SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

For the fiscal year ended June 30, 1997

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

For the transition period from _____________________ to________________________

Commission file number: 0-26348

HPR INC.
(Exact name of registrant as specified in its charter)

Delaware 04-2985551
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)

245 First Street
Cambridge, MA 02142
(Address of principal executive offices)

(617) 679-8000
(Registrant's telephone number, including area code)

Securities registered pursuant to 12(b) of the Act:

Title of each class Name of each exchange on which registered

None _____________________________________

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

Common Stock, par value $0.01
(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. [ ]

The aggregate market value of the voting stock held by stockholders who are not
affiliates of the registrant was approximately $268 million based on the last
reported sale price of the registrant's Common Stock on the Nasdaq National
Market on August 11, 1997.

As of August 11, 1997, there were outstanding 15,334,919 shares of the
registrant's Common Stock, $0.01 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE

Certain of the information called for by Parts I through IV of this report on
Form 10-K is incorporated by reference from certain portions of the Proxy
Statement of the registrant to be filed pursuant to Regulation 14A and to be
sent to stockholders in connection with the Annual Meeting of Stockholders to be
held on October 31, 1997. Such Proxy Statement, except for the parts therein
that have been specifically incorporated herein by reference, shall not be
deemed "filed" as part of this report on Form 10-K.

PART I

Item 1. Business

The Company

The Company was incorporated on September 28, 1987 in Massachusetts under
the name HPR, Inc. The Company re-incorporated in Delaware on December 20, 1991,
under the name Health Payment Review, Inc. On July 24, 1995, the name of the
Company was changed to HPR Inc. Unless the context otherwise requires,
references herein to the "Company" and "HPR" refer to HPR Inc., a Delaware
corporation, its wholly-owned subsidiaries and HPR, Inc., its Massachusetts
predecessor. On June 3, 1992, Concurrent Review Technology, Inc., a California
corporation, was merged into the Company's wholly- owned subsidiary, Concurrent
Review Technology, Inc., a Delaware corporation. On August 16, 1995 the Company
established a wholly-owned subsidiary, HPR Securities Corp., a Massachusetts
corporation. On April 30, 1996, the Company acquired The Integrity Group, Inc.,
an Alabama corporation, which became a wholly-owned subsidiary of HPR. On April
18, 1997 the Company established a wholly-owned subsidiary, HPR International,
Inc., a Barbados corporation. The Company's executive offices are located at 245
First Street, Cambridge, Massachusetts 02142. Its telephone number is (617)
679-8000.

General

HPR develops and markets software and proprietary database products
incorporating clinical knowledge that enable payors and providers of healthcare
services to better manage the financial risk associated with the delivery of
healthcare and the quality of care. HPR products are used to manage healthcare
costs and quality of care by clinically evaluating providers' claims for
payment; measuring efficiency, quality, and medical outcomes; determining
appropriate utilization of medical services; influencing physician referral
patterns and profiling practice patterns; assisting in HEDIS(R) reporting; and
managing and supporting the physician credentialing and accreditation processes.
The Company's clinical knowledge bases are developed and maintained by a full
time medical staff in consultation with board-certified physicians serving on
Company-organized panels.

The Company's products are designed to meet the needs of parties assuming
financial risk for the delivery of healthcare. HPR believes that providing
clinical knowledge in usable form is essential to its customers. The Company
believes it can be distinguished from its competitors through the depth and
integrity of its "clinical knowledge bases," as further described below. HPR is
currently marketing its CodeReview(R), Medicare CodeReview(TM), ProMatch(TM),
Patterns Review(R), CRMS Fundamentals(TM), Episode Profiler(TM), Quality
Profiler(TM), Referral Profiler(TM), Patterns Profiler(TM), HealthPlan
Reporter(TM), Credentialer(TM), and CCMS Core(TM) products. HPR markets its
products through a combination of a national direct sales force and third-party
marketing agreements.

The Company was incorporated in 1987. In 1988, the Company introduced its
first product, CodeReview. In 1992, the Company acquired the clinical knowledge
base for Patterns Review by means of a merger with Concurrent Review Technology,
Inc., and shortly thereafter released Patterns Review. In 1993 Medicare
CodeReview was released, and in May 1995, the Company released its fourth
product, Episode Profiler. In October 1995, the Company released its fifth
product, Quality Profiler. With the acquisition of The Integrity Group, Inc. in
April 1996, the Company acquired and began marketing its sixth product,
Credentialer. During fiscal 1997 the Company introduced four more products to
market: Referral Profiler in July 1996, Patterns Profiler in September 1996,
HealthPlan Reporter in March 1997, and ProMatch in June 1997. The introduction
of these four products brings HPR's total marketable product count as of June
30, 1997 to ten. The Company released its eleventh product, CRMS Fundamentals in
July 1997 and is currently developing its twelfth product, CCMS Core that will
represent the first product the Clinical Care Management System product line.

Industry Background

The United States healthcare industry is undergoing rapid change. In recent
years, healthcare expenditures have increased at approximately twice the rate of
inflation. In 1997, healthcare expenses have increased to over $1 trillion. The
increase in healthcare expenditures has forced payors and providers to change
the way they operate. As pressure to manage healthcare costs has increased,
demand has intensified for healthcare information systems for use by the parties
assuming financial risk. These parties include "payors," such as self-insured
employers; managed care organizations ("HMOs and PPOs"); traditional indemnity
insurers and third party administrators ("TPAs"); and increasingly, "providers,"
such as physicians, hospitals, and integrated healthcare delivery systems. This
environment has caused physicians to form groups or networks and to affiliate
with hospitals, and has provided an impetus for consolidation among hospitals
and the emergence of integrated healthcare delivery systems.

Increasingly, these parties are under growing pressure to provide greater levels
of value - more services at a lower price. Market factors - competition,
regulation - are trimming profit margins ever thinner and forcing organizations
to seek out the highest levels of efficiency in order to achieve every cost
savings possible while improving the delivery of healthcare to their members.

Historically, cost containment efforts have been hampered by a lack of
integrated clinical and financial information. Payors continue to require
methods for cost control to review and correct healthcare claims. As managed
care techniques are becoming more sophisticated and responsibility for cost
containment is shared by payors and providers, however, these parties need to
manage risk by linking information from analysis and reporting software to
real-time care management tools. Each of these goals requires the collection,
analysis, and interpretation of clinical and financial information related to
the delivery of healthcare, intensifying the need for integrated medical
management solutions.

Today, employers, government purchasers, and consumers are demanding more
services for less dollars, they are increasingly requiring verification that the
quality of care they are buying is not being compromised, and access to services
is not diminished. Reporting requirements like HEDIS 3.0 and accreditation
standards that demand demonstrable quality management initiatives are direct
outgrowths of these concerns.
These factors have combined to create a new emphasis in the market. Today's
healthcare environment has evolved from pure cost management to an integrated
medical management focus. This philosophy is more member-focused with an
objective of improving the effectiveness of the provider, and improving the
quality of care received by the member - maximizing the value that can be
derived from the available healthcare premium dollars as measured by the health
of the members.

Strategy

HPR develops and markets software and proprietary database products
incorporating clinical knowledge that enable payors and providers to better
manage the financial risk in the delivery of healthcare. Key elements of the
Company's strategy are to:

- Maintain clinical focus. The Company has established its reputation by
focusing on the application of clinical knowledge. HPR plans to continue
to develop and expand its clinical knowledge bases to deliver information
solutions to its customers. The Company believes that its ability to
incorporate clinical expertise into its products is a key strategic asset.

- Target parties assuming financial risk. Historically, the Company's
products have been used primarily by payors who traditionally have assumed
most of the financial risk associated with the delivery of healthcare. In
response to the shifting of risk from payors to providers, the Company has
developed products that specifically address the needs of providers as
well as payors.

- Expand product offering. The Company plans to expand its product offering
through research and development and the acquisitions of new products,
technologies and businesses. The Company is currently marketing
CodeReview, Medicare CodeReview, ProMatch, Patterns Review, CRMS
Fundamentals, Episode Profiler, Quality Profiler, Referral Profiler,
Patterns Profiler, HealthPlan Reporter, Credentialer, and CCMS Core.

- Leverage existing customer base. Through the introduction of new products,
the Company can leverage its existing customer base by cross-selling. The
modular design of the Company's products is intended to accommodate new
products as they are introduced.

- Generate recurring revenue. The Company generates recurring revenues
through a combination of multi-year licenses and historically high renewal
rates. The Company seeks to maintain and increase recurring revenues
through a combination of regular product updates and comprehensive
customer service.

Clinical Knowledge Bases

HPR believes that providing clinical knowledge in usable form is essential
to meeting the needs of its customers. The Company believes it can be
distinguished from its competitors through the depth and integrity of its
"clinical knowledge bases." Clinical knowledge bases represent the codification
of specific medical treatments, protocols, and "best treatment practices" from
within the medical community. These practices are represented as a series of
software algorithms or rules. The rules contained in the clinical knowledge
bases form the foundation for the application software in the Company's
products. The clinical knowledge bases are updated continually and refined
through the combined efforts of the Company's in-house clinical affairs staff of
ten physicians and nurses and of the board-certified physicians serving on
Company-organized panels, many of whom have been associated with the Company
since its inception.

The Company's application software and databases incorporate diagnoses and
clinical procedures represented by numeric codes selected from industry-standard
coding systems. These classification systems include the World Health
Organization's International Classification of Diseases, 9th Edition ("ICD-9")
(diagnostic codes); the American Medical Association's Current Procedural
Terminology, 4th Edition ("CPT-4") (medical procedure codes); and U.S.
Healthcare Financing Administration ("HCFA") Level I, II, and III HCFA Common
Procedure Coding System ("HCPCS") (codes for procedures or services that are not
incorporated into CPT-4). These coding systems are updated each year by the
World Health Organization, the American Medical Association, and HCFA,
respectively.

The Company develops clinical knowledge bases for new products and regularly
updates the clinical knowledge bases for existing products. In addition to
annual updates that incorporate the annual revisions to ICD-9, HCPCS, and CPT-4
codes, the Company reviews its clinical knowledge bases approximately once every
two years to reflect changes in medical practice. Focusing on one medical
specialty at a time, the clinical staff revises the rules incorporated into the
clinical knowledge bases on the basis of clinical experience, changes in medical
practice, and reviews of current medical literature.

Revisions are subjected to multiple levels of review by the physicians
serving on Company-organized panels. Participation on these panels is based upon
experience with utilization review, geography, academic and practical
experience, and medical specialty. As a result of the level of physician
involvement in the development of its clinical knowledge bases, HPR believes
that its products have credibility among physicians who are subject to
reimbursement and payment constraints imposed by cost containment efforts. This
"clinical credibility" allows customers using the Company's products to be
better able to influence physician practice patterns.

- Consensus Panels. The Company has organized sixteen "consensus panels" of
between eight and 15 physicians. The consensus panels identify changes in
medical practice relevant to revising and enhancing the Company's clinical
knowledge bases. Panelists are chosen for their clinical knowledge and
practical experience within a medical specialty. There are over 200
board-certified physicians who are available to the Company for service on
a consensus panel. Panel membership is rotated regularly to maintain
balanced and diverse clinical perspectives. Each panelist is financially
compensated. Consensus panels convene approximately eight to 10 times per
year.

- Senior Advisory Panel. The "senior advisory panel" is comprised of
approximately 10 physicians who each have at least 10 years of experience
in utilization management or managed care and have participated in a
consensus panel. The senior advisory panel reviews the work of consensus
panels and the clinical knowledge base updates that reflect annual
revisions to diagnostic and procedural codes. Members of the senior
advisory panel are financially compensated. The senior advisory panel
meets once or twice per year.

- Specialty Consultants. Currently more than 30 physicians with clinical
expertise and utilization management experience serve as "specialty
consultants." The specialty consultants are retained by the Company for
advice on specific clinical issues on an as-needed basis.

Software Development

In addition to the clinical knowledge bases that form the foundations for
its products, HPR has developed application software that enables customers to
access the clinical knowledge bases. HPR's clinical and software development
staff collaborate to develop products designed to be responsive to customer
needs. In particular, the products generally are portable, scaleable and
customizable, and support an open architecture. The Company's software has been
developed using commercially available technology.

Products

HPR is currently marketing CodeReview, Medicare CodeReview, ProMatch,
Patterns Review, CRMS Fundamentals, Episode Profiler, Quality Profiler, Referral
Profiler, Patterns Profiler, HealthPlan Reporter, Credentialer, and CCMS Core.
Each of these products is designed to be used individually or as part of an
integrated system (with the exception of ProMatch, which can only be used with
CodeReview).

Current Products

Clinical Payment Management System (CPMSTM)

CPMS includes clinically sophisticated software products that can be
integrated into a user's claims processing system to detect and correct
billing errors as well as identify potentially inappropriate or unnecessary
care before the customers pay for it. HPR's CPMS products are available on
many industry standard hardware and operating systems. The Clinical Payment
Management System is made up of the following products: CodeReview,
ProMatch, and Patterns Review. A description of each of these products
follows:

- CodeReview

CodeReview reduces healthcare claims costs by detecting, correcting, and
documenting improper or erroneous numerical coding of physician claims under
both the CPT-4 and HCPCS coding systems. CodeReview makes no judgment about
the necessity, clinical appropriateness, or price of services rendered, but
instead reviews medical treatment and procedure codes submitted by
physicians for clinical inconsistencies and logical errors. CodeReview
allows payors to subject physician claims to a consistent and objective
claims review prior to making payment. CodeReview is also used by payors and
providers to standardize billing data to permit fair comparisons of practice
patterns.

Generally, physicians are paid by payors for healthcare services
performed according to a fee schedule associated with CPT-4 or HCPCS
treatment codes. The coding systems used by physicians may allow a medical
claim to be billed in various ways through the submission of different
combinations of treatment codes. This may result in significantly different
reimbursement for the claim. For example, the surgical removal of a gall
bladder typically involves a series of distinct procedures to prepare the
patient, remove the gall bladder, complete the surgery, and monitor
recovery. The surgery may also include exploration of the abdomen and
imaging services. However, while exploration of the abdomen and the
provision of imaging services each has a unique treatment code, proper
billing practice requires coding the entire series as one procedure -- the
removal of a gall bladder -- which generally reduces the payment due for the
procedure.

CodeReview screens each claim against its clinical knowledge base, which
incorporates all of the approximately 7,500 CPT-4 and 2,800 HCPCS Level II
codes, and applies over 80,000 logical rules for detecting improper or
erroneous coding to the claims submitted by providers. If, for example, a
physician files a claim with codes for both the removal of a gall bladder
and the exploration of the abdomen, CodeReview "re-bundles" the claim,
recoding it to include only removal of a gall bladder. CodeReview also
detects other coding errors, such as "upcoding," or billing for a more
extensive procedure than actually was performed.

CodeReview can be customized to include procedures for which selected
coverage policies may vary, or to account for regional variations in payment
practices. CodeReview was introduced in 1988 and developed pursuant to a
product development agreement with Caterpillar, Inc. There currently are
more than 240 licensees of CodeReview, each of which has entered into a
written non-cancelable license agreement for a term of years with the
Company pursuant to which the licensee generally agrees to pay an annual
license fee for use of the product, maintain the product's confidentiality,
and use the product only for certain purposes.

- ProMatch

ProMatch is an add-on module to the CodeReview claims editing software
application. ProMatch is used to identify inappropriate and miscoded
procedure/diagnosis combinations. The product is designed to share a single
interface with CodeReview, making it easy to implement and use. The savings
realized using ProMatch are in addition to those savings achieved by
CodeReview alone. There are currently 10 licenses of ProMatch.

- Patterns Review

Patterns Review evaluates physician practice patterns for both inpatient
and outpatient services by comparing those patterns (determined on the basis
of codes filed by the physician) with accepted medical standards for
appropriateness, frequency, and intensity. A "pattern" is a group of
diagnoses for which similar clinical management is appropriate. For example,
there are separate diagnostic codes for a wrist sprain and an ankle sprain,
but the appropriate course of treatment for each is similar, so both
diagnoses fall within the same pattern.

The clinical knowledge base for Patterns Review assigns each of the
approximately 15,000 ICD-9 diagnostic codes to one of approximately 340
treatment patterns. The clinical knowledge base for Patterns Review includes
guidelines for clinical appropriateness, frequency, and intensity for each
pattern. Patterns Review matches the diagnostic code of a claim to the
appropriate treatment pattern and then compares the pattern to the actual
treatment rendered.

Patterns Review can be used by customers both as a tool for consistent
and objective claims review prior to making payment under a claim and as a
management tool for post-payment utilization analysis. When used prior to
making payment, Patterns Review provides the clinical rationale for reducing
payment. When used as a post-payment utilization management tool, Patterns
Review profiles physician practice patterns by comparing them to the
clinical guidelines incorporated in the clinical knowledge base. This
enables customers to identify inefficient or inappropriate practice patterns
by specific provider.

There currently are more than 116 licensees of Patterns Review, each of
which has entered into a written non-cancelable license agreement for a term
of years with the Company pursuant to which the licensee generally agrees to
pay an annual license fee for use of the product, maintain the product's
confidentiality and use the product only for certain purposes. In 1992, the
Company merged with Concurrent Review Technology, Inc. whose principal
product, Patterns of Treatment, was a collection of clinical protocols. HPR
incorporated those protocols into the application software and clinical
knowledge base for Patterns Review.

CodeReview and Patterns Review are designed to function in conjunction
with a customer's claims processing system to evaluate claims each time a
claim is processed. The Company has developed interfaces that enable
CodeReview and Patterns Review to function with most commercially available
healthcare claims processing systems.

Clinical Resource Management System (CRMS(TM))

CRMS is a fully integrated line of clinical analysis products, each
supported by a common data warehouse and a flexible Windows(R)-based
analytic workstation. CRMS products enable users to assemble information,
access it quickly and easily, analyze it, and apply the results to provide
users with the clinical knowledge to manage cost, quality, and outcomes of
patient care. Each CRMS product incorporates a common look and feel,
minimizing the user learning curve and making it easy to move from one
application to another. Information is presented in both a numeric and
graphic format for easy interpretation.

The Clinical Resource Management Systems is made up of the following
products: Episode Profiler, Quality Profiler, Referral Profiler, Patterns
Profiler, HealthPlan Reporter, and CRMS Fundamentals. The following is a
description of the each of these products.

- Episode Profiler

Episode Profiler provides comprehensive clinical and provider profiling
using "episode of care" analysis. An "episode" includes all aspects of
treatment, starting with an initial diagnosis and incorporates inpatient,
outpatient, hospital, and physician services. The clinical knowledge base
for Episode Profiler assigns each of the approximately 15,000 ICD-9
diagnostic codes to one of approximately 560 episode treatment groups
("ETGs"). Each ETG describes an appropriate episode of care for the natural
progression and treatment of a specific medical condition.

Episode Profiler can compare a provider's costs on a per episode basis
with those of a specified comparison group. Customers can use Episode
Profiler to create profiles for an entire health plan, a specific group of
providers, or an individual provider, adjusting a provider's patient
population for illness severity and accounting for complications and other
medical conditions.

The Company introduced Episode Profiler in May 1995. There currently are
more than 60 licensees of Episode Profiler, each of which has entered into a
written non-cancelable license agreement for a term of years with the
Company pursuant to which the licensee generally agrees to pay an annual
license fee for use of the product, maintain the product's confidentiality
and use the product only for certain purposes. The software for the ETGs is
licensed by the Company from Symmetry Health Data Systems, Inc.

- - Quality Profiler

Quality Profiler evaluates the quality of healthcare delivered and
identifies instances of healthcare providers delivering inadequate levels of
medical care. Quality Profiler is designed to screen for failure to provide
preventive care services and minimum levels of care for specific acute and
chronic illnesses, as well as to identify complications that may be
indicative of poor patient outcome.

In screening for failures to provide preventive care services, the
clinical knowledge base for Quality Profiler incorporates the clinical
components of the U.S. Preventive Task Force Guidelines and the Health
Employer Data Information Set (HEDIS) guidelines established by the National
Committee for Quality Assurance (NCQA). Quality Profiler is designed to
compare patient data (such as age and gender) to claims filed for the
patient over a specific period of time to look for the absence of
appropriate codes for preventive treatments that should have been performed
under the guidelines. For example, for a 55-year old woman, Quality Profiler
is designed to search over the prior 12 months for the CPT-4 code indicating
the performance of a mammogram.

Quality Profiler's clinical knowledge base also incorporates protocols
for medical services associated with favorable outcomes for certain specific
acute and chronic illnesses as identified by members of the consensus and
senior advisory panels. Quality Profiler is designed to compare the claims
filed for a patient diagnosed with one of these illnesses to the protocols
developed by HPR's physician consulting network to identify instances of
under-utilization. Quality Profiler tracks complications that indicate poor
outcomes for specified illnesses. Quality Profiler is designed to generate
both provider-specific and member-specific information.

The Company introduced Quality Profiler in October 1995 and there are
currently more than 48 licensees, each of which has entered into a written
non-cancelable license agreement with the Company pursuant to which the
licensee generally agrees to pay an annual license fee for use of the
product, maintain the product's confidentiality and use the product only for
certain purposes. The product was developed with assistance from
Healthsource, Inc., which has received a license to use the product.

- - Referral Profiler

Referral Profiler is expert software designed to analyze primary care
work-ups and referral patterns to specialists in relation to clinical
guidelines. Referral Profiler enables users to manage medical care more
cost-effectively by identifying redundant testing and unnecessary or
inappropriate services associated with the referral management process.
Referral Profiler guidelines specify when certain tests and specialty
consultations are most effective in the diagnostic work-up. Users can share
the diagnosis-specific guideline and cost information with providers as part
of ongoing educational or payment-related programs to improve performance,
or use the guidelines as a reference tool to provide information at the
point of care for improved medical management. With Referral Profiler, end
users generate clinically-detailed reports on the utilization of specialists
for use in network management, quality and outcomes management, utilization
control, and physician selection.

The product was developed with assistance from United Healthcare
Corporation, which has received a license to use the product. Referral
Profiler was released in July 1996 and currently has 17 licensees.

- - Patterns Profiler

Using clinical and financial results from Patterns Review, Patterns
Profiler is designed to create summary and detailed reports for use in
network management and provider profiling. Patterns Profiler provides peer
comparisons of provider performance by specialty, plan type, or employer,
helping users to quickly identify opportunities to reduce inappropriate or
unnecessary patient care.

Patterns Profiler was released in September 1996 and currently has 46
licensees.

- - HealthPlan Reporter

HealthPlan Reporter produces annual HEDIS reports. By design, HealthPlan
Reporter incorporates claims, encounter, provider and membership data into one
warehouse to produce all of the eight HEDIS domains. It supports random sampling
(hybrid method) for those applicable measures and offers a utility to capture
and incorporate the results of the medical record review. Narrative and
statistical (provider & plan) information provided by the plan is
imported/entered directly into the application, thus maintaining a central
approach to HEDIS processing.

HealthPlan Reporter was released in March 1997 and currently has more
than 22 licensees.

CRMS Product Under Development

- - CRMS Fundamentals

CRMS Fundamentals is a Windows-based, client server software that generates
per-member-per month (PMPM) and rates-per-1000 reports. CRMS Fundamentals is
being designed to work with all sizes and types of healthcare organizations
managing financial risk and it will include an efficient user interface. CRMS
Fundamentals will facilitate reporting and analysis of critical cost and
utilization trend information. Customers will be able to "slice and dice"
traditional managed care statistics by more than a dozen variables including:
product lines, employers, providers, procedure groups, diagnoses, age, and
gender. With CRMS Fundamentals, users will be able to:

o compare actual financial performance to budget
o identify variations that impact the financial performance
o point to clinical practices where targeted intervention and/or
education will improve the efficiency of the user's health care
delivery system

CRMS Fundamentals was released in July 1997 and currently has 2 licensees.

HPR's Credentialing Management System

The Credentialing Management System supports the authorization of
independently licensed health practitioners to deliver patient care services.

- - Credentialer

Credentialer is a comprehensive provider network management tool. Providing
automated workflow support to healthcare organizations, Credentialer enables
users to effectively manage credentialing and recredentialing processes in
compliance with the NCQA guidelines for accreditation. Credentialer provides an
infrastructure to collect, store, and report on a practitioner's credentials, as
well as their status within the network and basic information regarding their
practice. Additionally, Credentialer can be used to generate provider
directories, and to collect and analyze provider-specific patient satisfaction
and complaints/grievances data.
Credentialer was acquired as part of The Integrity Group, Inc.
acquisition on April 30, 1996 and currently has over 75 licensees.

HPR's Clinical Care Management System (CCMS(TM))

CCMS, currently under development and not yet available for general
release, is designed to be an integrated product line of clinically based
workflow software applications that provides a comprehensive solution for
member-centered medical management. CCMS provides access to all of the
information necessary to effectively manage an individual member's care.

CCMS supports the next generation of medical management, enabling case
managers to perform consistent, "real time" evaluation and tracking of
individual patients as care is being delivered, and also allows them to follow
patients with chronic diseases to help prevent acute episodes. CCMS incorporates
case management guidelines based on a comprehensive foundation of clinical
knowledge. These guidelines allow for more effective, medically sound, and
clinically appropriate case and medical management.

CCMS Core, the first in the suite of CCMS products, is being developed in
conjunction with three co-development partners: Tufts Associated Health Plans of
Massachusetts, Healthsource, Inc. of New Hampshire, and ChoiceCare Health Plans
of Ohio.

Three customers, in addition to Tufts Associated Health Plans and
Healthsource, have signed license agreements to receive the software upon
general release, which the Company anticipates in the first half of fiscal 1998.

Product and Customer Support

The Company's products are valuable to customers only if the clinical
knowledge bases embodied therein are current and each customer can effectively
apply the clinical knowledge bases to its own analytical requirements. In
addition to updates to incorporate annual revisions to ICD-9, HCPCS, and CPT-4
codes, the Company updates its clinical knowledge bases approximately once every
two years on the basis of clinical experience, changes in medical practice, and
review of current medical literature.

The Company provides all its customers with toll free telephone hotline
support, available weekdays during business hours, to supply both clinical and
technical assistance. The Company also works with customers on a consulting
basis to facilitate product installation and utilization.

HPR invites its customers to participate in an annual conference. The users
conference is a source of ideas and suggestions for current and future products,
as well as a forum on market and industry issues. This conference lasts three to
four days and over 200 people participate in sessions for analytical, technical,
and clinical personnel. The users conference is a valuable resource for the
Company as well as its customers, providing feedback on products and marketing
opportunities to provide training and new product demonstrations.

In addition to the annual users conference, for the past several years the
Company has convened a "medical directors forum." This group includes the
medical directors from a number of HPR's clients, and provides valuable insight
for the Company into its customers' ongoing and future product needs, from which
the Company can make plans for enhancement of existing products and development
of new products.

Medical Advisory Board

The Company's Medical Advisory Board, chaired by Dr. Richard H. Egdahl, was
formally established in 1995 to serve as an important resource to HPR's
management. The Medical Advisory Board is composed of prominent physicians who
first met in December 1995. The Medical Advisory Board meets approximately twice
annually and is otherwise available to provide advice at the Company's request
on clinical issues and matters of overall policy and direction of the Company.
Members of the Medical Advisory Board receive an honorarium for each meeting
attended.

Customers

The Company has approximately 360 customers. Based upon discussions with
its customers, the Company believes that, in the aggregate, its customers cover
approximately 70 million lives. Approximately 55% are managed care organizations
such as HMOs and PPOs, 20% are indemnity plans, 10% are TPAs and employers, and
15% are providers.

The Company estimates based on industry data and surveys by industry
analysts, that in the United States there are currently approximately 900
payors, 180 groups of greater than 50 physicians and 6,000 hospitals with
greater than 50 beds, which are either customers or potential customers. The
Company believes these provider groups represent a relatively unpenetrated
market for its products. Additionally, the emergence of integrated healthcare
delivery systems may represent a significant potential market opportunity. The
Company expects the mix of its customers to shift toward providers who will
assume more of the financial risk in the delivery of healthcare. There is no
assurance, however, that the Company will be able to penetrate these relatively
new market opportunities with the same level of success that has been realized
in the payor market.

Currently, 42% of the Company's customers use more than one of the Company's
products. The Company's customers include:

Managed Care Indemnity
Foundation Health Corporation Blue Cross/Blue Shield of Arkansas,Inc.
Healthsource, Inc. Blue Cross/Blue Shield of New Jersey, Inc.
Kaiser Permanente Blue Cross/Blue Shield of Tennessee,Inc.
Oxford Health Plans, Inc. Fortis Benefits Insurance Company
United HealthCare Corporation

Providers TPAs/Employers
Monarch Health Systems ACMG, Inc.
Lovelace Health Systems First Health Services Corporation
Allina Health Plans Holy Cross Shared Services

Sales and Marketing

HPR markets its products through a combination of a national direct sales
force and third-party marketing agreements. Currently, the Company's sales force
consists of approximately 30 people, operating out of four sales offices.
Because the Company's products represent a large capital investment for its
customers, and due to the length of the sales cycle, senior management and
clinical support staff take an active role in marketing and sales activities.

Corporate marketing activities conducted by the Company's marketing staff
include press releases, customer testimonials, the development of corporate
product literature, presentations at industry events and trade shows and
advertising, as well as communications with targeted decision makers and
consultants in the healthcare community.

Research and Development

Nearly half of the Company's employees are involved with product
development. In addition, the Company's over 200 physician consultants,
organized into panels, contribute to product development.

The Company's research and development activities include new product
development, product updates and enhancement of existing products. Some of the
Company's product development has been accomplished with support from third
party users of the products, allowing the Company more efficiently to develop
products that are responsive to customer needs. A substantial majority of the
Company's research and development expenses are incurred in connection with new
product development.

The Company's research and development expenses for fiscal 1995, 1996 and
1997 were $3,257,000, $3,891,000, and $7,011,000, respectively.

Competition

The Company's competitors include healthcare information companies and large
data processing and information companies. Many of these competitors have
substantial installed customer bases in the healthcare industry and the ability
to fund significant product development and acquisition efforts. The Company
believes that the principal competitive factors in its market are clinical
credibility and integrity and product innovation. These factors address both
customer needs for cost containment tools and increasing industry concerns about
quality control. Other important competitive factors include product reputation
and reliability, system features, client service, price, and the effectiveness
of marketing and sales efforts. Based on historical performance, the Company
believes it competes favorably with respect to each of these factors. However,
there can be no assurance that the Company will remain competitive with respect
to any individual factor or combination thereof.

Governmental Regulations and Healthcare Reform

The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare organizations. The Company's products are designed to function within
the structure of the healthcare financing and reimbursement system currently
being used in the United States. During the past several years, the healthcare
industry has been subject to an increase in governmental regulation of, among
other things, reimbursement rates. Certain proposals to reform the U.S.
healthcare system are currently under consideration by the U.S. Congress. These
programs may contain proposals to increase governmental involvement in
healthcare and otherwise change the operating environment for the Company's
customers. Healthcare organizations may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments,
including those for the Company's products. On the other hand, changes in the
regulatory environment have in the past increased and may continue to increase
the needs of healthcare organizations for cost-effective information management
and thereby enhance the marketability of the Company's products and services.
The Company cannot predict with any certainty what impact, if any, such
proposals or healthcare reforms might have on the Company's results of
operations, financial condition and business.

Intellectual Property

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

The Company also relies on a combination of trade secrets, copyright and
trademark laws, contractual provisions and technical measures to protect its
rights in various methodologies, systems and products and knowledge-bases.
Except as described below, the Company has not filed any patent applications or
copyrights covering its software technology. Any infringement or
misappropriation of the Company's proprietary software and clinical
knowledge-bases would disadvantage the Company in its efforts to retain and
attract new customers in a highly competitive market and could cause the Company
to lose revenues or incur substantial litigation expense.

HPR was awarded a U.S. patent (No. 5,253,164) in October 1993 for the system
and methodology embodied in CodeReview(R). On January 23, 1995, the Company and
GMIS, Inc. ("GMIS") entered into an agreement settling certain litigation
initiated by GMIS to declare the Company's patent invalid and responded to by
the Company with a countersuit for patent infringement. Under the settlement
agreement, the Company granted GMIS a non-exclusive license under the patent,
and GMIS acknowledged the validity of the patent and made a one-time payment of
$7,200,000 to the Company.

Due to the nature of its application software, the Company believes that
patent, trade secret and copyright protection are less significant than the
Company's ability to further develop, enhance and modify its current products.

Although the Company believes that its products do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against the Company in the future. If asserted, such
a claim could cause the Company to lose revenues or incur substantial litigation
expense.

Employees

As of June 30, 1997, the Company employed 179 individuals. None of the
Company's employees are represented by a union or other collective bargaining
group. The Company believes its relationship with its employees to be
satisfactory.

Executive Officers of the Registrant

The executive officers of the Company, and their ages as of July 31, 1997,
are as follows:

Name Age Position
Marcia J. Radosevich,Ph.D 44 Chairman of the Board, Chief Executive
Officer, President
Brian D. Cahill 39 Chief Operating Officer and Chief Financial
Officer
George A. Abatjoglou 27 Treasurer and Controller
Paul W. Brient 29 Vice President, Product Marketing
Andrew C. Garling, M.D. 52 Vice President, Clinical Affairs
Joseph K. Jaeger 38 Vice President, Sales
Matthew Ricketson 39 Vice President, Professional Services
Steven J. Rosenberg 41 Senior Vice President,Software Development
and Services
Thomas L. Saltonstall 49 Vice President, Human Resources and
Corporate Administration
James B. Stowe 48 Vice President, Marketing
- --------------------------------------------------------------------------------

Dr. Radosevich has served as Chief Executive Officer and a director of the
Company since 1988 and was elected Chairman of the Board of Directors in June
1995. From 1988 until 1992, and since May 31, 1996 she also has held the
position of President of the Company. She served as Vice Chairman of the Board
from 1992 to June 1995. Dr. Radosevich is a director of Oxford Health Plans, a
health maintenance organization.

Mr. Cahill joined the Company as Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary in 1993 and was promoted to Chief Operating
Officer in 1997. From 1982 to 1992, Mr. Cahill held various accounting and
finance positions at Epsilon Data Management, Inc., a database marketing company
which in 1990 became a subsidiary of American Express Travel Related Services
Company, Inc. He became Controller, Treasurer and Secretary of Epsilon Data in
1987 and Vice President, Finance and Chief Financial Officer in 1990.

Mr. Abatjoglou, CPA, joined HPR in 1995 and was promoted to Treasurer and
Controller in 1997. He is responsible for managing the daily operations of the
finance department. Prior to joining HPR, Mr. Abatjoglou served three years as a
senior accountant at the public accounting firm of Coopers & Lybrand L.L.P., the
Company's independent accountants.

Mr. Brient, who joined HPR in 1995 as the manager of new product
development, was promoted to Vice President, Product Management in 1997.
Previously, he served as a senior consultant at the Boston Consulting Group and
founded a successful practice management software business in Florida.

Dr. Garling joined the Company as Vice President, Clinical Affairs in 1997.
Previously he served as Vice President and Corporate Medical Director at
Advanced Health Corporation, a publicly held company which provides physician
practice management services. Prior to Advanced Health, he served as Vice
President of Prudential Health Care. In addition he served eleven years as an
emergency room physician with Kaiser Permanente.

Mr. Jaeger joined the Company in 1993 and spent four years as the National
Director of Sales prior to his promotion to Vice President, Sales in 1997. Prior
to working for HPR, Mr. Jaeger held Regional Sales Manager positions for Mozart
Systems and On-Line Software in Chicago. He also spent four years as a Sales
Representative for Pansophic Systems, Inc. Mr. Ricketson joined HPR in 1996 as
Vice President, Professional Services. He most recently worked at Marcam
Corporation, a producer of enterprise-wide software for manufacturers, where he
oversaw the Customer Service function during a period when that company grew
from $20 million to $200 million in annual revenues.

Mr. Rosenberg joined the Company as Vice President, Software Development and
Services in 1994. From 1992 to 1994, he served as Vice President of Sales
Technologies Inc., a sales force automation company, and from 1990 to 1992 was
Vice President of AICORP, Inc., a software company.

Mr. Saltonstall joined the Company in 1996 as Vice President, Human
Resources and Corporate Administration. He comes to HPR from National Medical
Care, Inc., an international healthcare company, where he was Vice President for
Human Resources.

Mr. Stowe joined the Company as Vice President, Marketing and Business
Development in 1995. From 1989 until joining the Company, he was a partner and
practice leader at Charles J. Singer & Co., a managed care research and
consulting firm.

Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of the
Company.

Item 2. Properties

The Company's executive and corporate offices comprise 48,000 square feet of
a facility at 245 First Street, Cambridge, Massachusetts under lease agreements
that expire on August 31, 2003. The Company also maintains three sales offices
in Illinois, Arizona and Nevada. The Company believes that its facilities are
adequate for its current operations.

Item 3. Legal Proceedings

From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Annual Report on Form 10-K, the Company is not a party to any legal
proceedings which, if decided adversely to the Company, in management's opinion
would have a material adverse effect on the Company's results of operations or
financial position.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.

Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market for Common Stock

The Company effected its initial public offering on August 10, 1995 at a price
of $8.00 per share (adjusted to reflect a 2 for 1 stock split for shareholders
of record as of April 26, 1996 effected in the form of a stock dividend). Since
that date, the Company's Common Stock has traded on the Nasdaq National Market
under the symbol HPRI. The following table represents the high and low sales
prices for the Company's common stock for each quarter of fiscal 1997 and 1996
as reported by Nasdaq National Market. All stock prices have been restated to
reflect a 2 for 1 stock split to shareholders of record as of April 26, 1996
effected in the form of a stock dividend.

High Low
Fiscal 1997
4th quarter ended June 30, 1997 $18.75 $ 10.75
3rd quarter ended March 31, 1997 $18.38 $ 10.13
2nd quarter ended December 31, 1996 $16.25 $ 11.50
1st quarter ended September 30, 1996 $22.00 $ 13.50

Fiscal 1996
4th quarter ended June 30, 1996 $25.63 $ 18.25
3rd quarter ended March 31, 1996 $21.75 $ 15.50
2nd quarter ended December 31, 1995 $18.13 $ 11.25
1st quarter ended September 30, 1995 $13.25 $ 9.00

Holders of Record

As of August 11, 1997 there were 84 holders of record of the Company's
Common Stock.

Dividends

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

Item 6. Selected Financial Data

The following table contains selected consolidated financial data of the
Company and is qualified by the more detailed Consolidated Financial Statements
and Notes thereto included in Item 8 hereof. The statement of operations data
for the fiscal years ended June 30, 1995, 1996 and 1997 and the balance sheet
data as of June 30, 1996 and 1997 have been derived from Consolidated Financial
Statements, which statements have been audited by Coopers & Lybrand L.L.P.,
independent accountants, and are included in Item 8 of this Form 10-K. The
statement of operations data for the fiscal years ended June 30, 1993 and 1994
and the balance sheet data as of June 30, 1993, 1994, and 1995 have been derived
from the Company's Consolidated Financial Statements, which statements have been
audited by Coopers & Lybrand L.L.P. and are not included in this Form 10-K. This
data should be read in conjunction with Consolidated Financial Statements and
Notes thereto and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Fiscal Year Ended June 30,
(in thousands, except per share data)

1993 1994 1995 1996(6) 1997

Statement of Operations Data:
Revenues......................... $10,770 $14,065 $18,264 $28,310 $39,101
------- ------- ------- ------- -------
Expenses:
Cost of revenues............... 2,277 3,452 4,235 7,348 7,900
Marketing and sales............ 3,529 4,016 4,664 6,328 8,672
Research and development....... 598 1,499 3,257 3,892 7,011
General and administrative..... 1,701 2,324 2,037 3,594 4,774
Cost of acquisition (1) ....... -- -- -- 336 --
-- -- -- --- --
Total expenses............... 8,105 11,291 14,193 21,498 28,357
----- ------ ------ ------ ------
Operating income................. 2,665 2,774 4,071 6,812 10,744
Interest income (expense), net... (105) 17 302 878 1,240
Gain on settlement of litigation(2) -- -- 5,800 -- --
-- -- ----- -- --
Income before taxes.............. 2,560 2,791 10,173 7,690 11,984
----- ----- ------ ----- ------
Provision for income taxes....... 1,059 1,160 4,106 3,168 4,973
----- ----- ----- ----- -----
Net income(2).................... $1,501 $1,631 $6,067 $4,522 $7,011
====== ====== ====== ====== ======
Net income per share............. $0.11 $0.12 $0.43 $0.29 $0.44

1995 Pro forma net income(3)..... $2,608
1995 Pro forma net income per $0.18
share(3).........................
1996 Pro forma net income(4)..... $4,719
1996 Pro forma net income per $0.30
share(4).........................
Weighted average common shares and
equivalents (5)................ 13,522 13,966 14,175 15,840 16,103

June 30,
----------------------------------------------------
(in thousands)

1993 1994 1995 1996(6) 1997
------- ------- ------- -------- -------

Balance Sheet Data:
Working capital............... $2,192 $3,555 $11,130 $20,465 $31,881
Total assets.................. 7,915 10,805 17,988 34,603 47,531
Long-term liabilities......... 367 601 1,931 882 559
Stockholders' equity.......... 3,377 5,055 11,282 27,915 38,269
Dividends per share............. 0 0 0 0 0

<FN>

(1) In April 1996, the Company incurred costs related to the acquisition of The
Integrity Group, Inc. which resulted in an expense of $336,000.
(2) In January 1995, GMIS, Inc. made a one-time payment to the Company in
settlement of certain litigation, which payment was recorded as a gain, net
of certain legal and other costs.
(3) Reflects the fiscal 1995 net income on a pro forma basis by excluding the
gain on settlement of litigation and its related tax effect. Gain on
settlement of litigation, net of expenses, was $5,800,000, less an
effective tax rate of 40.4% ($2,341,000), which results in an after tax
gain of $3,459,000 on settlement of litigation. Accordingly, net income of
$6,067,000 less the $3,459,000 after tax gain results in pro forma net
income of $2,608,000.
(4) Reflects the fiscal 1996 net income on a pro forma basis by excluding the
costs related to the acquisition of The Integrity Group, Inc. and the
related tax effect. Costs of the acquisition were $336,000, less an
effective tax rate of 41.2% ($138,000), resulting in an after tax loss of
$198,000 due to acquisition costs. Accordingly, net income of $4,521,000
plus the $198,000 after tax expenditures results in pro forma net income of
$4,719,000.
(5) All share and earnings per share amounts have been restated to reflect the
impact of a stock split effected in the form of a 100% stock dividend
granted on May 6, 1996 to all shareholders of record on April 26, 1996.
(6) The acquisition of The Integrity Group was accounted for as a pooling of
interests. However, due to the relative immateriality of TIG's financial
position with respect to HPR as of the date of combination, the merger of
the equity interests was given retroactive effect to the beginning of
fiscal 1996. Accordingly, TIG's assets, liabilities, and shareholder's
equity were brought onto the Company's consolidated books as of the
beginning of the period as an adjustment to beginning equity.

</FN>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview

The Company licenses its products primarily pursuant to multi-year
non-cancellable agreements that, in general, provide for payment of equal annual
license fees over their terms. This type of arrangement provides the Company
with a significant recurring component to its revenues each year. Revenue from
software license agreements is recognized upon execution of a contract and
shipment of the software provided that no significant vendor obligations remain
outstanding and the related receivable is due within one year of the contract
date and collection is deemed probable by management. For recurring license
fees, revenues are recognized on the contract anniversary date. The Company
accrues incidental support costs associated with these licenses when revenues
are recognized. Revenues from services are recognized when the services are
delivered. There can be no assurance that the Company will be able to enter into
new license agreements at the current rate or to maintain the current pricing
for its products.

Prior to fiscal 1993, the Company's revenues were derived from a single
product, CodeReview, and between July 1993 and May 1995 from three products,
CodeReview, Medicare CodeReview and Patterns Review. In May 1995, the Company
introduced its fourth product, Episode Profiler, and in October 1995 introduced
its fifth product, Quality Profiler. The acquisition of The Integrity Group,
Inc. in April 1996 provided the Company with its sixth product, Credentialer.
During fiscal 1997 the Company introduced four more products to market: Referral
Profiler in July 1996, Patterns Profiler in September 1996, HealthPlan Reporter
in March 1997, and ProMatch in June 1997. The introduction of these four
products brings HPR's total product count to ten as of June 30, 1997. In July
1997, the Company released its eleventh product to market, CRMS Fundamentals. In
addition, the Company has expended significant development resources during
fiscal 1997 towards the production of its twelfth product, CCMS Core, the first
product in the CCMS line. The Company believes that as the markets for
CodeReview and Patterns Review mature, the continued growth of the Company will
require the successful introduction of new products and further enhancements to
its existing products. There can be no assurance that the Company will continue
to design, develop, and release successful new product offerings in the future.

The Company believes that continued investment in research and development
and expansion of its national direct sales force are critical to its success.
The Company believes that the aggregate amount of research and development
expense will continue to increase, if revenues increase as expected, while the
level of research and development expense as a percentage of revenues will
remain relatively constant.

For each of the last three fiscal years, the Company has made significant
investments in the direct sales force in anticipation of new product releases.
As the Company has grown from two products in fiscal 1994 to the current
offering of three distinct product suites encompassing 12 individual products,
the Company has continued to invest in quality personnel within the sales
organization. The Company believes that the national sales force is well
positioned to address the shift of financial risk associated with the delivery
of healthcare from payors to providers and consequently, will be prepared to
sell into this new market for the Company. However, there is no assurance that
the Company will be able to penetrate these relatively new market opportunities
with the same level of success that has been realized in the payor market.

The Company capitalizes software costs for internally developed software in
accordance with FASB 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed." These costs relate primarily to the
development of new products and the extension of existing applications to new
markets or platforms using existing technologies and programming methods. The
capitalized costs are amortized on a straight-line basis over the estimated
useful life of the product (typically three years), commencing when each product
is available to the market.

Results of Operations

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

Fiscal Year Ended June 30,

1995 1996 1997
-------- -------- ------
Revenues...................... 100 % 100% 100%
Expenses:
Cost of revenues............ 23 26 20
Marketing and sales......... 26 22 22
Research and development.... 18 14 18
General and administrative.. 11 13 12
Cost of acquisition -- 1 0
-- - -
Total expenses........... 78 76 72
-- -- --
Operating income.............. 22 24 28
Interest income (expense), 2 3 3
net...........................
Gain on settlement of 32 -- --
litigation.................... -- -- --

Income before taxes........... 56 27 31
Provision for income taxes.... 23 11 13
-- -- --
Net income.................... 33 % 16% 18%
==== === ===

Fiscal Years Ended June 30, 1995, 1996 and 1997

Revenues. Revenues increased 55% from $18,264,000 in 1995 to $28,310,000 in
1996 and 38% to $39,101,000 in 1997. A major contributor to this steady revenue
growth has been the successful release of new products to market. Over the three
year period from fiscal 1995 to fiscal 1997 the Company's product offering has
grown from three products in fiscal 1995 to ten products as of June 30, 1997.
The Company's first two products, CodeReview and Patterns Review, continue to
show strong year over year performance both through new licenses and renewals of
existing licenses.

Fiscal year 1996 revenues reflect revenues from the acquisition of The
Integrity Group, Inc. ("TIG") in April 1996, which was accounted for as a
pooling of interests incorporating TIG's results of operations for the entire
fiscal year. In addition, the fiscal 1996 results reflect a full year of
revenues related to the Company's Episode Profiler product, initially released
in the fourth quarter of fiscal 1995, as well as revenues from the release of
Quality Profiler in October 1995.

Fiscal 1997 revenues include contributions from 4 new products: Referral
Profiler, Patterns Profiler, HealthPlan Reporter, and ProMatch. In addition, the
Company has recognized development revenues in fiscal 1997 from CCMS Core
co-development contracts with Tufts Associated Health Plans and Healthsource,
Inc.

Cost of Revenues. Cost of revenues increased 74% from $4,235,000 in 1995 to
$7,348,000 in 1996 and 8% to $7,900,000 in 1997. As a percentage of revenues,
the cost of revenues increased from 23% in 1995 to 26% in 1996 and decreased to
20% in 1997. The increase from 1995 to 1996 was primarily due to certain royalty
payments to third parties for software licensed by the Company for incorporation
into the Company's products and by increased investment in the technical and
clinical customer support functions. During fiscal 1997 significant resources
were dedicated to the development of three new products released during the
year, as well as HPR's newest products, CCMS Core (currently under development)
and CRMS Fundamentals. As a result, there was a shift in personnel resources and
the related expenses from application maintenance and other typical cost of
revenue projects, to application development. Accordingly, there was a
redistribution of fiscal 1997 expense classification from cost of revenue to
research and development. As the Company finishes development of CCMS Core in
fiscal 1998 it is expected that the cost of revenues will remain relatively
constant or increase slightly as a percentage of revenues as resources focus on
the maintenance of the Company's twelve existing products.

Marketing and Sales. Marketing and sales increased 36% from $4,664,000 in
1995 to $6,328,000 in 1996 and 37% to $8,672,000 in 1997. As a percentage of
revenues, marketing and sales decreased from 26% in 1995 to 22% in 1996 and
remained flat in 1997. The Company invests in certain promotional activities
each fiscal year which include trade shows and seminars as well as the
development of collateral materials designed to increase awareness of the
Company and its products. In addition, the Company spends significant time and
resources in recruiting quality individuals to be a part of the direct sales
force. As the Company has continued to invest in marketing and sales programs,
the investment has contributed to higher revenues in each of the last three
fiscal years causing sales and marketing expense to decrease as a percentage of
revenues over that same period. The Company expects sales and marketing to
remain relatively constant as a percentage of revenues.

Research and Development. Research and development efforts by the Company
are focused on developing new products and enhancing existing products. Research
and development costs increased 19% from $3,257,000 in 1995 to $3,892,000 in
1996 as a result of continued research efforts on Quality Profiler and Referral
Profiler. Research and development increased 80% from $3,892,000 in 1996 to
$7,011,000 in 1997 as a result of development in connection with the release of
four new products to market in fiscal 1997. In addition, in fiscal 1997 the
Company underwent one of its largest development efforts to date in the design
and production of CCMS Core, the first in a suite of Clinical Care Management
System products. As a percentage of revenues, research and development decreased
from 18% in 1995 to 14% in 1996 and then increased in 1997 to 18%. The decrease
in 1996 is a result of two factors: the significant increase in revenue dollars
in 1996 over 1995 and the release of Episode Profiler in late 1995 and Quality
Profiler in October 1996, both of which were in development during fiscal 1995.
The increase in fiscal 1997 is a by-product of the development efforts discussed
above. With the increase in development activities on the Company's new product
lines, management expects that research and development expenditures will
increase but remain substantially the same or decrease slightly as a percentage
of revenue for the foreseeable future.

General and Administrative. General and administrative expenses increased
76% from $2,037,000 in 1995 to $3,594,000 in 1996 and 33% to $4,774,000 in 1997.
As a percentage of revenues, general and administrative expenses increased from
11% in 1995 to 13% in 1996 and decreased slightly to 12% in fiscal 1997. The
increased expenditures from 1995 to 1996 are due primarily to increased expenses
related to being a publicly-traded company, certain costs incurred in moving the
Company's headquarters in August 1995, and an increase in the provision for bad
debt expenses in proportion to the increase in revenues. During fiscal 1997 the
Company made significant investments in infrastructure, management information
systems, and human resources to prepare itself for the future. Although the
increase in expenditures in fiscal 1997 is in line with the Company's growth
during the year, the Company believes that if revenues increase, general and
administrative expenses should decrease as a percentage of revenues in the
future. However, there can be no assurance that general and administrative
expenses will not increase at a rate faster than revenues in the future.

Costs of Acquisition. In April 1996, the Company acquired The Integrity
Group, Inc. ("TIG"), an Alabama corporation, in a transaction accounted for as a
pooling of interests. The Company incurred one time costs related to the
acquisition of $336,000 primarily related to legal, accounting, and finders
fees.

Interest Income (Expense), Net. The Company realized interest income of
$302,000 in 1995, $877,000 in 1996, and $1,240,000 in 1997. Interest income
represents interest earned on the Company's excess cash balances, which are
generally placed in short term investments, money market funds and government
securities. The increase is due to the interest earned on cash balances of the
Company generated from operations and the proceeds from the Company's initial
public offering of its common stock completed in August 1995 and from the
follow-on offering completed in February 1996.

Gain on Settlement of Litigation. In January 1995, the Company settled all
of the outstanding claims between the Company and GMIS, Inc. related to the
Company's patent for CodeReview. Under the settlement agreement, the Company
granted GMIS a nonexclusive license under the patent, and GMIS acknowledged the
validity of the patent and made a one-time payment, net of legal and certain
other costs, of $5,800,000 to the Company.

Income Taxes. The Company's effective tax rate was 40.4% in 1995 compared
with 41.2% in 1996 and 41.5% in 1997. The Integrity Group, Inc. was a Subchapter
S corporation until its acquisition on April 30, 1996. As a result, the former
shareholders of TIG are responsible for all taxes on profits made through that
date. The Company has recorded taxes for the final two months of the 1996 fiscal
year related to TIG's activity. The Company has no federal income tax loss carry
forwards.

Liquidity and Capital Resources

During the period from inception through June 30, 1997, the Company raised
approximately $15.9 million, net of expenses, through the issuance of equity
securities, of which amount approximately $7.2 million was raised in the first
quarter of fiscal 1996 in the Company's initial public offering and $4.2 million
was raised in the third quarter of fiscal 1996 in the Company's second public
offering. The Company generated cash of $5.3 million from operations in fiscal
1995, approximately $4.5 million in fiscal 1996 and approximately $3.8 million
during fiscal 1997. At June 30, 1997, the Company had cash and cash equivalents
of $13.9 million. The Company regularly invests excess funds in short-term money
market funds, government securities and commercial paper.

On February 7, 1997, the Company received an extension and modification of
its revolving bank credit facility from $5,000,000 to $7,500,000 with an
expiration date of December 30, 1997. No borrowings have been made to date under
the facility.

The Company believes that available funds and cash generated from operations
will be sufficient to meet the Company's operating requirements, assuming no
change in the operations of the Company's business, for the foreseeable future.

To date inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation may not adversely
affect the Company's financial results in the future.

Impact of Recently Issued Accounting Pronouncements

The FASB issued Statement No. 128 ("SFAS 128"), "Earnings per Share," which
modifies the way in which earnings per share ("EPS") is calculated and
disclosed. Currently, the Company discloses primary EPS. Upon adoption of this
standard for the fiscal period ending June 30, 1998, the Company will be
required to disclose either basic EPS or both basic and dilutive EPS. The
principal difference being that common stock equivalents would not be considered
in the computation of basic EPS. The impact of adoption of SFAS 128 has not yet
been determined.

The FASB recently issued Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. While not mandating a specific financial
statement format, the Statement requires that an amount representing total
comprehensive income be reported. Comprehensive income components include:
unrealized gains and losses on available-for-sale investments in debt and equity
securities, foreign currency translation adjustments, and minimum pension
liability adjustments. The Statement will become effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods is required for comparative purposes. The Company does not
believe that this statement will have a material impact on the results of
operations.

In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). SFAS No. 131 specifies new guidelines for
determining a company's operating segments and related requirements for
disclosure. The Company does not believe that this statement will have an impact
on the presentation of the financial statements and the disclosures therein.

Risk Factors Relating to Forward-Looking Statements

Statements in this report concerning the future results of operations,
financial condition and business of the Company are "forward-looking" statements
as defined in the Securities Act of 1933 and the Securities Exchange Act of
1934. Investors are cautioned that information contained in these
forward-looking statements is inherently uncertain, and that actual performance
and results may differ materially due to numerous risk factors, including but
not limited to the following:

Seasonality and Variable Operating Results.

The Company has experienced a seasonal pattern in its operating results,
with the fourth and second fiscal quarters typically having the highest revenues
and net income and the first and third fiscal quarters typically having lower
revenues and net income. The timing of revenues is influenced by a number of
factors, including the timing of individual orders and shipments, seasonal
customer buying patterns and changes in product development and sales and
marketing expenditures. The Company believes the seasonality of its revenues and
net income for the fourth fiscal quarter can be attributed to due dates for
payment obligations under multi-year license agreements, renewals of existing
agreements and the Company's sales compensation program, which is based
significantly on fiscal year sales levels. The Company believes the seasonality
of its revenues and net income in the second fiscal quarter can be attributed to
the seasonal purchasing patterns of its customers. The Company most recently
reported a net loss in the first and third quarters of fiscal 1994 and there can
be no assurance that the Company will be profitable during future quarters. In
addition, although the Company has no present agreements or commitments to enter
into any major contracts, the signing of a major contract could generate a large
increase in revenues and net income for any given quarter or fiscal year, which
increase may prove anomalous when compared to changes in revenues and net income
in other periods. Furthermore, the Company typically experiences long sales
cycles for new customers, which may extend over several quarters before a sale
is consummated. As a result, the Company believes that quarterly results of
operations will continue to be subject to significant fluctuations and that its
results of operations for any particular quarter or fiscal year may not be
indicative of results of operations for future periods.

Dependence Upon New Product Development, Acceptance and Enhancement.

The market for the Company's products is characterized by rapid
technological progress and changing customer needs. The Company believes that as
the markets for CodeReview and Pattern Review mature, the continued growth of
the Company will require the successful introduction of new products.
Accordingly, the Company's future success will depend on its ability to
successfully develop and introduce new products, including HealthPlan Reporter,
CCMS Core, and the other modules of the Clinical Care Management System
("CCMS"), and to enhance its existing products. There can be no assurance that
the Company will be successful in developing, introducing on a timely basis, and
marketing such products or enhancements or that they will be accepted by the
market. Significant research and development expenditures will be required in
the future. There can be no assurance that the Company's expected new product
releases and product enhancements will adequately address customer requirements
for performance and functionality or that its software will not contain "bugs"
that would delay product introduction or shipment.

Dependence on Third Party for Component of Episode Profiler.

A principal component of Episode Profiler, the "Episode Treatment Groups"
product, is licensed from a third-party vendor, Symmetry Health Data Systems,
Inc. ("Symmetry"), under the terms of a 63-month license which commenced
November 17, 1994 and has a 24-month renewal term which is contingent on the
Company meeting minimum royalty requirements. Symmetry has agreed, subject to
certain conditions, that it will not license Episode Treatment Groups to certain
other companies which might be considered competitors of the Company. While the
Company believes that the terms of such license are adequate to protect the
Company's investment in Episode Profiler, any factor adversely affecting the
Company's ability to retain the benefits of such license or to obtain the
updated Episode Treatment Groups would have a material adverse effect on the
Company's results of operations, financial condition and business.

Risk of Inability to Grow Through Acquisitions.

The Company has grown, and intends to continue to grow, in part through
acquisitions of products, technologies and businesses. The Company's ability to
expand successfully through acquisitions depends on many factors, including the
successful identification and acquisition of products, technologies and
businesses and management's ability to effectively integrate and operate the new
products, technologies or businesses. There is significant competition for
acquisition opportunities in the industry, which may intensify due to
consolidation in the industry, increasing the costs of capitalizing on such
opportunities. The Company competes for acquisition opportunities with other
companies that have significantly greater financial and management resources.

Management of Growth.

The Company is currently experiencing a period of rapid growth and expansion
which could place a significant strain on the Company's personnel and resources.
The Company's growth has resulted in an increase in the level of responsibility
for both existing and new management personnel. The Company has sought to manage
its current and anticipated growth through the recruitment of additional
management and technical personnel and the implementation of internal systems
and controls. However, the failure to manage growth effectively could adversely
affect the Company's results of operations, financial condition or business.

Inability to Retain or Attract Customers Due to Competition and
Consolidation.

The market in which HPR's products are licensed is highly competitive. Most
of the Company's competitors have significantly greater financial, technical,
product development and marketing resources than the Company. The Company's
potential competitors for customers include healthcare information companies and
large data processing and information companies that may have more diverse
product offerings covering a broader spectrum of the healthcare industry. Many
of these competitors have substantial installed customer bases in the healthcare
industry and the ability to fund significant product development and acquisition
efforts. In addition, the Company has noted a trend towards consolidation of
customers within its market. While this consolidation results in substantially
larger potential customers, the Company also is faced with a risk of existing
customers being acquired by entities that use a competitor's product. The
Company continues to believe that the principal competitive factors in its
market are clinical credibility and integrity and product innovation. These
factors address both customer needs for cost containment tools and increasing
industry concerns about quality control. Other important competitive factors
include product reputation and reliability, system features, client service,
price, and the effectiveness of marketing and sales efforts. There can be no
assurance that future competition will not have a material adverse effect on the
Company's results of operations, financial condition or business.

Dependence on Proprietary Software and Clinical Knowledge-Bases.

The Company's success is dependent to a significant extent on its ability to
maintain the proprietary and confidential software and clinical knowledge-bases
incorporated in CodeReview, ProMatch, Patterns Review, Episode Profiler, Quality
Profiler, Referral Profiler, HealthPlan Reporter, Patterns Profiler, CRMS
Fundamentals, CCMS Core and other products as they are released. The Company
relies on a combination of patent, trade secret, copyright and contractual
protections to establish and protect its proprietary rights. There can, however,
be no assurance that the legal protections and the precautions taken by the
Company will be adequate to prevent misappropriation of the Company's
technology. Any infringement or misappropriation of the Company's proprietary
software and clinical knowledge-bases would disadvantage the Company in its
efforts to retain and attract new customers in a highly competitive market, and
could cause the Company to lose revenues or incur substantial litigation
expense. In addition, these protections and precautions do not prevent
independent third-party development of competitive technology or products.
Further, the Company depends on third-party suppliers to license to HPR
necessary technology that is incorporated into certain of the Company's
products, including Episode Profiler. The inability of the Company for any
reason to continue using or otherwise acquire such technology could prevent
distribution of such products, which would have a material adverse effect on the
Company's results of operations, financial condition or business.

Dependence on Certain Key Personnel.

The Company depends to a significant extent on key management, technical and
marketing personnel. The Company's growth and future success will depend in
large part on its ability to attract, motivate and retain highly qualified
personnel. The Company does not have employment agreements with any of its
officers or key employees providing for their employment for any specific term.
The Company does not have "key person" life insurance on any of its personnel
other than Marcia J. Radosevich, the Company's Chairman of the Board, Chief
Executive Officer, and President. The loss of key personnel or the inability to
hire or retain qualified personnel could have a material adverse effect on the
Company's results of operations, financial condition or business.

Uncertainty in the Healthcare Industry.

The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare organizations. The Company's products are designed to function within
the structure of the current national healthcare financing and reimbursement
system currently being used in the United States. The Company believes that the
commercial value and appeal of its products may be adversely affected if that
system were to be materially changed. During the past several years, the United
States healthcare industry has been subject to an increase in governmental
regulation of, among other things, reimbursement rates. Proposals to reform the
United States healthcare system are from time to time under consideration by the
U.S. Congress. These programs may contain proposals to increase government
involvement in healthcare and otherwise change the operating environment for the
Company's customers. Healthcare organizations may react to these proposals and
the uncertainty surrounding such proposals by curtailing or deferring
investments in cost containment tools and related technology such as the
Company's products. The Company cannot predict what impact, if any, such factors
might have on its results of operations, financial condition or business. In
addition, many healthcare providers are consolidating to create integrated
healthcare delivery systems with greater regional market power. As a result,
these emerging systems could have greater bargaining power, which may lead to
price erosion of the Company's products. The failure of the Company to maintain
adequate price levels would have a material adverse effect on the Company's
results of operations, financial condition or business. Other legislative or
market-driven reforms could have unpredictable effects on the Company's results
of operations, financial condition or business.

Risk of Product Liability Claims.

The Company's products provide information that relates to payment of
healthcare claims and to the appropriateness of medical treatment in particular
cases and in general. Any failure by the Company's products to process such
claims or to review such treatments accurately could result in claims against
the Company by its customers. Further, successful use of the Company's products
could influence the treatments rendered by providers and give rise to claims
against the Company by patients or providers. The Company maintains insurance to
protect against certain claims associated with the use of its products, but
there can be no assurance that its insurance coverage would adequately cover any
claim asserted against the Company. A successful claim brought against the
Company in excess of, or excluded from, its insurance coverage could have a
material adverse effect on the Company's results of operations, financial
condition or business. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources. While to
date the Company has not experienced any product liability claims against it,
the Company is aware of claims made against payors by patients for coverage
decisions which adversely influenced medical treatment. There can be no
assurance that the Company will not be subject to product liability claims, that
such claims will not result in liability in excess of its insurance coverage,
that the Company's insurance will cover such claims or that appropriate
insurance will continue to be available to the Company in the future at
commercially reasonable rates. In addition, if liability of the Company were to
be established, substantial revisions to its products could be required that may
cause the Company to incur additional unanticipated research and development
expenses.

Possible Volatility of Stock Price.

Prior to August 10, 1995, there was no public market for the Common Stock,
and there can be no assurance that an active trading market will be sustained or
that the market price of the Common Stock will not decline below its current
price. The stock market historically has experienced volatility which has
affected the market price of securities of many companies and which has
sometimes been unrelated to the operating performance of such companies. The
trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products or acquisitions by the Company or its competitors,
governmental regulatory action, other developments or disputes with respect to
proprietary rights, general trends in the industry and overall market
conditions, and other factors. The market price of the Common Stock may be
significantly affected by factors such as announcements of new products by the
Company's competitors, as well as variations in the market conditions in the
medical cost containment or software industries in general. The market price may
also be affected by movements in prices of equity securities in general.

Item 8. Financial Statements and Supplementary Data

HPR Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
Report of Independent Accountants............................................29
Consolidated Balance Sheets as of June 30, 1996 and 1997 ....................30
Consolidated Statements of Operations for the fiscal years ended June 30,
1995, 1996 and 1997..........................................................31
Consolidated Statements of Stockholders' Equity for the fiscal years ended
June 30, 1995, 1996 and 1997.................................................32
Consolidated Statements of Cash Flows for the fiscal years ended June 30,
1995, 1996 and 1997..........................................................33
Notes to Consolidated Financial Statements...................................34

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of HPR Inc:

We have audited the accompanying consolidated balance sheets of HPR Inc. as
of June 30, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended June 30, 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 consolidated financial position of HPR Inc. as of
June 30, 1996 and 1997 and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
August 1, 1997

HPR Inc.

CONSOLIDATED BALANCE SHEETS

June 30,
---------------------------

1996 1997
------------ ------------

ASSETS:
Current Assets:
Cash and cash equivalents (Note 2) ................ $ 8,479,122 $ 13,943,693
Investments in marketable securities (Note 4) ..... 9,016,146 10,842,696
Accounts receivable, net of allowances for doubtful
accounts of $603,000 and $651,500 for 1996 and .. 4,491,065 6,952,573
1997
Contract receivables .............................. 3,142,680 6,890,342
Deferred income taxes (Note 7) .................... 415,149 698,022
Prepaid expenses and other current assets ......... 727,044 1,257,276
------------ ------------
Total current assets ....................... 26,271,206 40,584,602
Investments in marketable securities (Note 4) ....... 5,394,340 2,984,465
Property and equipment, net (Note 5) ................ 1,964,164 2,509,775
Software development costs, net (Note 2) ............ 873,427 1,347,654
Other assets ........................................ 100,332 104,570
------------ ------------
Total assets ............................... $ 34,603,469 $ 47,531,066
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable .................................. $ 607,259 $ 749,138
Accrued royalties ................................. 456,521 1,025,979
Accrued expenses .................................. 581,524 1,181,450
Accrued support costs ............................. 1,425,191 1,792,584
Accrued employee compensation and benefits ........ 1,323,973 2,247,295
Deferred revenue .................................. 698,029 1,498,147
Income taxes payable .............................. 438,758 --
Sales taxes payable ............................... 275,022 209,067
------------ ------------
Total current liabilities .................. 5,806,277 8,703,660
Deferred income taxes (Note 7) ...................... 882,173 558,791
------------ ------------
Total liabilities .......................... 6,688,450 9,262,451
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' Equity:
Convertible preferred stock, par value $0.10,
3,000,000
shares authorized; zero shares outstanding at
June 30,
1996 and 1997 .................................... -- --
Common stock, par value $0.01, 35,000,000 shares
authorized; 17,918,625 and 15,325,303 shares
issued
and 15,012,375 and 15,325,303 shares outstanding
at
June 30, 1996 and 1997, respectively ............ 179,185 153,253
Additional paid-in capital ........................ 15,972,680 18,335,055
Less treasury stock, at cost: 2,906,250 and zero
shares at
June 30,1996 and 1997, respectively ............. (2,843,900) --
Retained earnings ................................. 14,607,054 19,780,307
------------ ------------
Total stockholders' equity ................. 27,915,019 38,268,615
------------ ------------
Total liabilities and stockholders' equity . $ 34,603,469 $ 47,531,066
============ ============

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

HPR Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Year Ended June 30,
1995 1996 1997
------------- ------------- ---------

Revenues......................... $18,263,831 $28,310,272 $39,101,380
Expenses:
Cost of revenues............... 4,234,427 7,348,354 7,900,286
Marketing and sales............ 4,664,362 6,328,282 8,672,199
Research and development....... 3,257,268 3,891,381 7,010,839
General and administrative..... 2,036,644 3,594,331 4,774,084
Cost of acquisition (Note 12) . -- 335,544 --
-- ------- --
Total expenses................... 14,192,701 21,497,892 28,357,408
---------- ---------- ----------
Operating income................. 4,071,130 6,812,380 10,743,972
Interest income (expense), net... 301,412 877,377 1,240,066
Gain on settlement of litigation
(Note 11)...................... 5,800,223 -- --
--------- -- --
Income before provision for income
taxes.......................... 10,172,765 7,689,757 11,984,038
Provision for income taxes....... 4,105,277 3,167,894 4,973,385
--------- --------- ---------
Net income....................... $6,067,488 $4,521,863 $7,010,653
========== ========== ==========

Net income per share............. $0.43 $0.29 $0.44
Weighted average common shares and
equivalents (1)................ 14,175,000 15,840,000 16,103,000

(1) All share and earnings per share amounts have been restated to reflect the
stock split effected in the form of a 100% stock dividend granted on May 6,
1996 to all shareholders of record on April 26, 1996.

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

HPR Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Year Ended June 30, 1995, 1996 and 1997

Preferred
Stock Common Common Additional Treasury Treasury Total
Shares Stock Stock Paid-in Retained Stock Stock Stockholders'
Issued Amount Issued Amount Capital Earnings Shares Amount Equity
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Balance at June 30, 2,762,500 $ 276,250 8,835,900 $ 88,359 $ 3,606,576 $ 3,928,199 (2,906,250) $(2,843,900) $ 5,055,484
1994 Issuance of
common stock 25,000 250 16,000 16,250
Options exercised 1,465,000 14,650 127,880 142,530
Net income ....... 6,067,488 6,067,488
----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- -----------

Balance at June 30,
1995 .............. 2,762,500 276,250 10,325,900 103,259 3,750,456 9,995,687 (2,906,250) (2,843,900) 11,281,752
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Pooling of interests
with The Integrity
Group, Inc. .. 260,001 2,600 119,900 89,504 212,004
Balance as restated 2,762,500 276,250 10,585,901 105,859 3,870,356 10,085,191 (2,906,250) (2,843,900) 11,493,756
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Conversion of
preferred stock... (2,762,500) (276,250) 5,525,000 55,250 221,000 --
Issuance of common
stock in initial
public offering 1,077,052 10,770 8,002,578 8,013,348

Expenses related
to initial public
offering ...... (858,896) (858,896)
Issuance of common
stock in second 288,596 2,886 4,645,545 4,648,431
public offering
Expenses related to
second public .... (424,420) (424,420)
offering
Options exercised .. 442,076 4,420 164,632 169,052
Tax benefits on stock
options
exercised...... 351,885 351,885
Net income ...... 4,521,863 4,521,863
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Conversion of
Balance at June 30,
1996 .............. -- -- 17,918,625 179,185 15,972,680 14,607,054 (2,906,250) (2,843,900) 27,915,019
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Options exercised 325,180 3,252 399,349 402,601
Purchase of
Treasury Stock (12,252) (7,922) (7,922)
Tax benefits on
stock options 2,948,264 2,948,264
exercised
Retirement of (2,918,502) (29,184) (985,238 (1,837,400) 2,918,502 2,851,822 --
Treasury Stock

Net income 7,010,653 7,010,653
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June
30, 1997 ........ -- $ 0 15,325,303 $ 153,253 $18,335,055 $19,780,307 -- $ 0 $38,268,615
=========== =========== =========== =========== =========== =========== =========== =========== ===========

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

HPR Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended June 30,
1995 1996 1997
------------ ------------ --------

Cash flows from operating activities:
Net income........................ $6,067,488 $4,521,863 $7,010,653
Adjustments to reconcile net
income to
cash provided by operating
activities:
Depreciation and amortization.. 1,074,491 1,254,119 1,467,972
Provision for doubtful accounts 210,000 321,302 425,000
Loss on disposal of equipment.. 124,488 -- --
Amortization of discount on
investments.................. -- (114,242) (203,353)
Change in operating assets and
liabilities:
Accounts receivable............ (1,867,568) (1,785,004) (6,634,170)
Prepaid expenses............... (970,859) 490,502 (530,232)
Other assets................... 76,191 -- (4,238)
Accounts payable and other
accrued
liabilities.................. 1,130,196 322,411 2,601,978
Sales taxes payable............ (123,944) 128,403 (65,955)
Deferred revenue............... (62,258) (90,895) 800,118
Deferred income taxes.......... 373,364 (1,026,570) (606,255)
Income taxes payable........... (705,401) 438,758 (438,758)
--------- ------- ---------
Net cash provided by operating
activities................ 5,326,188 4,460,647 3,822,760
--------- --------- ---------
Cash flows for investing activities:
Capitalized software development
costs.......................... (591,261) (366,332) (1,025,009)
Capital expenditures.............. (664,330) (1,732,624) (1,462,801)
Sale of marketable securities..... -- 15,276,906 18,763,596
Purchase of marketable securities. -- (29,573,130) (17,976,918)
-- ------------ ------------
Net cash used in investing
activities................ (1,255,591) (16,395,180) (1,701,132)
----------- ------------ -----------
Cash flows from financing
activities:
Proceeds from initial public
offering....................... -- 8,013,348 --
Expenses related to initial public
offering....................... -- (858,896) --
Proceeds from second public
offering....................... -- 4,648,431 --
Expenses related to second public
offering....................... -- (424,420) --
Proceeds from sale of common stock 16,250 -- --
Proceeds from exercise of stock
options........................ 142,530 169,052 402,601
Payments to acquire treasury stock -- -- (7,922)
Payments on long-term debt........ (91,860) -- --
Tax benefits from exercise of stock
options...................... -- 351,885 2,948,264
-- ------- ---------
Net cash provided by
financing activities...... 66,920 11,899,400 3,342,943
------ ---------- ---------
Net increase (decrease) in cash and
cash
equivalents....................... 4,137,517 (35,133) 5,464,571
--------- -------- ---------
Cash and cash equivalents, beginning
of
period............................ 4,348,545 8,486,062 8,479,122
Cash and cash equivalents provided
by the
acquisition of The Integrity -- 28,193 --
Group, Inc. ........................
Adjusted cash and cash equivalents,
beginning of period............... 4,348,545 8,514,255 8,479,122
--------- --------- ---------
Cash and cash equivalents, end of
period............................ $8,486,062 $8,479,122 $13,943,693
========== ========== ===========

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

HPR Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

The Company's products are designed to meet the needs of parties assuming
financial risk for the delivery of healthcare. HPR believes that providing
clinical knowledge in usable form is essential to its customers. The Company
believes it can be distinguished from its competitors through the depth and
integrity of its "clinical knowledge bases. HPR is currently marketing its
CodeReview(R), Medicare CodeReview(TM), ProMatch(TM), Patterns Review(R), CRMS
Fundamentals(TM), Episode Profiler(TM), Quality Profiler(TM), Referral
Profiler(TM), Patterns Profiler(TM), HealthPlan Reporter(TM), Credentialer(TM),
and CCMS Core(TM) products. HPR markets its products through a combination of a
national direct sales force and third-party marketing agreements.

The Company was incorporated on September 28, 1987 in Massachusetts under
the name HPR, Inc. The Company re-incorporated in Delaware on December 20, 1991,
under the name Health Payment Review, Inc. On July 24, 1995, the name of the
Company was changed to HPR Inc. Unless the context otherwise requires,
references herein to the "Company" and "HPR" refer to HPR Inc., a Delaware
corporation, its wholly-owned subsidiaries and HPR, Inc., its Massachusetts
predecessor. On June 3, 1992, Concurrent Review Technology, Inc., a California
corporation, was merged into the Company's wholly-owned subsidiary, Concurrent
Review Technology, Inc., a Delaware corporation. On August 16, 1995 the Company
established a wholly-owned subsidiary, HPR Securities Corp., a Massachusetts
corporation. On April 30, 1996, the Company acquired The Integrity Group, Inc.,
an Alabama corporation, which became a wholly-owned subsidiary of HPR. On April
18, 1997 the Company established a wholly-owned subsidiary, HPR International,
Inc., a Barbados corporation.

(2) Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Concurrent Review Technology, Inc., HPR
Securities Corp., The Integrity Group, Inc., and HPR International, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Financial Statement Presentation

On July 20, 1995, the stockholders of the Company approved a 2.5-for-1 stock
split of the Company's common stock and preferred stock and approved an increase
of the authorized number of common shares to 35,000,000 and of preferred shares
to 3,000,000. On April 16, 1996, the Company announced a stock split effected in
the form of a 100% stock dividend to all shareholders of record on April 26,
1996. The stock dividend was granted on May 6, 1996. Accordingly, all share and
per share amounts have been adjusted to reflect the stock splits as though they
had occurred at the beginning of the initial period presented.

Reclassification

Certain reclassifications have been made to prior year's financial
statements to conform to the fiscal 1997 presentation.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with original
maturities of three months or less at the time of acquisition to be cash
equivalents. Cash and cash equivalents include U.S. government obligations and
U.S. government money market mutual funds used for temporary cash management
purposes.

Investments in Marketable Securities

In accordance with FAS 115, the Company determines the appropriate
classification of its investments in debt and equity securities at the time of
purchase and reevaluates such determination at each balance sheet date. Debt
securities which the Company has the intent or ability to hold to maturity are
classified as held to maturity. The Company held no investments in equity
securities at June 30, 1996 and 1997. Securities held to maturity are carried at
amortized cost which approximates fair market value. At June 30, 1997 the
Company had no investments that qualified as trading or available for sale. The
Company classifies investments that mature greater than 12 months from the
balance sheet date as long term investments.

Concentration of Credit Risk

Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of cash, investments, and accounts and contract
receivables. The Company places its temporary cash investments in three
financial institutions. The Company has not experienced any losses on these
investments to date. The Company has not experienced significant losses related
to receivables from individual customers or groups of customers in the
healthcare industry or by geographic area.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over a two-to five year estimated useful life for all
property and equipment with the exception of leasehold improvements, which are
amortized over the shorter of the life of the improvement or the remaining life
of the lease. Repairs and maintenance costs are charged to expense as incurred.
Upon retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of net income.

Software Development Costs

The Company capitalizes software costs for internally developed software in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
These costs relate primarily to the development of new products and extending
existing applications to new markets or platforms using existing technologies
and programming methods. All costs incurred to establish technological
feasibility are charged to expenses as incurred. Internally developed software
costs capitalized were $591,261, $366,332 and $1,025,009 for fiscal years 1995,
1996, and 1997, respectively. The capitalized costs are amortized on a
straight-line basis over their estimated useful lives (typically three years),
commencing when each product is available to the market. Amortization of these
software development costs is included in costs of revenues. Amortization
expense for computer software was $608,285, $578,125 and $550,782 during 1995,
1996, and 1997, respectively. Accumulated amortization of software development
costs was $1,438,254, $2,016,379 and $2,567,161 at June 30, 1995, 1996, and
1997, respectively.
The Company evaluates, on a quarterly basis, the recoverability of
capitalized software costs on the basis of whether such costs are fully
recoverable from projected undiscounted cash flows of individual products. In
performing its evaluation, the Company must make estimates of anticipated future
gross revenues as well as the remaining economic life of the product. It is
reasonably possible that those estimates could be reduced in the near term as a
result of items such as competitive pressures. As a result, the carrying amount
of the capitalized software costs for a particular product line may be reduced
materially in the near term.

Revenue Recognition

The Company licenses its products primarily pursuant to multi-year
non-cancellable agreements that provide for payment of equal annual license fees
over their terms. The Company recognizes revenue in accordance with Statement of
Position No. 91-1, "Software Revenue Recognition," issued by the American
Institute of Certified Public Accountants. Revenue from software license
agreements is recognized upon execution of a contract and shipment of the
software provided that no significant vendor obligations remain outstanding and
the related receivable is due within one year of the contract date and
collection is deemed probable by management. For recurring license fees,
revenues are recognized on the contract anniversary date. The Company also
accrues incidental support costs associated with these licenses when revenues
are recognized. Revenues from services are recognized when the services are
delivered.

In fiscal 1995, the Company retroactively changed its method of recognizing
renewal or recurring revenue from the recognition of the annual contract amount
ratably over the renewal period to the recognition of the entire recurring
amount on the contract anniversary date. The change was made in accordance with
the Accounting Principles Board Opinion No. 20 in contemplation of an initial
public distribution of the financial statements. The financial statements for
all periods presented have been restated to reflect the change in accounting.
The effect of the restatement was an increase to revenue of $1,703,000 for the
year ended June 30, 1995. The effect of the restatement was an increase to net
income and net income per share of $987,000 or $0.07.

Customer payment terms vary. Amounts billed in advance of satisfying revenue
recognition criteria are classified in current and long term liabilities as
deferred revenue in the accompanying balance sheets. Costs and earnings
recognized in advance of billing are classified in current assets as contract
receivables.

Research and Development

Research and development costs are charged to expense as incurred.

Income Taxes

Under the liability method specified by SFAS No. 109, a deferred tax asset
or liability is determined based on the difference between the financial
statement and tax basis of assets and liabilities, as measured by the enacted
tax rates expected to apply when these differences reverse. SFAS No. 109 also
requires a valuation allowance against net deferred tax assets if, based upon
the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.

Net Income Per Share

Net income per share of common stock is computed for each year based upon
the weighted average number of common shares outstanding and dilutive common
stock equivalents. For purposes of this calculation, outstanding options are
considered common stock equivalents (using the treasury stock method). Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
and common equivalent shares issued during the 12 month period prior to the date
of the initial filing of the Company's Registration Statement have been included
in the calculation, using the treasury stock method, as if they were outstanding
for all periods presented. Fair market value for the purpose of this calculation
was assumed to be $6.75, which is the midpoint of the initial public offering
price range. The number of shares used in this calculation has been adjusted to
reflect a 2.5-for-1 stock split in July 1995 and a 2 for 1 stock split effected
in the form of a 100% stock dividend in May 1996.

Use of Estimates in the Preparation of the Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(3) Line of Credit

On February 1, 1997, the Company received an extension and modification of
its revolving bank credit facility from $5,000,000 to $7,500,000 with an
expiration date of December 30, 1997. The $7,500,000 bank line is an
uncollateralized borrowing line. The current and prior agreements require the
Company to achieve certain levels of tangible net worth and to maintain certain
financial ratios. Borrowings under the new agreement bear interest at prime
rate, 8.50% at June 30, 1997. During 1996 and 1997 the line of credit was
unused; therefore, no interest was paid.

(5) Property and Equipment

Property and equipment, at cost, consist of the following:

June 30,
-------------------------
1996 1997
Computer equipment......... $1,272,852 $2,112,785
Computer software.......... 367,643 455,918
Furniture and fixtures..... 612,366 646,034
Office equipment........... 323,081 436,047
Leasehold improvements..... 433,576 811,354
------- -------
3,009,518 4,462,138
Less accumulated (1,045,354) (1,952,363)
----------- -----------
depreciation...............
$1,964,164 $2,509,775

Depreciation expense was $332,624, $675,967 and $917,190 in 1995, 1996, and
1997 respectively.

(6) Commitments and Contingencies

The Company has entered into operating leases of office facilities, which expire
at various dates through 2003. Certain leases include renewal options and
escalation clauses for increases in real estate taxes and operating expenses.
Future minimum rental payments under the operating leases as of June 30, 1997
are as follows:

Minimum Lease
Payments Due
Year
1998 $1,118,004
1999 1,146,399
2000 1,104,375
2001 1,119,829
2002 1,258,375
Thereafter 1,500,297

Total rent expense under noncancelable operating leases was
approximately $437,000, $667,000, and $868,900 during 1995, 1996, and 1997,
respectively.

The Company's Executive Separation Benefits Plan provides for severance
payments to be made to members of its senior management in the event of
termination of the eligible employee's employment. The Plan provides for payment
for up to 24 months of annual base salary upon termination by the Company for
reasons other than disability or "good cause" as defined therein. The Company's
Non-Executive Separation Benefits Plan for key contributors and other employees
as defined therein provides for payment of up to six months annual base salary
upon termination by the Company for reasons other than disability or "good
cause" as defined.

The Company has also entered into non-competition agreements with certain of
its executive officers. These agreements provide that upon termination of such
officer's employment by the Company, he or she will refrain for a period of up
to 24 months, to be determined by the Company, from certain competitive
activities with respect to the Company. If the Company exercises its option to
restrain any such officer from competitive activity, it will pay such officer
33% of his or her monthly salary as of termination for each month for which the
executive officer agrees to refrain from competing with the Company.

The Company has third party royalty and marketing agreements for certain of
its products. The agreements call for the payment of predetermined royalty
amounts over the life of the Company's software license agreements with
customers. All amounts due under such agreements have been accrued as of June
30, 1997.

(7) Income Taxes

The Company follows SFAS No. 109, "Accounting for Income Taxes". Under SFAS
109, deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the basis of assets and liabilities using
statutory rates.

June 30, June 30,
1996 1997
Gross deferred tax assets:
Reserves and certain accrued $995,566 $1,197,630
expenses.................... -------- ----------
Subtotal...... 995,566 1,197,630
Gross deferred tax liabilities:
Property and equipment
depreciation.............. (13,762) (20,537)
Deferred revenue............ (1,086,813) (499,609)
Capitalized software
amortization.............. (351,729) (538,253)
Other................ (10,286) -
-------- ---------
Subtotal..... (1,462,590) (1,058,399)
--------- ---------
Net deferred tax
(liability)/asset. $(467,024) $139,231
========== ========

The provision for income taxes consists of the following:

Fiscal Year Ended June 30,
1995 1996 1997
---------- ------------ --------
Current:
Federal............... $2,845,133 $3,276,743 $4,540,134
State................. 886,780 917,722 1,039,506
------- ------- ---------
3,731,913 4,194,465 5,579,640
Deferred
Federal............... 285,285 (784,396) (644,925)
State................. 88,079 (242,175) 38,670
------ --------- ------
373,364 (1,026,571) (606,255)
------- ----------- ---------
Provision for income
taxes.................. $4,105,277 $3,167,894 $4,973,385
========= ========== ==========
.

A reconciliation between the Company's effective rate and the U.S. statutory
rate is as follows:

Fiscal Year Ended
June 30,
1995 1996 1997
-------- --------------
U.S. statutory rate........... 34.0% 34.0% 35%
State taxes, net of federal 6.3 5.9 5.0
benefit.......................
Goodwill...................... 0.5 -- --
Other......................... 0.5 2.1 2.3
Research and development credits (0.9) -- --
Federal rate differential..... -- -- (0.8)
Acquisition of The Integrity -- (0.8) --
Group, Inc. ----- ----- -----
40.4% 41.2% 41.5%
===== ===== =====

Total tax payments made in the fiscal years ended June 30, 1995, 1996 and
1997 were $4,708,000, $3,187,000, and $3,390,000 respectively. In fiscal years
ended June 30, 1996 and 1997, the Company recognized $351,900 and $2,948,300 of
tax benefits associated with the exercise of employee stock options.

(8) Stockholders' Equity

Preferred Stock

Holders of the Company's outstanding convertible preferred stock are
entitled to convert each share into one share of common stock, subject to
certain antidilutive adjustments. In the event of liquidation of the Company the
holders of preferred stock are entitled to receive, before distribution to
common stockholders, $1.02 per share. There were no outstanding shares of
preferred stock as of June 30, 1997.

Treasury Stock

During 1997, the Company retired 2,918,438 common stock shares held in
treasury. The excess of cost over par value was charged proportionally to
Additional Paid in Capital and Retained Earnings.

Stock Option Plans

1991 Stock Plan. The Company's 1991 Stock Plan (the "1991 Stock Plan")
provides for the grant of nonqualified and incentive stock options to employees
and others to purchase up to 1,160,000 shares of the Company's common stock.
Options granted under the plan are exercisable at the fair market value of the
stock at the date of grant, are exercisable in full at any time, vest over three
to four years and expire ten years from the date of grant.

1995 Stock Plan. The Company's 1995 Stock Plan (the "1995 Stock Plan") was
approved by the Board of Directors on June 26, 1995, and by the Company's
stockholders on July 20, 1995, and amended by the Board of Directors on July 22,
1996 and approved (as amended) by the Company's stockholders on November 1,
1996. The 1995 Stock Plan provides for the grant or award of stock options,
restricted stock, stock appreciation rights and other performance awards which
may or may not be denominated in shares of Common Stock or other securities
(collectively, the "Awards"). Stock options granted under the 1995 Stock Plan
may be either incentive stock options or non-qualified options. The purpose of
the 1995 Stock Plan is to attract and retain outstanding employees through the
incentives of stock ownership and monetary payments. Every regular full-time
employee of the Company, including officers but excluding directors who are not
officers, is eligible to receive awards.

The 1995 Stock Plan is administered by the Compensation Committee of the
Board of Directors. Subject to the provisions of the 1995 Stock Plan and
approval by the Board of Directors, the Compensation Committee has the authority
to designate participants, determine the types of Awards to be granted, the
number of shares to be covered by each Award, the time at which each Award is
exercisable or may be settled, the method of payment and any other terms and
conditions of the Awards. All Awards are evidenced by an Award Agreement between
the Company and the participant.

While the Compensation Committee determines the prices at which options and
other Awards may be exercised under the 1995 Stock Plan, the exercise price per
share of an incentive stock option shall be at least 100% of the fair market
value (as determined under the terms of the 1995 Stock Plan) of a share of
Common Stock on the date of grant. The aggregate number of shares of Common
Stock available for awards under the Plan is 2,035,000. The maximum term for
Awards under the 1995 Stock Plan is ten years, and no Awards may be made under
the 1995 Stock Plan after June 25, 2005.

During 1996 employees of The Integrity Group, Inc. were granted options to
purchase 8,254 shares of common stock at a price per share of $0.49 which was
below the fair market value at the date of the grant. This discount from fair
market value has been recorded as deferred compensation and charged to expense
ratably over the four year vesting period of the options.

1995 Eligible Directors Stock Plan. The Company's 1995 Eligible Directors
Stock Plan (the "Directors Stock Plan") was approved by the Board of Directors
on June 26, 1995, and by the Company's stockholders on July 20, 1995, and
amended by the Board of Directors July 22, 1996 and approved (as amended) by the
Company's stockholders on November 1, 1996. Under the Directors Stock Plan and
subject to the approval by the Board of Directors, each director who is not an
officer or employee of the Company or any subsidiary of the Company (an "outside
director") will be granted, upon first being elected to the Board of Directors,
an option to purchase 10,000 shares of Common Stock at an exercise price equal
to the fair market value on the date of the grant. In addition, upon
re-election, each outside director will be granted an option on the thirtieth
day following the date of each annual meeting of stockholders to purchase 4,000
shares of Common Stock at an exercise price equal to the fair market value on
the date of grant. A total of 150,000 shares of Common Stock are available for
awards under the Directors Stock Plan, as amended July 22, 1996 and approved by
shareholders on November 1, 1996. The options granted under the Directors Stock
Plan will vest in five equal annual installments commencing one year after the
date of grant. The maximum term for Awards under the 1995 Eligible Directors
Stock Plan is ten years, and no Awards may be made under the 1995 Stock Plan
after June 25, 2005.

As of June 30, 1997, the Company has reserved 3,345,000 shares of common
stock for issuance under all of its stock option plans.

A summary of the Company's stock option activity as of June 30, 1995, 1996
and 1997 is presented below.

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

Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price

Outstanding at
beginning of year... 2,363,166 $0.13 1,878,366 $2.51 1,502,553 $3.64
Granted 1,105,700 3.80 68,256 14.17 1,034,400 14.33
Exercised (1,465,000) 0.10 (441,941) 0.38 (325,180) 1.24
Expired (125,500) 0.18 (2,128) 1.07 (234,398) 9.21
--------- ---- ------- ---- --------- ----
Outstanding at end
of year................ 1,878,366 $2.51 1,502,553 $3.64 1,977,375 $8.95
========= ===== ========= ===== ========= =====

Options exercisable
at year-end........... 408,630 $0.18 543,469 $1.75 512,328 $3.25
Weighted-average
fair value of
options
granted during the
year................... 1,105,700 $3.80 68,256 $14.17 1,034,400 $14.33

The following table summarizes information about the Company's stock
options plans at June 30, 1997:

Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------

Range of Shares Weighted-Average Shares
Exercise Outstanding at Remaining Weighted-Average Exercisable Weighted-Average
Prices June 30, 1997 Contractual Life Exercise Price at June 30 , 1997 Exercise Price
- ------ ------------- ---------------- -------------- ----------------- --------------

$0.11 - $4.99 414,975 5.6 $0.72 269,178 $0.57
$5.00 - $9.99 569,500 8.0 $5.60 228,750 $5.60
$10.00 - $16.38 992,900 9.4 $16.10 14,400 $14.30

In October of 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation," which is effective for periods beginning after December 15,
1995. SFAS 123 requires that companies either recognize compensation expense for
grants of stock, stock options and other equity instruments based on fair value,
or provide pro forma disclosure of net income and earnings per share in the
notes of the financial statements. The Company adopted the disclosure provisions
of SFAS 123 effective July 1, 1996 and has applied APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for stock options issued to employees at fair market value.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended June 30, 1996 and 1997 would have been adjusted to the pro forma
amounts indicated below:

1996 1997
--------------------------------------- ---------------------------------------

As Reported Pro Forma As Reported Pro Forma

Net income $4,521,863 $4,494,140 $7,010,653 $6,542,563
Net income per share $0.29 $0.28 $0.44 $0.41

The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended June 30, 1996 and 1997:

1996 1997
---- ----
Risk-free interest rate 5.47% 6.36%
Expected life 5 years 5 years
Expected volatility 50% 50%
Dividend yield 0% 0%

The effects of applying SFAS 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net income for future
years. Additional awards in future years are anticipated. SFAS 123 does not
apply to awards prior to 1995.

(10) Employee Benefits

The Health Payment Review, Inc. 401(k) Plan is a defined contribution plan
available to substantially all of HPR's employees. The 401(k) Plan was
established effective June 1, 1993 under section 401(k) of the Internal Revenue
Code. Under the Plan, employees may make voluntary contributions based on a
percentage of their pretax earnings. HPR contributions to the Plan are
established each year at the discretion of the Board of Directors. No Company
contributions were made to the Plan in fiscal 1995, 1996, and 1997. The Company
paid administrative costs on behalf of the Plan of $6,500, $12,500, and $15,000
in fiscal 1995, 1996 and 1997, respectively.

(11) Legal Proceedings

On January 31, 1994, a suit was filed in the U.S. District Court for the
Eastern District of Pennsylvania by GMIS, Inc. ("GMIS") against the Company,
alleging that the Company's patent relating to its CodeReview product was
invalid, not infringed, and unenforceable. GMIS also alleged that the Company
interfered with the business relationships of GMIS and sued for damages of an
unspecified amount.

The Company filed a patent infringement counterclaim on March 25, 1994
alleging, among other things, that GMIS' product, ClaimCheck, infringed upon the
patent.

On January 23, 1995 the Company settled all of its outstanding claims with
GMIS. Pursuant to the settlement, the terms of which were undisclosed, the
Company granted GMIS a nonexclusive license under the patent, and GMIS
acknowledged the validity of the patent and made a one-time payment to the
Company. The payment was recorded by the Company net of legal and other costs.

(12) Acquisitions

On April 30, 1996 the Company acquired The Integrity Group, Inc. ("TIG"),
an Alabama corporation, in a transaction accounted for as a pooling of interests
under which all of the capital stock of TIG was exchanged for 260,001 shares of
HPR Inc. common stock. TIG is a vendor of provider credentialing, accreditation
support, Healthcare Employer Data Information Set (HEDIS) reporting and data
warehousing tools and support for effective provider network management. The
accompanying financial statements for periods prior to 1996 do not include the
amounts for this acquisition as they were deemed to be immaterial. Only 1996
financial information has been restated as if the transaction had occurred as of
July 1, 1995.

TIG was a Subchapter S corporation for income tax purposes and, therefore,
did not pay U.S. federal income taxes. TIG has been included in the Company's
U.S. federal income tax return effective April 30, 1996.

(12) Recent Accounting Pronouncements

The FASB issued Statement No. 128 ("SFAS 128"), "Earnings per Share,"
which modifies the way in which earnings per share ("EPS") is calculated
and disclosed. Currently, the Company discloses primary EPS. Upon adoption
of this standard for the fiscal period ending June 30, 1998, the Company
will be required to disclose either basic EPS or both basic and dilutive
EPS. The principal difference being that common stock equivalents would not
be considered in the computation of basic EPS. The impact of adoption of
SFAS 128 has not yet been determined.

The FASB recently issued Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". This statement requires changes in comprehensive
income to be shown in a financial statement that is displayed with the same
prominence as other financial statements. While not mandating a specific
financial statement format, the Statement requires that an amount
representing total comprehensive income be reported. Comprehensive income
components include: unrealized gains and losses on available-for-sale
investments in debt and equity securities, foreign currency translation
adjustments, and minimum pension liability adjustments. The Statement will
become effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods is required
for comparative purposes. The Company does not believe that this will have
a material impact on the results of operations.

In June 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 specifies
new guidelines for determining a company's operating segments and related
requirements for disclosure. The Company does not believe that this
statement will have an impact on the presentation of the financial
statements and the disclosures therein.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None

PART II

Item 10. Directors and Executive Officers of the Registrant

The information required by this item is incorporated herein by reference
to the section entitled "Election of Directors" included in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on October 31, 1997,
which will be filed with the Securities and Exchange Commission within 120 days
after the end of the Company's fiscal year to which this Annual Report on Form
10-K relates. Certain information concerning the registrant's executive officers
is included under the caption "Executive Officers of the Registrant" at pages
14-15 following Part I, Item 1 of this report.

Item 11. Executive Compensation

The information required by this item is incorporated herein by reference
to the section entitled "Executive Compensation" included in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on October 31, 1997,
which will be filed with the Securities and Exchange Commission within 120 days
after the end of the Company's fiscal year to which this Annual Report on Form
10-K relates.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated herein by reference
to the section entitled "Voting Securities" included in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on October 31, 1997,
which will be filed with the Securities and Exchange Commission within 120 days
after the end of the Company's fiscal year to which this Annual Report on Form
10-K relates.

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to
the section "Compensation Committee Interlocks, Insider Participation and
Certain Transactions" included in the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on October 31, 1997, which will be filed with
the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year to which this Annual Report on Form 10-K relates.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

a. (1) Financial Statements

All financial statements are included in Item 8 hereof.

a. (2) Financial Statement Schedules

None

a. (3) Exhibits

Exhibit
Number Description of Document

3.1* -- Amended and Restated Certificate of Incorporation of the Company
approved by the directors of the Company on June 26, 1995, as adopted by the
stockholders on July 20, 1995.
3.2* -- By-laws of the Company, as amended effective on August 16, 1995.
4.1* -- Article Fourth of the Certificate of Incorporation of the Company
(included in Exhibit 3.1).
10.1* -- Lease dated June 2, 1995, between Riverview Building Combined Limited
Partnership and the Company, for premises located at the Riverview
Complex, 245 First Street, Cambridge, Massachusetts.
10.2 -- The Company's 1991 Stock Plan, as amended effective
November 1, 1996, and related forms of stock option agreements.
10.3 -- The Company's 1995 Stock Plan, as amended effective November 1, 1996, and related forms of stock
option agreements.
10.4 -- The Company's 1995 Eligible Directors Stock Plan, as amended effective November 1, 1996, and related
form of stock option agreement.
10.5* -- Software Development and License Agreement between the Company and
Caterpillar, Inc. dated August 15, 1988.
10.6*+ -- Product License Agreement between the Company and Symmetry Health Data
Systems, Inc. dated as of November 17, 1994, as amended.
10.7* -- Stock Purchase Agreement for shares of Series A Convertible Preferred
Stock purchased by Greylock Limited Partnership dated December 20, 1991, as
amended on June 26, 1995.
10.8* -- Stock Purchase Agreements for shares of Series A Convertible Preferred
Stock purchased by Marcia J. Radosevich dated October 7, 1992 and November 2, 1992.
10.9* -- Registration Rights Agreement dated as of June 3, 1992.
10.10* -- Noncompetition Agreement between the Company and Dr. Robert D.Hertenstein, dated April 13, 1992,
as amended on June 2, 1995.
10.11* -- Letter Agreement between the Company and Marcia J. Radosevich dated
December 6, 1989, as amended on June 26, 1995.
10.12* -- Letter Agreement between the Company and Douglas R. Percy dated April 22, 1992.
10.13* -- Letter Agreement between the Company and Thomas M. McNamara dated November 2,1992.
10.14* -- Agreement Pertaining to Certain Activities between the Company and Marcia J.Radosevich dated December 20,
1991.
10.15* -- Noncompetition agreements with Douglas R. Percy, Brian D. Cahill,Thomas M.
McNamara, Lawrence G. Miller, Steven J. Rosenberg and James B. Stowe.
10.16* -- Consulting Agreement between the Company and Richard H. Egdahl dated
January 1, 1992, as amended on June 26, 1995.
10.17* -- Form of Indemnification Agreement between the Company and its directors and executive officers
10.18 -- Sublease dated April 17, 1997 between Open Market and the Company, for premises located at the
Riverview Complex, 245 First Street, Cambridge,Massachusettes.
10.19 -- Lease dated April 17, 1997 between Beacon Management and the Company, for premises located at the
Riverview Complex, 245 First Street, Cambridge, Massachusettes.
10.20 -- Executive Separation Benefits Plan dated January 1, 1997
10.21 -- Non-Executive Separation Benefits Plan effective as of January 1, 1997
10.22 -- Director Termination Benefits Plan effective as of January 1, 1997
10.23 -- Second Amendment to Product License Agreement with Symmetry Health Data
Systems, Inc. dated December 12, 1996.
11.1 -- Statement re computation of earnings per share.

21.1 -- Subsidiaries of the Company.
23.1 - Consent of Coopers & Lybrand L.L.P., independent accountants
27.1 Financial Data Schedule

<FN>

+ Confidential treatment has been requested and granted with respect to certain
portions of this exhibit. Omitted portions have been filed separately with
the Securities and Exchange Commission.

* Incorporated by reference from the Company's registration statement on Form
S-1 No. 33-94132 filed with the Securities and Exchange Commission on June
30, 1995, as amended on July 25, August 1 and August 7, 1995.

</FN>

b. Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, Section 13 or 15(d), the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

HPR INC.

Dated: August 21, 1997 By: /s/ Marcia J. Radosevich
------------------------
Marcia J. Radosevich
Chairman of the Board, Chief Executive
Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated below on the 21st day of August, 1997.

Signature Title

/s/ Marcia J. Radosevich Chairman of the Board, Chief Executive
(Marcia J. Radosevich) Officer, President and Director
(Principal Executive Officer)

/s/ Brian D. Cahill Chief Operating Officer, Chief Financial
(Brian D. Cahill) Officer, and Vice President, Corporate
(Principal Financial and Accounting Finance and Planning
Officer)

/s/ Richard H. Egdahl Vice Chairman of the Board and Director
(Richard H. Egdahl)

/s/ Harris A. Berman Director
(Harris A. Berman)

/s/ Howard E. Cox, Jr. Director
(Howard E. Cox, Jr.)

/s/ William G. Nelson Director
(William G. Nelson)