Directors in which shareholders might receive a premium value for their shares.
As a result, shareholders who might desire to participate in such a transaction
may not have the opportunity to do so. In addition, the Board of Directors has
the power to designate the issuance of shares of preferred stock. The rights and
preferences for any series or class of preferred stock may be set by the Board
of Directors, in its sole discretion and without approval of the holders of the
Common Stock and the rights and preferences of any such preferred stock may be
superior to those of the Common Stock, thus adversely affecting the rights of
the holders of Common Stock. Furthermore, there are currently authorized and
outstanding 2,800,000 shares of the Company's Series B Convertible Preferred
Stock, no par value per share (the "Series B Preferred Stock"). The Series B
Preferred Stock has a liquidation preference to the Common Stock and the
creation of any other class or series of preferred stock senior to or pari passu
with the Series B Preferred Stock.


                                       19
<PAGE>   20
           Volatility of Stock Price; Absence of Dividends. From time to time,
there may be significant volatility in the market price for the Common Stock.
Quarterly operating results of the Company, changes in earnings estimates by
analysts, changes in general conditions in the Company's industry or the economy
or the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced significant price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance. For the foreseeable future, it is expected that earnings, if any,
generated from ENVOY's operations will be used to finance the growth of its
business, and that no dividends will be paid to holders of the Common Stock.



                                       20
<PAGE>   21
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.


                         Report of Independent Auditors


Board of Directors and Shareholders
ENVOY Corporation

We have audited the accompanying consolidated balance sheets of ENVOY
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the accompanying financial statement schedule filed herewith. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Professional Office Services, Inc. and XpiData, Inc., which
statements reflect total assets constituting 6% in 1997 and 4% in 1996, and
total revenues constituting 18% in 1997, 16% in 1996, and 24% in 1995 of the
related consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for Professional Office Services, Inc. and XpiData, Inc., is
based solely on the reports of the other auditors.

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

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of ENVOY Corporation and subsidiaries at
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed more fully in Note 2, the Company and the staff of the Securities
and Exchange Commission have had discussions with respect to the methods used by
the Company to value acquired in-process technology. As a result of these
discussions, the Company has modified the methods used to value acquired
in-process technology recorded and written off in connection with the Company's
1996 acquisition of National Electronic Information Corporation and 1997
acquisitions of Healthcare Data Interchange Corporation and Diverse Software
Solutions and accordingly, has restated the consolidated financial statements
for the years ended December 31, 1997 and 1996 to reflect this change.
Additionally, as discussed more fully in Note 2, the Company has given
retroactive effect to the change in accounting for its convertible securities
having a beneficial conversion feature.

                                              
                                             /s/ Ernst & Young LLP
                                                 Ernst & Young LLP
Nashville, Tennessee
March 5, 1998, except for the business
combinations accounted for as poolings 
of interests referred to in Notes 1 and 4,
as to which the date is April 29, 1998;
the restatement for the beneficial conversion
feature referred to in Note 2, as to 
which the date is June 26, 1998; the 
restatement related to acquired in-process 
technology referred to in Note 2 and the
subsequent event referred to in Note 22, 
as to which the date is November 9, 1998.





                                       21

<PAGE>   22



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Professional Office Services, Inc.:

We have audited the balance sheets of PROFESSIONAL OFFICE SERVICES,
INC., not separately presented herein, as of December 31, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Professional Office Services,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.


                                              /s/ ARTHUR ANDERSEN LLP
                                                  ARTHUR ANDERSEN LLP

Nashville, Tennessee
February 11, 1998





                                       22
<PAGE>   23

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To XpiData, Inc.:

We have audited the balance sheets of XPIDATA, INC., not separately presented 
herein, as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of XpiData, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.


                                              /s/ ARTHUR ANDERSEN LLP
                                                  ARTHUR ANDERSEN LLP

Nashville, Tennessee
January 30, 1998




                                       23
<PAGE>   24
                                ENVOY Corporation

                           Consolidated Balance Sheets

                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                              DECEMBER 31,

                                                                   1997                         1996
                                                       -----------------------      ------------------------
                                                       (Restated - see Note 2)      (Restated - see Note 2)
<S>                                                    <C>                          <C>
Assets
Current assets:
    Cash and cash equivalents                                $8,598                       $36,737
    Trade accounts receivable, less allowance for
       doubtful accounts of $3,641 and $2,228 in
       1997 and 1996, respectively                           33,510                        24,549
    Inventories                                               2,585                         2,975
    Deferred income taxes                                     1,797                         1,309
    Other                                                     1,811                         3,000
                                                       ------------                   -----------
Total current assets                                         48,301                        68,570

Property and equipment:
    Equipment                                                35,890                        26,791
    Furniture and fixtures                                    2,433                         3,197
    Leasehold improvements                                    2,766                         2,156
                                                       ------------                   -----------
                                                             41,089                        32,144
Less accumulated depreciation and amortization              (21,581)                      (15,507)
                                                       ------------                   -----------
                                                             19,508                        16,637
Other assets:
   Goodwill, net of amortization                             67,001                        42,992
   Other intangibles, net of amortization                    27,384                        25,682
   Other                                                      4,431                         2,487
                                                       ------------                   -----------
Total assets                                               $166,625                      $156,368
                                                       ============                   ===========
</TABLE>

See accompanying notes.


                                  24
<PAGE>   25
                                ENVOY Corporation

                     Consolidated Balance Sheets (continued)

                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                               1997                          1996
                                                      ------------------------       ----------------------
<S>                                                   <C>                            <C>
Liabilities and shareholders' equity                  (Restated - see Note 2)        (Restated - see Note 2)
Current liabilities:
    Accounts payable                                            $ 3,334                               $5,707
    Accrued expenses and other current liabilities               25,362                               13,154
     Short-term debt                                              1,315                                1,781
    Current portion of long-term debt                               263                                  387
                                                             ----------                          -----------
Total current liabilities                                        30,274                               21,029

Long-term debt, less current portion                                527                                8,926

Deferred income taxes                                             1,579                                1,988

Other non-current liabilities                                     9,163                                    0

Shareholders' equity:
    Preferred stock--No par value; authorized,
        12,000,000 shares; issued, 3,730,233                     55,021                               55,021
    Common stock--No par value;
        authorized, 48,000,000 shares;
        issued, 20,075,822 and 18,854,531 in
        1997 and 1996, respectively                             114,652                              103,265
    Additional paid-in capital                                    7,208                                7,193
    Retained deficit                                           (51,799)                             (41,054)
                                                             ----------                          -----------
Total shareholders' equity                                      125,082                              124,425
                                                             ----------                          -----------
Total liabilities and shareholders' equity                     $166,625                             $156,368
                                                             ==========                          ===========
</TABLE>

See accompanying notes.


                                       25
<PAGE>   26
                           ENVOY Corporation

                 Consolidated Statements of Operations

                 (In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,

                                                                       1997              1996            1995
                                                                    ------------------------------------------

                                                                    (Restated -      (Restated -
                                                                    see Note 2)      see Note 2)
<S>                                                                 <C>              <C>              <C>
Revenues                                                             $137,605           90,572        $ 34,197
Operating costs and expenses:
   Cost of revenues                                                    64,247           43,500          18,967
   Selling, general and administrative expenses                        32,734           24,631          11,156
   Research and development expenses                                    2,192            1,779           1,466
   Depreciation and amortization expenses                              34,432           25,497           2,725
   Merger and facility integration costs                                    0            4,664               0
   Write-off of acquired in-process technology                          6,600            8,700               0
   EMC losses                                                               0              540               0
                                                                    ------------------------------------------
Operating loss                                                         (2,600)         (18,739)           (117)

   Other income (expense):
       Interest income                                                  1,312            1,032             380
       Interest expense                                                (1,577)          (2,872)           (659)
                                                                    ------------------------------------------
                                                                         (265)          (1,840)           (279)
                                                                    ------------------------------------------
    Loss from continuing operations
        before income taxes and loss in investee                       (2,865)         (20,579)           (396)

    Provision (benefit) for income taxes                                6,333            1,717             (50)
    Loss in investee                                                        0                0          (1,776)
                                                                    ------------------------------------------
    Loss from continuing operations                                    (9,198)         (22,296)         (2,122)

    Income from discontinued operations, net of
        income taxes                                                        0                0              30

    First Data transaction expenses, including income                       0                0          (2,431)
    taxes
                                                                    ------------------------------------------

    Loss from discontinued operations                                       0                0          (2,401)
                                                                    ------------------------------------------
    Net loss                                                           (9,198)         (22,296)         (4,523)
    Less preferred stock dividends                                          0          (14,921)              0
                                                                    ------------------------------------------
    Net loss applicable to common stock                              $ (9,198)       $ (37,217)        $(4,523)
                                                                    ==========================================
</TABLE>

     (CONTINUED)

                                       26
<PAGE>   27
                                ENVOY Corporation

                Consolidated Statements of Operations (Continued)

                      (In thousands, except per share data)



<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                                1997              1996              1995
                                                             ------------      -----------       ---------
    Basic and diluted net loss per common share:              (RESTATED -      (RESTATED -
                                                              SEE NOTE 2)      SEE NOTE 2)
<S>                                                           <C>              <C>               <C>
           Loss from continuing operations                     $ (0.47)          $ (2.25)         $ (0.14)
           Loss from discontinued operations                          0                 0           (0.17)
                                                               --------         ---------        ---------
    Basic and diluted net loss per common share                $ (0.47)          $ (2.25)         $ (0.31)
                                                               ========         =========        =========

    Weighted average shares outstanding                          19,686            16,519           14,739
                                                               ========         =========        =========

    Pro forma net loss data (unaudited), reflecting pro
    forma tax provision on income of ExpressBill
    companies (see Notes 4 and 16):

           Historical loss from continuing operations
           applicable to common stock                          $ (9,198)        $ (37,217)        $ (2,122)
           pro forma adjustment to provision for
           income taxes                                           1,032               165                0
                                                               --------         ---------        ---------
           Pro forma loss from continuing operations
           applicable to common stock                           (10,230)          (37,382)          (2,122)

           Loss from discontinued operations                          0                 0           (2,401)
                                                               --------         ---------        ---------
           Pro forma net loss applicable to common             $(10,230)         $(37,382)         $(4,523)
           stock
                                                               ========         =========        =========
           Basic and diluted pro forma loss per
           common share
                     Pro forma loss-continuing                  $(0.52)           $(2.26)          $(0.14)
                     operations
                     Pro forma loss-discontinued
                     operations                                       0                 0           (0.17)
                                                               --------         ---------        ---------
           Basic and diluted pro forma net loss per
           common share                                         $(0.52)           $(2.26)          $(0.31)
                                                               ========         =========        =========
</TABLE>



    See accompanying notes.


                                       27
<PAGE>   28
                           ENVOY Corporation

            Consolidated Statements of Shareholders' Equity
                            (In thousands)


<TABLE>
<CAPTION>
                                                                                                                    ADDITIONAL
                                                                     COMMON STOCK               PREFERRED STOCK       PAID-IN
                                                                SHARES           AMOUNT       SHARES      AMOUNT       CAPITAL
                                                                -------         --------      -----      ---------     ------
<S>                                                             <C>             <C>           <C>        <C>          <C>
    Balance at December 31, 1994                                 14,514          $11,081                              $35,190
           Stock options exercised                                  271              271                                  349
           Income tax benefit realized on exercise of stock           0                0                                   46
           options
           First Data merger:
              Stock option compensation charge                        0                0                                    0
              Equity transfer                                         0                0                              (28,430)
           Capital distributions of ExpressBill                       0                0                                    0
           Capital contributions of ExpressBill                       4                3                                   28
           Net loss                                                   0                0                                    0
                                                                -------         --------      -----      ---------     ------
    Balance at December 31, 1995                                 14,789           11,355                                7,183
           Stock options exercised                                  163              510                                    0
           Stock issued in connection with acquisitions             413            6,650      3,730      $40,100            0
           Conversion of debt to common stock                       170            1,786          0            0            0
           Proceeds from issuance of stock                        3,320           82,964          0            0            0
           Capital distributions of ExpressBill                       0                0          0            0            0
           Capital contributions of ExpressBill                       0                0          0            0           10
           Accretion of Series B preferred stock dividends            0                0          0       14,921            0
           Net loss                                                   0                0          0            0            0
                                                                -------         --------      -----      ---------     ------
    Balance at December 31, 1996 (Restated - See Note 2)         18,855          103,265      3,730       55,021        7,193

           Stock options exercised                                  437            1,844          0            0            0
           Income tax benefit realized on exercise of stock           0            1,249          0            0            0
           options
           Conversion of debt to common stock                       781            8,214          0            0            0
           Proceeds from issuance of stock                            3               80          0            0            0
           Capital distributions of ExpressBill                       0                0          0            0            0
           Capital contributions of ExpressBill                       0                0          0            0           15
           Net loss                                                   0                0          0            0            0
                                                                -------         --------      -----      ---------     ------

    Balance at December 31, 1997 (Restated - See Note (2)        20,076         $114,652      3,730      $55,021       $7,208
                                                                =======         ========      =====      =========     ======
</TABLE>


<TABLE>
<CAPTION>
                                                                RETAINED                      TOTAL
                                                                EARNINGS      DEFERRED     SHAREHOLDERS'
                                                               (DEFICIT)    COMPENSATION      EQUITY
                                                                -------        ---------      -------
<S>                                                             <C>         <C>             <C>
    Balance at December 31, 1994                                 $8,558       $(1,264)        $53,565
           Stock options exercised                                    0             0             620
           Income tax benefit realized on exercise of stock           0             0              46
           options
           First data merger:
              Stock option compensation charge                        0         1,264           1,264
              Equity transfer                                    (6,989)            0         (35,419)
           Capital distributions of ExpressBill                    (212)            0            (212)
           Capital contributions of ExpressBill                       0             0              31
           Net loss                                              (4,523)            0          (4,523)
                                                                -------        ---------      -------
    Balance at December 31, 1995                                 (3,166)            0          15,372
           Stock options exercised                                    0             0             510
           Stock issued in connection with acquisitions               0             0          46,750
           Conversion of debt to common stock                         0             0           1,786
           Proceeds from issuance of stock                            0             0          82,964
           Capital distributions of ExpressBill                    (671)            0            (671)
           Capital contributions of ExpressBill                       0             0              10
           Accretion of Series B preferred stock dividends      (14,921)            0               0
           Net loss                                             (22,296)            0         (22,296)
                                                                -------        ---------      -------
    Balance at December 31, 1996 (Restated - See Note 2)        (41,054)            0         124,425

           Stock options exercised                                    0             0           1,844
           Income tax benefit realized on exercise of stock           0             0           1,249
           options
           Conversion of debt to common stock                         0             0           8,214
           Proceeds from issuance of stock                            0             0              80
           Capital distributions of ExpressBill                  (1,547)            0          (1,547)
           Capital contributions of ExpressBill                       0             0              15
           Net loss                                              (9,198)            0          (9,198)
                                                                -------        ---------      -------

    Balance at December 31, 1997 (Restated - See Note (2)      $(51,799)           $0        $125,082
                                                               ========        =========     ========
</TABLE>


    See accompanying notes.

                                  28
<PAGE>   29
                                ENVOY CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                              1997                    1996                1995
                                                                       -----------------       -----------------        ---------
                                                                       (Restated - see Note 2) (Restated - see Note 2)
<S>                                                                    <C>                     <C>                      <C>
OPERATING ACTIVITIES:
NET LOSS                                                                  $  (9,198)              $ (22,296)             $  (4,523) 
Adjustments to reconcile net loss to net cash provided by operating                                                                 
activities:                                                                                                                         
                                                                                                                                    
        Depreciation and amortization                                        34,432                  25,507                  3,807  
        Stock option compensation expense                                         0                       0                  1,264  
        Provision for losses on accounts receivable                           1,461                   1,112                    430  
        Deferred income tax provision (benefit)                                (995)                    339                     11  
        Write-off of certain assets and investments                           6,600                  10,281                    820  
        Changes in assets and liabilities, net of First                                                                             
            Data transaction and acquired businesses:                                                                               
             Decrease (increase) in accounts receivable                      (9,782)                 (8,709)                    66  
             Decrease (increase) in inventories                                 388                    (543)                (1,643) 
             Decrease (increase) in other current assets                        981                  (1,887)                  (619) 
             Increase (decrease) in accounts payable, accrued                                                                       
                        expenses and other current liabilities               (1,900)                   (621)                 2,180  
                                                                          ---------               ---------              ---------
Net cash provided by operating activities                                    21,987                   3,183                  1,793  
                                                                                                                                    
INVESTING ACTIVITIES                                                                                                                
Net (increase) decrease in short-term investments                                 0                   5,103                 (5,103) 
Purchases of property and equipment                                          (8,744)                 (5,356)                (8,507) 
Decrease (increase) in other assets                                          (1,998)                      0                  1,047  
Investment in EMC                                                                 0                       0                   (750) 
Payments for businesses acquired, net of cash acquired of                                                                           
$5,543 in 1996                                                              (40,412)                (93,744)                     0  
                                                                          ---------               ---------              ---------  
Net cash used in investing activities                                       (51,154)                (93,997)               (13,313) 
                                                                                                                                    
FINANCING ACTIVITIES                                                                                                                
Proceeds from issuance of preferred stock                                         0                  40,100                      0  
Proceeds from issuance of common stock                                        3,174                  88,474                    623  
Capital distributions of Express Bill                                        (1,391)                   (671)                  (212) 
Capital contributions of Express Bill                                            15                      10                      0  
Proceeds from long-term debt                                                      0                  44,267                 10,457  
Payments on long-term debt                                                     (304)                (44,387)                (1,447) 
Proceeds from (payments on) short-term debt                                    (466)                    639                    741  
Payment of deferred financing costs                                               0                  (1,200)                     0  
Cash transferred in First Data transaction                                        0                       0                 (2,743) 
                                                                          ---------               ---------              ---------  
Net cash provided by financing activities                                     1,028                 127,232                  7,419  
                                                                          ---------               ---------              ---------  
Net increase (decrease) in cash and cash equivalents                        (28,139)                 36,418                 (4,101) 
Cash and cash equivalents at beginning of year                               36,737                     319                  4,420  
                                                                          ---------               ---------              ---------  
Cash and cash equivalents at end of year                                  $   8,598               $  36,737              $     319  
                                                                          =========               =========              =========  
</TABLE> 

(Continued)

                                  29
<PAGE>   30
                                ENVOY Corporation

                Consolidated Statements of Cash Flows (continued)

                                 (In thousands)


                             
<TABLE>
<CAPTION>                                                              YEAR ENDED DECEMBER 31,
                                                                 1997            1996            1995
                                                       ------------------------------------------------
                                                              (Restated -   (Restated -
                                                              see Note 2)   see Note 2)
<S>                                                    <C>                  <C>              <C>       
    SUPPLEMENTAL CASH FLOW INFORMATION                                      
    Interest paid                                          $     (238)       $   (2,357)     $     (659)
    Interest received                                           1,250             1,024             380
    Income taxes paid                                          (5,952)             (371)           (496)
                                                                            
    NONCASH TRANSACTIONS                                             
     First Data transaction:                                                
        Book value of assets transferred, excluding                         
           cash                                            $        0        $        0      $   36,083
        Liabilities transferred                                     0                 0          (3,407)
        Equity transferred                                          0                 0         (35,419)
                                                       -------------------------------------------------
    Cash transferred                                       $        0        $        0      $   (2,743)
                                                       =================================================
                                                                            
    ACQUISITIONS                                               
    Working capital                                        $        0       $       302      $        0
    Intangible assets                                               0             1,348               0
    Common stock issued                                             0            (1,650)              0
                                                       ------------------------------------------------
    Cash transferred                                       $        0       $         0      $        0
                                                       ================================================
                                                                            
    CONVERSION OF DEBT TO COMMON STOCK                     $    8,214       $     1,786      $        0
                                                       ================================================
</TABLE>

  See accompanying notes.


                                  30
<PAGE>   31
                           ENVOY Corporation

              Notes to Consolidated Financial Statements

1.     ORGANIZATION

ENVOY Corporation, a Tennessee corporation (the "Company" or "New ENVOY"), was
incorporated in August 1994 as a wholly-owned subsidiary of ENVOY Corporation, a
Delaware corporation ("Old ENVOY"), and through a stock dividend distribution by
Old ENVOY of all of the outstanding shares of the common stock of New ENVOY (the
"Distribution") the Company ceased to be a wholly-owned subsidiary of Old ENVOY.
Immediately after the Distribution, Old ENVOY was merged with and into First
Data Corporation ("First Data") (see Note 3). Old ENVOY was formed in 1981 to
develop and market electronic transaction processing services to capture and
transmit time critical information for the financial services and health care
markets. In 1995, the assets and liabilities of Old ENVOY associated with the
electronic transaction processing for the health care markets and governmental
benefits programs were transferred to New ENVOY. For accounting purposes, the
Company's financial statements for 1995 include financial information for its
predecessor, Old ENVOY, with the financial services electronic processing
business (the "Financial Business") shown as discontinued operations. For
purposes of the notes to the consolidated financial statements, the "Company"
refers to Old ENVOY and New ENVOY for the period prior to June 6, 1995. The
Company currently provides electronic data interchange ("EDI") and transaction
processing services to participants in the health care market, including
pharmacies, physicians, hospitals, dentists, billing services, commercial
insurance companies, managed care organizations, state and federal government
agencies and others.

As more fully discussed in Note 4, on February 27, 1998, the Company completed
business combinations with Professional Office Services, Inc. ("POS"), XpiData,
Inc. ("XpiData") and Automated Revenue Management, Inc. ("ARM"; and together
with POS and XpiData sometimes collectively referred to as the "ExpressBill
Companies"). These transactions have been accounted for as poolings of interests
and the Company's historical consolidated financial statements for 1997, 1996
and 1995 have been restated to include the accounts and results of operations of
the ExpressBill Companies.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. The carrying amount approximates
fair value because of the short maturity of those instruments.

SHORT-TERM INVESTMENTS

Short-term investments include investments in fixed rate securities consisting
primarily of bonds and corporate notes. These investments have maturity dates of
one to five years from the date of purchase and are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." All short-term
investments were sold prior to December 31, 1996.

Proceeds, gross realized gains and gross realized losses from the sale of
available-for-sale securities were $6,126,000, $1,911, and $39,138,
respectively, in 1996 and $9,470,000, $288,000, and $9,000, respectively, in
1995. The cost of securities sold is based on the specific identification
method.


                                  31
<PAGE>   32
                           ENVOY Corporation

              Notes to Consolidated Financial Statements

CONCENTRATION OF CREDIT RISK

The Company has one customer that accounted for approximately 12% of the
Company's consolidated revenues for 1997 and accounted for approximately 16% of
consolidated accounts receivable. No single customer accounted for more than 10%
of consolidated revenues in 1996 or 1995.

INVENTORIES

Inventories consist primarily of point-of-service terminals and supplies used in
the patient statement business, and are stated at the lower of cost (first-in,
first-out method) or market.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is provided over the
estimated lives of the respective assets on the straight-line basis principally
over five to seven years. Depreciation expense totaled $6,141,000, $4,920,000
and $2,674,000 for 1997, 1996 and 1995, respectively.

OTHER ASSETS

Other assets consist primarily of goodwill and other intangible assets as
follows (in thousands):


<TABLE>
<CAPTION>
                                                          December 31,          Amortization
                                               1997                   1996         Period
                                     --------------------------------------     ------------

<S>                                  <C>                        <C>             <C>       
Goodwill                              $    105,059              $    59,466      3-15 years
Less accumulated amortization              (38,058)                 (16,474)
                                      -------------------------------------
                                      $     67,001              $    42,992
                                     ======================================

Submitter and payor relationships     $     12,700              $    12,400      9 years
Customer contracts                          13,554                    8,554      9-10 years
Developed technology                         4,300                    2,100      2 years
Covenants not to compete                     4,081                    4,133      2 years
Trademarks and tradenames                      350                        0      3-7 years
Assembled work force                         3,140                    2,600      3-7 years
                                      -------------------------------------
                                            38,125                   29,787
Less accumulated amortization              (10,741)                  (4,105)
                                      -------------------------------------
                                      $     27,384              $    25,682
                                     ======================================
</TABLE>

Amortization expense related to such intangible assets for the years ended
December 31, 1997, 1996 and 1995 was $28,292,000, $20,578,000 and $39,000,
respectively. In establishing the amortization periods for intangible assets,
the Company considers several factors, including legal, regulatory, or
contractual provisions; effects of obsolescence, demand, competition and other
economic factors; service life expectancies of employees; and expected actions
of competitors and others. The Company reviews its long-lived and intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. The measurement of possible
impairment is based upon determining whether projected undiscounted future cash
flows of the acquired business or from the use of the asset over the remaining
amortization period is less than the carrying amount of the asset. As of
December 31, 1997, in the opinion of management, there has been no such
impairment.


                                  32
<PAGE>   33
                           ENVOY Corporation

              Notes to Consolidated Financial Statements

REVENUE RECOGNITION

Processing services revenue is recognized as the transactions are processed. The
Company recognizes revenue from software sales in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position 91-1,
"Software Revenue Recognition." Revenue from software product sales is
recognized upon delivery to the customer provided the collection of the sales
proceeds is deemed probable and no significant vendor obligations remain. Other
revenue, including hardware sales, maintenance, licensing and support
activities, is generally recognized as hardware is shipped or as services are
provided. Receivables generally are due within 30 days and do not require
collateral.

In October 1997, the AICPA issued Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition." SOP 97-2 is effective for fiscal years beginning
after December 15, 1997, and is not expected to have a material impact on the
Company's financial statements. Effective January 1, 1998, the Company adopted
SOP 97-2.

LOSS PER COMMON SHARE

In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per
Share." SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. The adoption of SFAS No. 128 had
no impact on the Company's computation of earnings per share for the current or
prior periods.

RESEARCH AND DEVELOPMENT

Research and development expenses of $2,192,000 in 1997, $1,779,000 in 1996 and
$1,466,000 in 1995 were charged to expense as incurred until technological
feasibility had been established for the product. Thereafter, all software
development costs are capitalized until the products are available for general
use by customers. The Company has not capitalized any significant software costs
to date.

INCOME TAXES

The Company and XpiData have used the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." The former
stockholders of POS and ARM elected under Subchapter S of the Internal Revenue
Code (the "Code") to include such companies' income in their own income for
federal and state income tax purposes. Accordingly, POS and ARM were not subject
to federal or state income taxes for periods prior to the Company's business
combinations with the ExpressBill Companies.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

STOCK BASED COMPENSATION

Under various benefit plans, the Company grants stock options for a fixed number
of shares to employees and directors with an exercise price which approximates
the fair value of the shares at the date of grant. The Company also has an
Employee Stock Purchase Plan, which is qualified under Section 423 of the Code.
The Company accounts for stock based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25,



                                  33
<PAGE>   34
                           ENVOY Corporation

              Notes to Consolidated Financial Statements

("APB No. 25") "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense.

RECLASSIFICATIONS

Certain reclassifications have been made in the 1996 and 1995 consolidated
financial statements to conform with the 1997 presentation.

RESTATEMENT OF FINANCIAL STATEMENTS

Restatement for Beneficial Conversion Feature

The results of operations presented in the financial statements for the year
ended December 31, 1996 have been restated to give effect to the accounting
treatment announced by the Securities and Exchange Commission at the March 13,
1997 meeting of the Emerging Issues Task Force relevant to the Company's Series
B Convertible Preferred Stock (the "Series B Preferred Stock") (see Notes 4 and
13) which has a "beneficial conversion" feature. The purchase price for the
Series B Preferred Stock ($10.75 per share) was established on October 25, 1996,
when the letter of intent related to the financing of the acquisition of
National Electronic Information Corporation ("NEIC") was executed. The Series B
Preferred Stock Purchase Agreement (the "Stock Purchase Agreement") was executed
on November 30, 1995, at which time the fair value of the Common Stock was
$14.75 per share and, pursuant to the terms of the Stock Purchase Agreement, was
convertible into Common Stock on the date of issuance on a one-for-one basis.
The discount between the issuance price of $40.1 million or $10.75 per share and
the fair value on the date of the Stock Purchase Agreement of $55.0 million or
$14.75 per share gives rise to a beneficial conversion feature. Under the
accounting treatment discussed above, the value of the discount has been
reflected in the restated financial statements as preferred dividends and has
been accreted on the date of issuance, March 6, 1996, which is also the first
possible conversion date. Accordingly, the entire discount is treated as a
dividend on the Series B Preferred Stock for the year ended December 31, 1996.
The restatement has no effect on cash flows of the Company.

Restatement Related to Acquired In-Process Technology

The management of the Company and the staff of the Securities and Exchange
Commission have had discussions with respect to the methods used to value
acquired in-process technology recorded and written off at the date of
acquisition. As a result of these discussions, the Company has modified the
methods used to value acquired in-process technology in connection with the
Company's 1996 acquisition of NEIC and 1997 acquisitions of Healthcare Data
Interchange Corporation ("HDIC") and Diverse Software Solutions ("DSS"). Initial
calculations of value of the acquired in-process technology were based on the
cost required to complete each project, the after-tax cash flows attributable to
each project, and the selection of an appropriate rate of return to reflect the
risk associated with the stage of completion of each project. Revised
calculations of the value of the acquired in-process technology are based on
adjusted after-tax cash flows that give explicit consideration to the Staff's
views on in-process research and development as set forth in its September 15,
1998 letter to the AICPA, and the Staff's comments for the Company to consider
(i) the stage of completion of the in-process technology at the dates of
acquisition, (ii) contributions of the Company's own distinct and unique
proprietary advantages, and (iii) the estimated total project costs of the
in-process research and development in arriving at the valuation amount. As a
result of this modification the Company has decreased the amount of the purchase
price allocated to acquired in-process technology in the NEIC acquisition from
$30 million to $8 million, in the HDIC acquisition from $35 million to $6
million, and in the DSS acquisition from $3 million to $600,000. As a result,
the Company increased other intangibles by $5 million (for customer contracts)
and goodwill by $48.4 million.



                                       34
<PAGE>   35
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements


Summary of Effects of Restatements

The effects of the restatement for the beneficial conversion feature and the
effects of the restatement related to acquired in-process technology resulted in
the following impact on the Company's results of operations for the years ended
December 31, 1997 and 1996 and its financial position at December 31, 1997 and
1996 (in thousands).


<TABLE>
<CAPTION>
                                                                                   1997            1996
                                                                                ----------      ---------
<S>                                                                              <C>             <C>      
Results of operations:
Loss from continuing operations before income taxes as previously reported       $(25,928)       $(36,590)

           Adjustment related to acquired in-process technology*                   23,063          16,011
                                                                                 --------        --------
           Restated                                                              $ (2,865)       $(20,579)
                                                                                 ========        ========
Net loss, as previously reported                                                 $(20,710)       $(38,307)
           Adjustment related to acquired in-process technology*                   11,512          16,011

           Adjustment related to beneficial conversion feature                         --         (14,921)
                                                                                 --------        --------
           Restated net loss applicable to common stock                          $ (9,198)       $(37,217)
                                                                                 ========        ========
Loss per share:
           As previously reported                                                $  (1.05)       $  (2.32)
                                                                       
           Adjustment related to acquired in-process technology*                     0.58            0.97

           Adjustment related to beneficial conversion feature                         --           (0.90)
                                                                                 --------        --------
           Restated                                                              $  (0.47)       $  (2.25)
                                                                                 ========        ========
</TABLE>

 *The adjustment results from the decrease in the value assigned to acquired 
  in-process technology and the increased amortization of goodwill and other 
  intangibles.



                                       35
<PAGE>   36
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements



<TABLE>
<CAPTION>
                                                              1997             1996       
                                                            ---------       ----------   
<S>                                                         <C>              <C>         
Financial Position:                                                                    
Goodwill, as previously reported                             $ 32,719        $ 26,981
  Adjustment related to acquired in-process technology         34,282          16,011
                                                             --------        --------
  Restated                                                   $ 67,001        $ 42,992
                                                             ========        ========
Other intangibles, as previously reported                    $ 22,592        $ 25,682
  Adjustment related to acquired in-process technology          4,792              -- 
                                                             --------        --------
  Restated                                                   $ 27,384        $ 25,682
                                                             ========        ========
Deferred tax asset (liability), as originally reported       $  9,972        $ (1,988)

  Adjustment related to acquired in-process technology        (11,551)             -- 
                                                             --------        --------
  Restated                                                   $ (1,579)       $ (1,988)
                                                             ========        ========
Retained deficit, as previously reported                     $(79,322)       $(57,065)
  Adjustment related to acquired in-process technology *       27,523          16,011

                                                             --------        --------
  Restated                                                   $(51,799)       $(41,054)
                                                             ========        ========
</TABLE>
                                                            
* The adjustment results from the decrease in the value assigned to acquired
in-process technology and the increased amortization of goodwill and other
intangibles.

3.         DISCONTINUED OPERATIONS--TRANSACTION WITH  FIRST DATA CORPORATION

On June 6, 1995, the Company completed a merger of its Financial Business with
First Data (the "First Data Merger"). Pursuant to a management services
agreement entered into in connection with the First Data Merger, the Company
received a fee from First Data of $1,500,000 per annum, payable in quarterly
installments of $375,000, during the first two years following the First Data
Merger. Management fees of $650,000, $1,500,000 and $850,000 for the years ended
December 31, 1997, 1996 and 1995 are classified in revenues in the consolidated
statements of operations.

The net assets of the Financial Business were merged with and into First Data
and were accounted for as discontinued operations.

Revenues of the Financial Business were $12,828,000 for the period January 1,
1995 through June 6, 1995.

The Company incurred $1,997,000 in expense related to the Distribution and First
Data Merger for the year ended December 31, 1995. These expenses consisted
primarily of legal, accounting and financial advisor fees. As set forth in the
merger agreement, First Data paid 50% of the costs of the transactions up to a
maximum expense to First Data of $2,000,000. The $1,997,000 incurred by the
Company is net of the $2,000,000 paid by First Data. The costs associated with
the First Data Merger have been included in discontinued operations including
applicable income taxes of $434,000 for the year ended December 31, 1995 and
reflect the reversal of tax benefits previously recognized for such charges.


                                       36
<PAGE>   37
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

4.         BUSINESS COMBINATIONS

BUSINESS COMBINATIONS ACCOUNTED FOR AS POOLINGS OF INTERESTS

On February 27, 1998, the Company completed business combinations with the three
companies operating the ExpressBill patient statement processing and printing
services businesses, for an aggregate of 3,500,000 shares of ENVOY Common Stock
("Common Stock"). Shareholders of XpiData, based in Scottsdale, Arizona,
received 1,365,000 shares and shareholders of POS and its affiliated company,
ARM, both of which are based in Toledo, Ohio, received an aggregate of 2,135,000
shares. The ExpressBill patient statement services include electronic data
transmission and formatting, statement printing and mailing services for health
care providers and practice management system vendors. These transactions have
been accounted for as poolings of interests. Accordingly, the Company's
historical consolidated financial statements for 1997, 1996 and 1995 have been
restated to include the accounts and results of operations of the ExpressBill
Companies. A reconciliation of previously reported revenues and earnings,
restated to reflect the modifications referred to in Note 2, appears below:


                             
<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                       1997             1996             1995
                                                                    ---------        ---------        ---------
                                                                        (In thousands, except per share data)
<S>                                                                 <C>              <C>              <C>      
    REVENUES:
            ENVOY                                                   $ 113,693        $  76,584        $  26,055
            ExpressBill Companies                                      23,912           13,988            8,142
                                                                    ---------        ---------        ---------
            Combined                                                $ 137,605        $  90,572        $  34,197
                                                                    =========        =========        =========
    Net income (loss)from continuing operations applicable
        to common stock
            ENVOY                                                   $ (12,251)       $ (37,810)       $  (2,000)
            ExpressBill Companies                                       3,053              593             (122)
                                                                    ---------        ---------        ---------
            Combined                                                $  (9,198)       $ (37,217)       $  (2,122)
                                                                    =========        =========        =========
    Net loss per common share from continuing operations
            ENVOY                                                   $   (0.76)       $   (2.90)       $   (0.18)
            Combined                                                $   (0.47)       $   (2.25)       $   (0.14)
</TABLE>

BUSINESS COMBINATIONS ACCOUNTED FOR AS PURCHASES

Each of the following acquisitions was accounted for under the purchase method
of accounting, applying the provisions of APB Opinion No. 16 ("APB 16") and, as
a result, the Company recorded the assets and liabilities of the acquired
companies at their estimated fair values with the excess of the purchase price
over these amounts being recorded as goodwill. The financial statements reflect
the operations of the acquired businesses for the periods after their respective
dates of acquisition.

NATIONAL ELECTRONIC INFORMATION CORPORATION

On March 6, 1996, the Company's shareholders approved the acquisition of NEIC
for an aggregate purchase price of approximately $94,301,000, consisting of
$88,354,000 paid to the NEIC stockholders and certain other transaction and
acquisition costs of $5,947,000, summarized as follows (in thousands):



                                       37
<PAGE>   38
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

<TABLE>
<S>                                                     <C>
  Purchase price                                         $   94,301
       Add liabilities assumed:
             Current liabilities                              9,033
             Long-term obligations                              186
             Other liabilities                                  111
             Deferred tax liability                           7,682
                                                            -------
                                                             17,012
     Less assets acquired:
             Current assets                                 (14,085)
             Property, plant and equipment, net              (3,000)
             Deferred tax asset                              (5,797)
             Deferred loan costs                             (1,200)
             Identifiable intangibles:
                  Developed technology                       (2,100)
                  Covenant not to compete                    (4,000)
                  Assembled work force                       (1,400)
                  Submitter and payor relationships         (12,100)
                                                            -------
                                                            (43,682)
  Less write-off of acquired in-process technology           (8,000)
                                                            -------
  Goodwill                                               $   59,631
                                                            =======
</TABLE>


Goodwill of $59,631,000 is being amortized over three years. Submittor and payor
relationships are being amortized over nine years; developed technology and
covenants not to compete are being amortized over two years; and assembled work
force is being amortized over seven years. In connection with the NEIC
acquisition, the Company incurred a one time write-off of acquired in-process
technology of $8,000,000. This amount represents an allocation of purchase price
to projects aimed at facilitating the ease of participation of health care
providers into clearinghouse technologies and ensuring compliance with
regulatory and other industry standards. Such amounts were charged to expense in
1996 because the projects related to research and development that had not
reached technological feasibility and for which there was no alternative future
use.

The NEIC acquisition was financed through equity and debt financing. An
aggregate of 3,730,233 shares of Series B Preferred Stock were issued to three
investors for a total purchase price of $40,100,000. Additionally, the Company
issued 333,333 shares of Common Stock to various investors for an aggregate
purchase price of $5,000,000. The Company also entered into a credit agreement,
whereby the Company obtained $50,000,000 in bank financing in the form of a
$25,000,000 revolving credit facility and a $25,000,000 term loan. An additional
840 shares of NEIC cumulative redeemable preferred stock were redeemed by the
Company on August 1, 1996 at a redemption price of approximately $2,200,000.



                                       38
<PAGE>   39
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

TELECLAIMS, INC. ("TELECLAIMS")

On March 1, 1996, the Company acquired all the issued and outstanding capital
stock of Teleclaims in exchange for 73,242 shares of Common Stock yielding a
purchase price of approximately $1,500,000, summarized as follows (in
thousands):


<TABLE>
<S>                                                   <C>       
Purchase price                                        $    1,500
Add liabilities assumed                                      229
Less assets acquired:
           Current assets                                  (137)
           Property and equipment, net                     (172)
           Other assets                                     (72)
           Submittor and payor relationships               (300)
                                                         -------
                                                           (681)
Less write-off of acquired in process technology           (700)
                                                         -------
Goodwill                                              $      348
                                                         =======
</TABLE>

Goodwill of $348,000 is being amortized over three years and submittor and payor
relationships in the amount of $300,000 are being amortized over nine years.
Also recorded as part of the Teleclaims acquisition was a one time write-off of
acquired in-process technology of $700,000. This amount represents an allocation
of purchase price to projects for the development of new products for health
care transaction processing. Such amounts were charged to expense in 1996
because the projects related to research and development that had not reached
technological feasibility and for which there was no alternative future use.

NATIONAL VERIFICATION SYSTEMS, L. P.  ("NVS")

On September 13, 1996, the Company completed the acquisition of certain assets
and liabilities of NVS for $2,150,000 in cash and the assumption of certain
liabilities, summarized as follows (in thousands):


<TABLE>
<S>                                              <C>      
Purchase price                                   $   2,150
Add liabilities assumed                                 51
Less assets acquired:
           Current assets                             (83)
           Property and equipment, net               (254)
           Customer contracts                      (1,500)
                                                   -------
                                                   (1,837)
                                                   -------
Goodwill                                         $     364
                                                   =======
</TABLE>

Goodwill of $364,000 is being amortized over three years and customer contracts
in the amount of $1,500,000 are being amortized over nine years.


                                       39
<PAGE>   40
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

PROFESSIONAL OFFICE SYSTEMS, INC. ("POSI")

On October 31, 1996, the Company acquired all the issued and outstanding capital
stock of POSI, the electronic data interchange clearinghouse for Blue Cross and
Blue Shield of the National Capital Area, for approximately $6,400,000 in cash
and the assumption of certain liabilities, summarized as follows (in thousands):


<TABLE>
<S>                                            <C>      
Purchase price                                 $   6,400
Add liabilities assumed                            1,581
Less assets acquired:
           Current assets                        (1,059)
           Property and equipment, net             (180)
           Identifiable intangibles:
                Customer contracts               (5,100)
                Assembled work force             (1,200)
                                                 -------
                                                 (7,539)
                                                 -------
Goodwill                                       $     442
                                                 =======
</TABLE>

Goodwill of $442,000 is being amortized over three years. Customer contracts are
being amortized over nine years and assembled work force is being amortized over
seven years.

DIVERSE SOFTWARE SOLUTIONS, INC.

On March 11, 1997, the Company completed the acquisition of certain assets of
DSS for $4,000,000 in cash, plus a variable payment based upon revenue earned
during a specified period following the acquisition, and the assumption of
certain liabilities, summarized as follows (in thousands):


<TABLE>
<S>                                                        <C>       
Purchase price                                             $    4,000
Add liabilities assumed:
           Current liabilities                                  2,490
           Variable payment                                     2,200
                                                             --------
                                                                4,690
Less assets acquired:
           Current assets                                       (446)
           Property and equipment, net                           (80)
           Identifiable intangibles:
                Developed technology                            (600)
                Assembled work force                            (340)
                Submittor and payor relationships               (300)
                Tradenames                                      (100)
                                                             --------
                                                              (1,866)
Less write-off of acquired in-process technology                (600)
                                                             --------
Goodwill                                                   $    6,224
                                                             ========
</TABLE>

Goodwill of $6,224,000 is being amortized over a period of 15 years. Developed
technology is being amortized over two years; assembled work force is being
amortized over seven years; submittor and payor relationships are being
amortized over nine years; and tradenames are being amortized over seven years.
At December 31, 1997, the Company had recorded a liability of $2,200,000 related
to the variable payments, which were paid in February 1998. This obligation is
included in accrued expenses at December 31, 1997. Also recorded as part of the
DSS acquisition was a one-time write-off of acquired in-process technology of
$600,000. This amount represents an allocation of 

                                       40
<PAGE>   41
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

purchase price to projects for the development of additional interfaces and
functionality for accounts receivable management service offerings provided by
DSS. This amount was charged to expense in 1997 because the projects related to
research and development that had not reached technological feasibility and for
which there was no alternative future use.

HEALTHCARE DATA INTERCHANGE CORPORATION

On August 7, 1997, the Company acquired all the issued and outstanding capital
stock of HDIC, the EDI health care services subsidiary of Aetna U.S. Healthcare,
Inc. ("AUSHC"), for approximately $36,400,000 in cash and the assumption of
approximately $14,800,000 of liabilities, summarized as follows (in thousands):


<TABLE>
<S>                                                      <C>         
Purchase price                                           $     36,400
Add liabilities assumed:
           Unfavorable contracts                               13,800
           Other liabilities                                      993
                                                             --------
                                                               14,793
Less assets acquired:
           Cash                                                  (11)
           Property and equipment, net                           (52)
           Identifiable intangibles:
                Customer contract                             (5,000)
                Developed technology                          (1,600)
                Tradenames                                      (250)
                Assembled work force                            (200)
                                                             --------
                                                              (7,113)
Less write-off of acquired in process technology              (6,000)
                                                             --------
Goodwill                                                 $     38,080
                                                             ========
</TABLE>

Goodwill of $38,080,000 is being amortized over a period of 15 years; developed
technology is being amortized over two years; tradenames and assembled work
force are being amortized over three years. In addition, the Company and AUSHC
simultaneously entered into a 10-year services agreement under which AUSHC has
agreed to use the Company as its single source clearinghouse and EDI network for
all AUSHC electronic health care transactions. The amount recorded for this
customer contract is being amortized over 10 years. Liabilities assumed include
approximately $13,800,000 relating to the assumption of unfavorable contracts.
At December 31, 1997, the remaining liability for unfavorable contracts was
$13,073,000, with $9,163,000 classified as a non-current liability, and
$3,910,000 classified as a current liability in accrued expenses and other
current liabilities. Also recorded as part of the HDIC acquisition was a
one-time write-off of acquired in-process technology of $6,000,000. This amount
represents an allocation of purchase price to projects for the development of
new transaction sets which would allow health care providers to submit
additional health care transactions electronically. This amount was charged to
expense in 1997 because the projects related to research and development that
had not reached technological feasibility and for which there was no alternative
future use.

The following presents unaudited pro forma results of operations (including the
one-time write-offs of acquired in- process technology and all merger and
facility integration costs) for the years ended December 31, 1997, 1996 and 1995
assuming the acquisitions accounted for as purchases, including EMC*Express,
Inc. ("EMC") (see Note 7), had been consummated at the beginning of the periods
presented (in thousands, except per share data):


                                       41
<PAGE>   42
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                            1997           1996           1995
                                         ----------     ---------       -------
<S>                                       <C>           <C>             <C>    
     Revenues                             $144,099      $115,978        $87,104
     Net loss applicable to common stock
                                           (13,985)      (45,744)       (40,431)
     Net loss per common share               (0.71)        (2.72)         (2.67)
</TABLE>


5.    SALE OF THE GOVERNMENT SERVICES BUSINESS

On September 16, 1997, the Company completed the sale of substantially all of
the assets related to the Company's hunting and fishing licenses and electronic
benefit transfer business (collectively "the Government Services Business") for
(i) $500,000 payable in the form of a promissory note due and payable in full on
August 31, 1999 and (ii) certain contingent payment amounts based upon the
achievement of specified future operating results of the Government Services
Business. The Company recorded a gain of $500,000 related to the sale of the
Government Services Business in 1997. The results of operations of the
Government Services Business are included in the Company's consolidated
statements of operations through the date of disposition.

6.    MERGER AND FACILITY INTEGRATION COSTS

As a result of the acquisitions of NEIC and Teleclaims in March 1996, the
Company approved a plan that reorganized certain of its operations, personnel
and facilities to gain the effects of potential cost savings and operating
synergies. Certain costs of this plan to reorganize were accrued in accordance
with the guidance set forth in Emerging Issues Task Force Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" and were not
part of the purchase price allocation. The costs for the year ended December 31,
1996 associated with this plan that were accrued totaled $1,772,000 consisting
of $372,000 for exit costs associated with lease terminations, $200,000 for
personnel costs, and $1,200,000 for writedowns of impaired assets. These costs
were incurred as a direct result of the plan and do not benefit future
continuing operations. The employee groups terminated included accounting,
marketing and certain areas of the systems and operations departments. The
number of employees terminated was approximately 120. Amounts charged against
this liability for 1997 and 1996 were approximately $385,000 and $1,434,000,
respectively. Additionally, the Company incurred costs of $2,892,000 to
integrate the acquired businesses with the Company, consisting primarily of
travel costs incurred by employees during the transition and integration of the
acquired businesses' operations and costs paid to consultants to assist the
Company during the transition and integration process. These costs benefit the
future continuing operations of the Company and, accordingly, were expensed as
incurred. The Company does not expect to incur any further merger and facility
integration costs related to NEIC and Teleclaims.

7.    LOSS IN INVESTEE

On January 28, 1995, the Company purchased 17.5% of the capital stock of EMC for
approximately $570,000. In connection therewith, the Company paid $250,000 for
an option to purchase the remainder of the capital stock of EMC (the "Option"),
and also entered into a management agreement to provide management services to
EMC (the "Management Agreement"). Under the terms of the Management Agreement,
the Company agreed to fund certain operating costs of EMC in the form of
advances. The Management Agreement could be terminated by the Company at any
time on 60 days written notice, at which time the Option would be terminated.
The Company gave notice to terminate the Management Agreement on January 31,
1996. As a result of the termination notice and other facts and circumstances,
the Company determined that it was probable an impairment to its investment had
occurred. Accordingly, the Company recorded an adjustment in the fourth quarter
of 1995 in the amount of $1,637,000 to

                                       42
<PAGE>   43
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

recognize an impairment in the carrying value of its investment including
writing off advances and providing for future commitments to EMC. During 1995,
the Company recognized losses for its initial investment and option aggregating
$820,000, advances of $817,000 and equity losses of $139,000 for a total loss in
the EMC investment of $1,776,000.

Based on the Company's decision to terminate the Management Agreement, the
Company discontinued the equity method of accounting for EMC and began
accounting for the investment on a cost basis during the fourth quarter of 1995.
Accordingly, the funding of EMC's operating costs in 1996 were charged to
operating expenses. The Company was committed through March 31, 1996 to continue
to fund certain operating costs of EMC. The amounts disbursed for the funding of
these costs during the first two quarters of 1996 were $540,000.

Following the termination of the Management Agreement and the Option, certain
shareholders of EMC filed a lawsuit in March 1996 against the Company asserting
claims for breach of contract and negligent conduct. On October 18, 1996, the
Company settled this lawsuit for $300,000. Concurrent with the settlement of the
lawsuit, the Company completed the acquisition of the remaining 82.5% interest
in EMC for approximately $2,000,000 in cash. The EMC acquisition was accounted
for under the purchase method of accounting applying the provisions of APB No.
16 and, as a result, the Company recorded the assets and liabilities at their
estimated fair values. The Company recorded $1,954,000 of other identifiable
intangible assets related to the EMC acquisition. The operations of EMC are
included in the consolidated statements of operations from the date of
acquisition.

8.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,

                                                             1997              1996
                                                           -------------------------
<S>                                                        <C>                 <C>
Current portion of liability for unfavorable contracts      $3,910                $0
Liability to former owners of DSS                            2,200                 0
Unearned income                                              1,942                 0
Accrued communication expense                                1,982             2,263
Accrued income taxes                                         1,679             1,898
Accrued salaries and benefits                                2,348             2,104
Accrued vendor incentives                                    1,808             1,110
Customer deposits                                            1,894               833
Other                                                        7,599             4,946
                                                           -------------------------
                                                           $25,362           $13,154
                                                           =========================
</TABLE>

The liability to former owners of DSS was paid in February 1998 and is related
to the DSS acquisition, and the liability for unfavorable contracts is related
to the HDIC acquisition (see Note 4).

9.    SHORT-TERM DEBT

At December 31, 1997, the ExpressBill Companies had various lines of credit
collateralized by certain assets. The lines of credit charged interest at rates
ranging from prime rate to prime plus 2%, which resulted in interest rates
ranging from 8.5% to 10.5% at December 31, 1997. These lines of credit included
various financial and other covenants, and were due on demand. The Company was
in compliance with these covenants or obtained appropriate waivers at December
31, 1997. The outstanding balance under these lines of credit was $1,315,000 at
December 31, 1997.

                                       43
<PAGE>   44
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

10.   LONG-TERM DEBT

In connection with the Distribution and First Data Merger, the Company entered
into a $10,000,000 note agreement with First Data on June 6, 1995 (the
"Convertible Note"). The Convertible Note was convertible, at the option of the
holder at any time, into fully paid and nonassessable shares of Common Stock at
the rate of one share for each $10.52 face amount. The conversion price and
conversion rights were subject to adjustment for stock dividends, subdivision,
and combinations, subsequent issuances of Common Stock, issuances of certain
rights, stock purchase rights or convertible securities and certain issuer
tender offers. During 1996, First Data sold the Convertible Note to an unrelated
third party for $13,500,000.

On November 7, 1996, the Company filed a registration statement with the
Securities and Exchange Commission covering the offering of 321,289 shares of
Common Stock pursuant to the demand of the current holders of the Convertible
Note under a Registration Rights Agreement dated June 6, 1995. The Company was
advised by the holders of the Convertible Notes that they intended to convert
$3,380,000 principal amount of the Convertible Notes into 321,289 shares of
Common Stock to permit their sale pursuant to the registration statement. Prior
to the termination of the registration statement on May 19, 1997, an aggregate
of $2,245,000 in principal amount of the Convertible Notes was converted into
213,389 shares of Common Stock and sold pursuant to the registration statement.
In a series of unrelated transactions, the remaining $7,755,000 in principal
amount of the Convertible Notes was converted into 737,167 shares of Common
Stock through June 1997. Accordingly, no Convertible Notes remain outstanding.

In November 1996, the Company amended its revolving credit facility to increase
the amount of credit available thereunder to $50,000,000. As of December 31,
1997, the Company had no amounts outstanding under the amended credit facility.
Any outstanding borrowing made against the amended credit facility would bear
interest at a rate equal to the Base Rate (as defined in the amended credit
facility) or LIBOR. The amended credit facility expires June 30, 2000. The
amended credit facility contains financial covenants applicable to the Company
including ratios of debt to capital, annualized EBITDA to annualized interest
expense, restrictions on payment of dividends, and certain other financial
covenants customarily included in a credit facility of this type. The Company
and its subsidiaries also are subject to certain restrictions relating to
payment of dividends, acquisitions, incurrence of debt and other restrictive
provisions. The amended credit facility is secured by substantially all of the
assets of the Company and its subsidiaries.

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                 ---------------------------
                                                    1997              1996
                                                 ---------------------------
<S>                                              <C>                <C>     
Convertible note                                 $      0           $  8,214
Other debt and capital lease obligations,
payable through 2002, interest ranging from
9.25% to 22% secured by assets                        790              1,099
                                                 ---------------------------
                                                      790              9,313
Less current portion                                (263)              (387)
                                                 ---------------------------
                                                 $    527           $  8,926
                                                 ===========================
</TABLE>



                                       44
<PAGE>   45
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

Annual long-term debt and capital lease obligations principal requirements are
as follows (in thousands):

<TABLE>
<S>                                   <C>
1998                                  $263
1999                                   307
2000                                   163
2001                                    50
2002                                     7
                                      ----
                                      $790
                                      ====
</TABLE>


11.    LEASES AND COMMITMENTS

The Company leases certain equipment and office space under operating leases.
Rental expense incurred under the leases during the years ended December 31,
1997, 1996 and 1995 was approximately $2,207,000, $1,955,000 and $1,304,000,
respectively.

Future minimum rental payments at December 31, 1997 under operating lease
arrangements are as follows (in thousands):

<TABLE>
<S>                                  <C>
1998                                 $ 3,099
1999                                   3,207
2000                                   2,872
2001                                   2,438
2002                                   1,603
Thereafter                             1,055
                                     -------
Total minimum lease payments         $14,274
                                     =======
</TABLE>


12.        STOCK INCENTIVE PLANS

The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing stock options. Under APB No. 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.



                                       45
<PAGE>   46
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

At December 31, 1997, the Company had reserved 4,214,640 shares of Common Stock
for issuance in connection with the stock option plans. Summaries of stock
options outstanding are as follows:

<TABLE>
<CAPTION>
                                                                                                           WEIGHTED-
                                                           NUMBER OF                OPTION PRICE PER       AVERAGE
                                                            SHARES                       SHARE          EXERCISE PRICE
<S>                                                       <C>                        <C>                <C>
Outstanding, December 31, 1994                            1,477,000                  $1.83-$7.00           $2.61
    Granted                                               1,829,000                  2.19-18.00             9.54
    Exercised                                             (271,000)                  1.83-3.79              2.28
                                                          ------------------------------------------------------
Outstanding, December 31, 1995                            3,035,000                  1.83-18.00             6.81
    Granted                                               625,000                    20.25-40.25           24.53
    Exercised                                             (163,000)                  1.83-7.75              3.12
    Canceled                                              (268,000)                  7.75-10.00             9.02
                                                          ------------------------------------------------------
Outstanding, December 31, 1996                            3,229,000                  1.83-40.25            10.25
    Granted                                               834,000                    21.25-36.75           23.22
    Exercised                                             (437,000)                  1.83-20.75             4.25
    Canceled                                              (224,000)                  7.75-30.00            19.92
                                                          ------------------------------------------------------
Outstanding, December 31, 1997                            3,402,000                  $1.83-$37.00         $13.58
                                                          ======================================================
</TABLE>


The number of stock options exercisable and the weighted average exercise price
of these options was 1,147,500 and $5.76 and 1,254,000 and $3.47 at December 31,
1997 and 1996, respectively. The weighted-average fair value of options granted
during 1997 and 1996 was $10.96 and $13.93, respectively. The weighted-average
remaining contractual life of those options is 5 years.

The Company's Amended and Restated 1995 Employee Stock Incentive Plan has
authorized the grant of options for up to 3,000,000 shares of Common Stock. All
options granted have 10 year terms from the grant date and vest over periods
from one to five years from the date of grant. At December 31, 1997, options for
the purchase of 2,691,000 shares were outstanding under this plan.

The Company's Amended and Restated 1995 Stock Option Plan for Outside Directors
has authorized the grant of options to the Company's non-employee directors for
up to 60,000 shares of Common Stock. All options granted have 10 year terms and
become fully exercisable one year from the date of grant. At December 31, 1997,
options for the purchase of 24,000 shares were outstanding under this plan.

Prior to the First Data Merger, Old ENVOY had outstanding non-qualified stock
options for the purchase of 1,214,640 shares of Common Stock. The grants were
made under the 1987 Stock Option Plan, the 1990 Director Stock Option Plan, the
1990 Officer and Employee Stock Option Plan, the 1992 Non-Employee Directors'
Plan and the 1992 Incentive Plan. Because all of these grants were made prior to
the First Data Merger, no further grants may be made under these plans. All
options granted thereunder have 10 year terms from the grant date. In connection
with the Distribution and First Data Merger, each holder of an outstanding
option to purchase shares of Old ENVOY common stock (an "Old ENVOY Option")
received an option to purchase an equal number of shares of Common Stock (a "New
ENVOY Option"). The exercise price of the New ENVOY Option is equal to a
percentage (the "distribution percentage") of the exercise price of the Old
ENVOY Option. The distribution percentage was established based upon the market
prices of Common Stock and Old ENVOY Common Stock as determined by the ratio of
(i) the average of the closing prices of Common Stock on the three trading days
immediately following the

                                       46
<PAGE>   47
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

First Data Merger to (ii) the closing price of Old ENVOY Common Stock
immediately prior to the First Data Merger. The distribution percentage was
33.33% and resulted in a retroactive correspondingly downward adjustment of each
New ENVOY Option. The distribution percentage adjustment was designed to place
the holder of an Old ENVOY Option in the same economic position after the First
Data Merger as before the First Data Merger. At December 31, 1997, options for
the purchase of 687,000 shares were outstanding and fully exercisable under
these plans.

The Compensation Committee of the Board of Directors amended the 1992 Incentive
Plan in August 1994 to provide that all options thereunder would vest
immediately preceding the expiration of such option grant or earlier upon the
attainment of certain performance criteria. This amendment resulted in the
recording of deferred compensation and additional paid-in capital of
approximately $1,974,000. The deferred compensation was recognized as an expense
over the vesting period. As a result of the First Data Merger, the vesting of
all outstanding options was accelerated and all options became fully vested as
of the effective date of the First Data Merger. Accordingly, during the year
ended December 31, 1995, the remaining deferred compensation expense of
$1,264,000 was recognized.

Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1997 and 1996, respectively:
risk-free interest rates of 5.77% and ranging from 5.36% to 6.69%; no dividend
yield; volatility factors of the expected market price of Common Stock ranging
from .436 to .455 and .385 to .419, respectively; and a weighted-average
expected life of the option of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except for loss per share information):

<TABLE>
<CAPTION>
                                              1997                 1996                  1995
                                              -----------------------------------------------
<S>                                        <C>                   <C>                    <C>
Pro forma net loss applicable to
common stock                               $(12,435)             $(38,957)              $(4,960)
Proforma loss per common share                (0.63)              (2.36)                (.34)
</TABLE>


Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until the
new rules are applied to all outstanding awards.

The Company implemented the ENVOY Corporation Employee Stock Purchase Plan (the
"ESPP") effective July 1, 1997, at which time participating employees became
entitled to purchase Common Stock at a discounted price through accumulated
payroll deductions. Under the terms of the ESPP, the purchase price of the
Common Stock for participating employees will be the lesser of (i) 85% of the
closing market price of the Common Stock on the last trading day of each
quarterly enrollment period or (ii) 85% of the closing market price of the
Common Stock on the first trading day of each quarterly enrollment period. The
Company has reserved 1,000,000 shares of Common



                                       47
<PAGE>   48
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

Stock for issuance under the ESPP. As of December 31, 1997, approximately 3,000
shares had been issued under the ESPP.

13.    SERIES B PREFERRED STOCK

In March 1996, the Company issued 3,730,233 shares of Series B Preferred Stock
in connection with the NEIC acquisition (see Notes 2 and 4). The Series B
Preferred Stock is recorded in the accompanying consolidated balance sheets at
the fair market value of the underlying shares on the date of the related Stock
Purchase Agreement, $55,021,000 in the aggregate, or $14.75 per share. Each
share of Series B Preferred Stock is convertible into one share of Common Stock
at any time. Each share of Series B Preferred Stock shall be entitled to vote on
all matters that the holders of Common Stock are entitled to vote upon, on an
as-if-converted basis, and shall be entitled to vote as a class with respect to
actions adverse to any rights of the Series B Preferred Stock and the creation
of any other class of preferred stock senior to or pari passu with the Series B
Preferred Stock. The Series B Preferred Stock shall be entitled to dividends
only to the extent cash dividends are declared and paid on the Common Stock on
an as if converted basis. From and after January 1, 1999, the Company shall have
an optional right to redeem all of the outstanding Series B Preferred Stock at a
redemption price of $10.75 per share, provided that the average sale price of
Common Stock for 60 trading days prior to the notice of redemption is not less
than $21.50 per share. In February 1998, 930,233 shares of Series B Preferred
Stock were converted into an equal number of shares of Common Stock.

14.    SHAREHOLDER RIGHTS PLAN

In connection with the First Data Merger, the Board of Directors adopted a
shareholder rights plan for the Company. The purpose of the shareholder rights
plan is to protect the interests of the Company's shareholders if the Company is
confronted with coercive or potentially unfair takeover tactics by encouraging
third parties interested in acquiring the Company to negotiate with the Board of
Directors.

The shareholder rights plan is a plan by which the Company has distributed
rights ("Rights") to purchase (at the rate of one Right per share of Common
Stock) one-tenth of one share of Series A Preferred Stock at an exercise price
of $60 per tenth of a share. The Rights are attached to the Common Stock and may
be exercised only if a person or group (excluding certain share acquisitions as
described in the plan) acquires 20% of the outstanding Common Stock or initiates
a tender or exchange offer that would result in such person or group acquiring
10% or more of the outstanding Common Stock. Upon such an event, the Rights
"flip-in" and each holder of a Right will thereafter have the right to receive,
upon exercise, Series A Preferred Stock having a value equal to two times the
exercise price. All Rights beneficially owned by the acquiring person or group
triggering the "flip-in" will be null and void. Additionally, if a third party
were to take certain action to acquire the Company, such as a merger or other
business combination, the Rights would "flip-over" and entitle the holder to
acquire shares of the acquiring person with a value of two times the exercise
price. The Rights are redeemable by the Company at any time before they become
exercisable for $0.01 per Right and expire in 2005.

15.    COMMON STOCK OFFERING

In August 1996, the Company completed an underwritten public offering of
3,320,000 shares of Common Stock at $26.50 per share. Net proceeds from this
offering were approximately $83,000,000, and were used to retire indebtedness of
$25,000,000 outstanding under a term loan agreement and indebtedness of
approximately $12,900,000 outstanding under a $25,000,000 revolving credit
facility. The remaining proceeds were used for general corporate purposes,
including funding working capital requirements and acquisitions.



                                       48
<PAGE>   49
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

16.    INCOME TAXES

The provision for income taxes was comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                1997          1996          1995
                                --------------------------------
<S>                           <C>            <C>            <C>
Current:
     Federal                  $ 4,957        $   271        $ 359
     State                      2,429          1,107           55
                              -------        -------        -----
Total current                    7,386          1,378          414
Deferred:
     Federal                      421          1,139           16
     State                     (1,474)          (800)          (4)
                              -------        -------        -----
Total deferred                 (1,053)           339           12
                              -------        -------        -----
Provision for income taxes    $ 6,333        $ 1,717        $ 426
                              =======        =======        =====
</TABLE>

The reconciliation of income tax computed by applying the U.S. federal statutory
rate to the actual income tax provision follows (in thousands):

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                            1997           1996           1995
                                            ----------------------------------
<S>                                       <C>            <C>            <C>
Income tax benefit at U.S. federal
    statutory rate                        $(1,003)       $(6,997)       $(1,388)
Nondeductible merger costs                      0          2,979            679
Nondeductible goodwill amortization         7,066          5,447              0
State income taxes, net of federal
    benefit                                   630            203             34
Change in valuation allowance                 238            163          1,130
Other,net                                    (598)           (78)           (29)
                                          -------        -------        -------
Income tax provision                      $ 6,333        $ 1,717        $   426
                                          =======        =======        =======
</TABLE>





                                       49
<PAGE>   50
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

The classification of the provision for income taxes in the consolidated
statements of operations is as follows (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                      1997         1996        1995
                                                      -----------------------------
<S>                                                  <C>          <C>          <C>
Income tax provision (benefit) attributable to
     continuing operations                           $6,333       $1,717       $ (50)
Discontinued operations:
Income from operations                                    0            0          42
First Data transaction expense                            0            0         434
                                                     ------       ------       -----
Total provision from discontinued
    operations                                            0            0         476
                                                     ------       ------       -----
Total income tax provision                           $6,333       $1,717       $ 426
                                                     ======       ======       =====
</TABLE>


Deferred income taxes reflects the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's temporary differences are as follows
(in thousands):



                                       50
<PAGE>   51
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements




<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                   1997          1996
                                                                   ------------------
<S>                                                              <C>            <C>
Deferred tax liability:
  Difference between book and tax depreciation
     and amortization related to property and equipment          $(2,348)       $(2,211)
  Difference between book and tax amortization
     related to goodwill and other intangibles                    (3,517)        (6,158)
                                                                 -------        -------
Total deferred tax liabilities                                    (5,865)        (8,369)
                                                                 -------        -------
Deferred tax assets:
  Difference between book and tax amortization related to
     write-off of acquired in-process technology                   2,432              0
  Difference between book and tax treatment
     of leased assets                                                585            516
  Reserves and accruals not currently deductible                   1,683          1,250
  Net operating loss                                                 398          4,629
  Difference between book and tax treatment
     of investments                                                  900            880
  Difference between book and tax treatment
     of compensation expense                                         408            581
  Tax credits                                                        583            503
  Other                                                              119            118
                                                                 -------        -------
Total deferred tax assets                                          7,108          8,477
Valuation allowance for deferred tax assets                       (1,025)          (787)
                                                                 -------        -------
Net deferred tax assets                                            6,083          7,690
                                                                 -------        -------
Net deferred tax assets(liability)                               $   218        $  (679)
                                                                 =======        =======
</TABLE>


At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $12,400,000 and $17,800,000, respectively. All of
the federal and approximately $7,400,000 of the state net operating losses
relate to the exercise of employee stock options and the tax benefit will be
allocated to equity when realized on the Company's tax returns. These losses
begin to expire in 2003.

Of the $12,400,000 federal net operating losses, $10,800,000 are attributable to
pre-acquisition years of NEIC and their use is limited by the Code to
approximately $4,700,000 per year. The remaining $1,600,000 of federal net
operating losses are attributable to pre-acquisition years of EMC and their use
is limited by the Code to approximately $141,000 per year.

The Company evaluates the amounts recorded for the valuation allowance for
deferred tax assets each year. The valuation allowance at December 31, 1996
relates to the loss on the investment in EMC. The valuation allowance at
December 31, 1997 relates to the loss on the investment in EMC plus certain tax
credits that expire in 1997 and might not be realized on the Company's 1997 tax
returns. The allowance was increased in 1997 to include these credits. In
evaluating the requirement for the valuation allowance, the Company considered
its deferred tax liabilities, which were $5,865,000 and $8,369,000 at December
31, 1997 and 1996, respectively, as a possible



                                       51
<PAGE>   52
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

source of taxable income. In addition, the Company considered its taxable income
as reported on its 1996 tax return, approximately $4,300,000, and its projected
taxable income for 1997. Management believes that it is more likely than not
that the deferred tax assets in excess of the valuation reserves will be
realized.

As previously discussed, POS and ARM operated under Subchapter S of the Code and
were not subject to corporate federal or state income taxes. Had POS and ARM
filed federal and state income tax returns as C corporations for 1997, 1996 and
1995, income tax expense (benefit) from continuing operations under the
provisions of SFAS No. 109 would have been $7,365,000, $1,882,000, and
$(50,000), respectively.

17.    PROFIT-SHARING PLANS

The Company and its subsidiaries sponsor 401(k) profit-sharing plans and other
noncontributory plans covering all employees who meet certain length of service
and age requirements. Eligible employees may elect to reduce their current
compensation and contribute to the 401(k) plans through salary deferral
contributions. The Company matches employee contributions, generally up to 25%
of the first 6% of compensation deferred by the employee. The amount of expense
for the Company contribution for all plans was approximately $613,000, $583,000
and $112,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

18.    FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value. The carrying amount reported in the balance sheet for short-term and
long-term debt also approximates fair value. The fair value of the Company's
short-term and long-term debt is estimated using discounted cash flows and the
Company's current incremental borrowing rate for similar types of borrowing
arrangements.



                                       52
<PAGE>   53
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

19.    LOSS PER COMMON SHARE

The following table sets forth the computation of loss per common share (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                           1997           1996             1995
                                                                                           ------------------------------------
Numerator for loss per common share:
<S>                                                                                     <C>             <C>             <C>
       Loss from continuing operations                                                  $ (9,198)       $(22,296)       $ (2,122)

       Income from discontinued operations, net of
              income taxes                                                                     0               0              30
       First Data transaction expenses, including
              income taxes                                                                     0               0          (2,431)
                                                                                        ----------------------------------------

       Loss from discontinued operations                                                       0               0          (2,401)
                                                                                        ----------------------------------------

       Net loss                                                                           (9,198)        (22,296)         (4,523)
       Less preferred stock dividends                                                       --           (14,921)           --
                                                                                        ----------------------------------------
       Net loss applicable to common shares                                             $ (9,198)       $(37,217)       $ (4,523)
                                                                                        ========================================


Denominator:
          Weighted average shares (1)                                                     19,686          16,519          14,739
                                                                                        ========================================

Loss per common share:
              Continuing operations                                                    $   (0.47)      $   (2.25)      $   (0.14)
              Discontinued operations                                                          0               0           (0.17)
                                                                                        ----------------------------------------

              Net loss per common share                                                $   (0.47)      $   (2.25)      $   (0.31)
                                                                                        ========================================
</TABLE>



       (1)    Stock options to purchase 3,402,000, 3,229,000, and 3,035,000
              shares of common stock in 1997, 1996, and 1995, respectively; the
              Series B Preferred Stock (convertible into 3,730,233 shares of
              common stock in 1997 and 1996); and the Convertible Note
              (convertible into 0, 629,281, and 950,570 shares of Common Stock
              in 1997, 1996, and 1995, respectively) were the only securities
              issued which would have been included in the diluted earnings per
              share calculation had they not been antidilutive due to the net
              loss reported by the Company.




                                       53
<PAGE>   54
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

20.    QUARTERLY FINANCIAL DATA (UNAUDITED)




<TABLE>
<CAPTION>
                                                                            1997
                                             --------------------------------------------------------------------
                                             1ST QUARTER        2ND QUARTER        3RD QUARTER        4TH QUARTER
                                             --------------------------------------------------------------------
                                                           (In thousands, except per share data)
Revenues
<S>                                      <C>                      <C>             <C>                   <C>
         As previously reported          $          26,092        $      26,416   $        28,590       $     32,595
         Adjustment (a)                              4,671                5,753             6,103              7,385
         As restated                     $          30,763        $      32,169   $        34,693       $     39,980
Gross profit
         As previously reported          $          13,226        $      13,484   $        14,779       $     17,181
         Adjustment (a) and (b)                      3,031                3,660             3,593              4,404
         As restated                     $          16,257        $      17,144   $        18,372       $     21,585
Net loss applicable to common stock
         As previously reported          $         (2,233)        $       (165)   $      (21,210)       $      (155)
         Adjustment (a) and (c)                       (82)                (773)            16,575            (1,155)
         As restated                     $         (2,315)  (d)   $       (938)   $       (4,635)  (e)  $    (1,310)
Net loss per common share
         As previously reported          $          (0.14)        $      (0.01)   $        (1.28)       $     (0.01)
         As restated                     $          (0.12)  (d)   $      (0.05)   $        (0.23)  (e)  $     (0.07)
</TABLE>



<TABLE>
<CAPTION>
                                                                            1996
                                            ----------------------------------------------------------------------
                                            1ST QUARTER         2ND QUARTER          3RD QUARTER       4TH QUARTER
                                            ----------------------------------------------------------------------
                                                           (In thousands, except per share data)


Revenues
<S>                                         <C>                           <C>           <C>                <C>
         As previously reported             $        10,330               $    19,590   $    21,502        $    25,162
         Adjustment (a)                               2,654                     3,090         3,873              4,371
         As restated                        $        12,984               $    22,680   $    25,375        $    29,533
Gross profit
         As previously reported             $         5,027               $     9,842   $    10,729        $    12,734
         Adjustment (a) and (b)                       1,692                     1,942         2,372              2,734
         As restated                        $         6,719               $    11,784   $    13,101        $    15,468
Net loss applicable to common stock
         As previously reported             $      (33,910)               $   (1,417)   $   (1,963)        $   (1,610)
         Adjustment (a), (c) and (f)                  6,763                   (1,554)       (1,505)            (2,021)
         As restated                        $      (27,147)   (f),(g)     $   (2,971)   $   (3,468)  (h)   $   (3,631)
Net loss per common share
         As previously reported             $        (2.97)               $    (0.12)   $    (0.14)        $    (0.11)
         As restated                        $        (1.82)   (f),(g)     $    (0.20)   $    (0.20)  (h)   $    (0.19)
</TABLE>



                                       54
<PAGE>   55
                               ENVOY CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(a)      Amounts include effects of the restatement for the Company's business
         combinations with the ExpressBill Companies which were accounted for as
         poolings-of-interests (See Note 4).

(b)      Reflects the reclassification of research and development expenses from
         the cost of revenue to separately classify such expenses in accordance
         with SFAS No.2. The amounts reclassified for the first, second, third,
         and fourth quarters of 1997 were $716,000, $521,000, $452,000, and 
         $503,000, respectively, after restatement for the poolings with the
         ExpressBill Companies. The amounts reclassified for the first, second,
         third, and fourth quarters of 1996 were $441,000, $442,000, $447,000,
         and $449,000, respectively, after restatement for the pooling with the
         ExpressBill Companies.

(c)      Amounts include effects of the restatement referred to in Note 2 and
         reflect the decrease in the value of acquired in-process technology and
         the increased amortization of goodwill and other intangibles. The
         adjustments for the restatement of the write-off of acquired in-process
         technology resulted in an increase to income of $2,400,000 in the first
         quarter of 1997 related to DSS, $29,000,000 in the third quarter of
         1997 related to HDIC and $22,000,000 in the first quarter of 1996
         related to NEIC. The adjustments for the restatement of amortization of
         goodwill and other intangibles resulted in decreases to income of
         $1,842,000, $1,873,000, $2,223,000, and $2,398,000 in the first,
         second, third, and fourth quarters of 1997, respectively, $489,000 in
         the first quarter of 1996, and $1,833,000 each quarter in the second,
         third, and fourth quarters of 1996. The related effects of these
         adjustments on the provision for income taxes resulted in increases in
         (decreases to) net income of ($909,000), $15,000, ($10,872,000), and
         $215,000 in the first, second, third, and fourth quarters of 1997,
         respectively. There were no related tax effects resulting from the
         adjustments in 1996.

(d)      The Company recorded a $600,000 write-off of acquired in-process
         technology related to the DSS acquisition (see Note 2 and Note 4).

(e)      The Company recorded a $6,000,000 write-off of acquired in-process
         technology related to the HDIC acquisition, less a related deferred
         income tax benefit of $2,280,000 (see Note 2 and Note 4).

(f)      Amounts include the effect of the accounting treatment announced by the
         staff of the Securities and Exchange Commission at the March 13, 1997
         meeting of the Emerging Issues Task Force relevant to the Company's
         Series B Convertible Preferred Stock having a "beneficial conversion"
         feature. For the three months ended March 31, 1996, the adjustment
         resulted in an increase in preferred dividends and net loss applicable
         to common stock of $14,921,000 (see Note 2 and Note 13).

(g)      The Company recorded a $8,700,000 write-off of acquired in-process
         technology related to the NEIC and Teleclaims acquisitions (see Note 2
         and Note 4).

(h)      The Company recorded a $300,000 charge related to the settlement of the
         EMC lawsuit (see Note 7).



                                       55
<PAGE>   56
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements


21.    RELATED PARTY TRANSACTIONS

As a result of the business combinations with the ExpressBill Companies, the
Company leases office space from a partnership of a significant stockholder.
Rentals paid were approximately $92,000 annually in each of the years in the
three year period ended December 31, 1997. During 1997, the Company entered into
a lease, which extends through February 2013, for a new operating facility with
this same partnership, with rentals to commence in March 1998. Annual rentals
under this new lease will be $457,500 through February 2003, $503,250 through
February 2008, and $553,575 through February 2013.

22.    SUBSEQUENT EVENTS

Class action complaints were filed on each of August 20, 1998, August 21, 1998
and September 15, 1998 (the "Complaints"), in the United States District Court,
Middle District of Tennessee, Nashville Division, against the Company and
certain of its executive officers. The Court has ordered that the three
Complaints be consolidated into a single class action lawsuit in the United
States District Court, Middle District of Tennessee, Nashville Division. The
Complaints allege, among other things, that from February 12, 1997 to August 18,
1998 (the "Class Period") the defendants issued materially false and misleading
statements about the Company, its business, operations and financial position
and failed to disclose material facts necessary to make defendants' statements
not false and misleading in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. Plaintiffs allege that the Company failed to disclose that the
Company's financial statements were not prepared in accordance with generally
accepted accounting principles due to the improper write-off of certain acquired
in-process technology, resulting in the Company's stock trading at allegedly
artificially inflated prices during the Class Period. The Complaints seek
unspecified compensatory damages, attorney's fees and other relief. The Company
believes that these claims are without merit and intends to defend the
allegations vigorously.


                                       56
<PAGE>   57
                                ENVOY Corporation

                   Notes to Consolidated Financial Statements

Schedule II
Valuation and Qualifying Accounts


December 31, 1995

<TABLE>
<CAPTION>
                                             Balance at                               Charged to                            Balance
                                             Beginning            Charged to        Other Accounts-      Deductions          End of
Description                                  of Period        Costs & Expenses          Describe          Describe           Period
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                      <C>                       <C>         <C>           <C>
Allowance for Doubtful Accounts            $   518,256              647,938                   0        a  464,231       $   701,963
                                           ----------------------------------------------------------------------------------------
                                           $   518,256              647,938                   0           464,231       $   701,963
                                           ========================================================================================
</TABLE>

December 31, 1996

<TABLE>
<CAPTION>
                                             Balance at                               Charged to                            Balance
                                             Beginning            Charged to        Other Accounts-      Deductions          End of
Description                                   of Period        Costs & Expenses        Describe           Describe           Period
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                    <C>                   <C>                <C>         <C>
Allowance for Doubtful Accounts            $   701,963            1,112,360         c   499,014       b    85,672      $  2,227,665
                                           ----------------------------------------------------------------------------------------
                                           $   701,963            1,112,360             499,014            85,672      $  2,227,665
                                           ========================================================================================
</TABLE>


December 31, 1997

<TABLE>
<CAPTION>
                                             Balance at                               Charged to                            Balance
                                             Beginning            Charged to        Other Accounts-      Deductions          End of
Description                                  of Period        Costs & Expenses         Describe           Describe           Period
----------------------------------------------------------------------------------------------------------------------------------

<S>                                       <C>                     <C>                   <C>               <C>       <C>
Allowance for Doubtful Accounts           $  2,227,665            1,518,716        c    600,000      b    705,036   $     3,641,345
                                          -----------------------------------------------------------------------------------------
                                          $  2,227,665            1,518,716             600,000           705,036   $     3,641,345
                                          =========================================================================================
</TABLE>

a.       Of this amount, $264,231 represents allowance for doubtful accounts
         associated with the spin-off of the Financial Business which was
         transferred to First Data. The remaining $200,000 represents a
         write-off of known uncollectible receivables against the allowance
         account.

b.       This amount represents a write-off of known uncollectible receivables
         against the allowance account.

c.       These amounts represent amounts recorded in connection with the opening
         balances of the Acquired Businesses. See Notes 4 and 7 of Notes to
         Consolidated Financial Statements.



                                       57
<PAGE>   58
                                   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 hereunto duly authorized.



                              ENVOY CORPORATION


Date: November 20, 1998       /s/ Kevin M. McNamara
                              ----------------------------
                              Kevin M. McNamara
                              Senior Vice President and Chief Financial Officer





                                       58
<PAGE>   59
                                  EXHIBIT INDEX

Exhibit
-------

23.1                     Consent of Ernst & Young LLP

23.2                     Consent of Arthur Andersen LLP

27                       Financial Data Schedule







                                       59